Spitzer Pulls AIG Trigger

His civil suit names the company, Greenberg and Smith.
Author:
Publish date:

Updated from 2:13 p.m. EDT

The New York attorney general filed civil fraud charges Thursday against

American International Group

(AIG) - Get Report

and ousted Chief Executive Maurice Greenberg, alleging the company engaged in a multiyear accounting charade designed to illegally polish its financial results.

The suit, filed in Manhattan by Eliot Spitzer's office in conjunction with the New York insurance commissioner, broadens the scope of malfeasance alleged at the once-venerable insurer and the man who built it, Greenberg. Spitzer claims to have emails that show the 80-year-old former CEO was personally involved in negotiating some of the transactions that led to the complaint.

The suit also adds detail to AIG's alleged scheming, claiming the company hid losses in a Brazil subsidiary by linking them to a Taiwanese unit and orchestrated a scheme to book workers' compensation premiums as revenue from other divisions. Spitzer says the company and its executives "repeatedly lied" about its offshore entities, although he noted AIG is now cooperating with his probe.

"The irony of this case is that AIG was a well-run and profitable company that didn't need to cheat," Spitzer said. "And yet, the former top management routinely and persistently resorted to deception and fraud in an apparent effort to improve the company's financial results."

AIG, Greenberg and former CFO Howard Smith were charged with securities fraud and fraudulent business practices in the complaint, which is the first formal legal action taken against the giant insurer since its accounting issues came to light in February. The suit seeks punitive damages.

Greenberg resigned from the company in March, the same month Smith was fired. Both executives have denied wrongdoing.

AIG, whose stock is down 20% this year, is in the process of completing its 2004 financial results for filing with the

Securities and Exchange Commission

by a May 30 deadline. The 10-K is expected to show a $2.7 billion reduction in AIG's shareholder equity, all of it the result of accounting issues detailed in Thursday's complaint.

The company previously conceded that its bookkeeping on various reinsurance transactions was faulty, including a five-year-old deal with a unit of Warren Buffett's

Berkshire Hathaway

(BRK.A) - Get Report

that improperly added $500 million to its reserve funds.

AIG has laid responsibility for some of its misdeeds on former senior executives, reportedly Greenberg and Smith. A May 2 statement by AIG singled out accounting entries dating to 2000 that "appear to have been made at the direction of certain former members of senior management without appropriate support." Those entries boosted AIG's equity by about $100 million.

The May 2 statement said loose oversight allowed "certain former members of senior management to circumvent internal controls over financial reporting in certain circumstances."

Greenberg's lawyer disputed the characterization at the time and said the accounting decisions involved current managers.

Separate investigations by the SEC and Justice Department are ongoing. In addition, Greenberg and Smith are reportedly among the people being investigated in a New York grand jury criminal probe led by Spitzer.

The New York attorney general has also taken testimony in the civil case from Buffett, who isn't accused of any wrongdoing.

On March 3, AIG conceded that two deals with Berkshire's

General Re

subsidiary dating to 2000 and 2001 didn't encompass enough risk-transfer to be considered insurance transactions, and would be rebooked in the company's financial results as deposits. The net effect is expected to be a reduction of the company's claims reserves by $250 million and an increase in liabilities of $245 million.

The company also copped in March to accounting errors in its dealings with a number of offshore entities with which it has done business over the past decade, most notably

Union Excess Reinsurance Co.

and

Richmond Insurance Co.

As with General Re, the issue was the use of favorable reinsurance accounting afforded transactions in which one insurer sells liabilities to another with the putative goal of diluting risk. Investigators suspect AIG exerted undue influence on a handful of smaller, mostly Caribbean-based companies to cut such deals simply to lighten its reserve balance.

AIG conceded in March that it exercised effective control over Union Excess, disqualifying the deals from the favorable reinsurance accounting. The error is expected to result in a $1.1 billion reduction in shareholder equity as of Dec. 31, 2004. A similar mistake with Richmond Insurance wasn't expected to have a material impact on AIG's equity.