AIG Agrees to $1.64 Billion Settlement

Most is restitution to its shareholders and customers.
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American International Group's

(AIG) - Get Report

long regulatory nightmare is finally over.

Wall Street's worst-kept secret became official Thursday, when federal and New York state regulators announced a $1.64 billion settlement with the insurance giant.

The agreement with the

Securities and Exchange Commission

, New York Attorney General Eliot Spitzer and the Department of Justice ends a yearlong investigation into improper accounting strategies and business practices at AIG.

The settlement, most of which consists of restitution payments to AIG shareholders and AIG customers, is one of the largest ever agreed to by a U.S. company. Of the $1.6 billion sum, AIG is paying $225 million in fines.

The New York-based insurer said it will take a $1.15 billion charge in its soon-to-be announced fourth-quarter earnings to cover the cost of the settlement.

"These settlements are a major step forward in resolving the legal and regulatory issues facing AIG,'' said CEO Martin Sullivan, in a press release. "We have already implemented a wide range of improvements in our accounting, financial reporting and corporate governance, and will continue to make enhancements in these areas. AIG is committed to business practices that provide transparency and fairness in the insurance markets."

The deal with regulators and prosecutors will lift a cloud that has hovered over AIG for the past year. In the early days of the scandal, AIG shares took a beating, falling as much as 31% to $50 a share.

But the stock since has recovered almost all of those early losses. In midday trading, shares of AIG were around $67, up 60 cents, or 1%.

In fact, AIG remains a highly profitable company. The company earned $10 billion through the first three quarters of 2005. Regulators pointed that many of the accounting gimmicks AIG resorted to over the years to boost earnings were largely unnecessary.

"AIG was and is a solid company that didn't need to cheat,'' said New York Attorney General Eliot Spitzer, in a press release. "It finds itself in this position solely because some senior managers thought it was acceptable to deceive the investing public and regulators.''

The investigation led to a clearing of the decks at AIG, beginning with the forced resignation last March of Maurice Greenberg, the firm's longtime CEO and chairman. The departure of Greenberg, long revered as the patriarch of the U.S. insurance business, was one of Wall Street's big business headlines last year.

The settlement between the regulators and AIG will not disturb the pending civil fraud lawsuit Spitzer's office has filed against Greenberg. The former AIG CEO has vowed to fight the civil charges and contends AIG has knuckled under to regulators by agreeing to such a sizable penalty.

"We have already debunked many of the allegations settled today by AIG in a white paper issued last summer," Greenberg's chief flack said. "The suggestion in the Attorney General's public comments that Mr. Greenberg may have been involved in any wrongdoing is false. We are confident that when the debate moves from the newspaper to the courts Mr. Greenberg will be vindicated."

The settlement with AIG comes a week after federal prosecutors indicted a former top AIG executive on charges he took part in a scheme to manipulate the insurer's earnings. Prosecutors are continuing their investigation, although it's not clear whether any other indictments will be forthcoming.

Last week, federal prosecutors in Virginia said a grand jury indicted Christian Milton, AIG's former vice president for reinsurance, and three former General Re executives on a variety of securities fraud charges. Gen Re is a division of

Berkshire Hathaway

(BRKA)

, the publicly traded investment vehicle of Warren Buffett, who hasn't been charged with any wrongdoing in the probe.

Federal prosecutors contend Gen Re participated in a scheme to prop up AIG's stock price by masking declines in its claims reserves and massaging quarterly earnings. Authorities contend the primary purpose of the transaction was to add $500 million in "phony loss reserves" to AIG's balance sheet to quell Wall Street criticism.

Authorities have alleged the Gen Re transaction began with a phone call from Greenberg to Ronald Ferguson, who was then Gen Re's president. The SEC complaint contends it was understood by Ferguson that AIG wouldn't assume any actual risk in the deal. Ferguson is one of the Gen Re executives indicted last week.

The alleged scheme involving Gen Re is just one of the accounting practices regulators have looked at.

Regulators also alleged AIG dumped poor-performing insurance contracts into several offshore reinsurance subsidiaries that should have been consolidated onto AIG's balance sheet.

AIG also settled allegations that it had harmed its business customers by participating in a bid-rigging scheme on insurance contracts that was orchestrated by

Marsh & McLennan

(MMC) - Get Report

. Marsh paid $850 million to Spitzer's office last year to settle the allegations arising out of the bid-rigging probe.

In the settlement, AIG, as is customary, neither admitted nor denied the allegations lodged against it. But Spitzer's office noted that the company issued a statement saying it "regrets and apologizes'' for its past conduct.