The Commission announced the settlement in coordination with the Office of the New York State Attorney General, the Superintendent of Insurance of the State of New York and the United States Department of Justice, which have also reached settlements with AIG.
The settlement with the Commission provides that AIG will pay $800 million, consisting of disgorgement of $700 million and a penalty of $100 million, and undertake corporate reforms designed to prevent similar misconduct from occurring. The penalty amount takes into account AIG’s substantial cooperation during the Commission’s investigation.
Linda Chatman Thomsen, Director of the Commission’s Division of Enforcement, said, “This important settlement arose out of our industry wide investigation into the misuse of finite insurance and reinsurance. While this settlement concludes our investigation of AIG, our investigation continues with respect to others who may have participated in AIG’s securities laws violations.”
Mark K. Schonfeld, Director of the Commission’s Northeast Regional Office said, “In this settlement, we have sought to balance AIG’s historical misconduct – which was substantial – with its new approach to compliance and cooperation with regulators and law enforcement. The Commission’s settlement will also deliver meaningful monetary relief to those harmed by AIG’s prior conduct.”
The Commission’s complaint, filed today in federal court in Manhattan, alleges that AIG’s reinsurance transactions with General Re Corporation (Gen Re) were designed to inflate falsely AIG’s loss reserves by $500 million in order to quell analyst criticism that AIG’s reserves had been declining. The complaint also identifies a number of other transactions in which AIG materially misstated its financial results through sham transactions and entities created for the purpose of misleading the investing public.
Specifically, the Commission’s complaint alleges that in December 2000 and March 2001, AIG entered into two sham reinsurance transactions with Gen Re that had no economic substance but were designed to allow AIG to improperly add a total of $500 million in phony loss reserves to its balance sheet in the fourth quarter of 2000 and the first quarter of 2001. The transactions were initiated by AIG to quell analysts’ criticism of AIG for a prior reduction of the reserves. In addition, the complaint alleges that in 2000, AIG engaged in a transaction with Capco Reinsurance Company, Ltd. (Capco) to conceal approximately $200 million in underwriting losses in its general insurance business by improperly converting them to capital (or investment) losses to make those losses less embarrassing to AIG. The complaint further alleges that in 1991, AIG established Union Excess Reinsurance Company Ltd. (Union Excess), an offshore reinsurer, to which it ultimately ceded approximately 50 reinsurance contracts for its own benefit. Although AIG controlled Union Excess, it improperly failed to consolidate Union Excess’s financial results with its own, and in fact took steps to conceal its control over Union Excess from its auditors and regulators. As a result of these actions and other accounting improprieties, AIG fraudulently improved its financial results.
Shortly after federal and state regulators contacted AIG about the Gen Re transaction, AIG commenced an internal investigation that eventually led to a restatement of its prior accounting for approximately 66 transactions or items. In its restatement, AIG admitted not only that its accounting for certain transactions had been improper, but also that the purpose behind some of those transactions was to improve financial results that AIG believed to be important to the market. AIG also conceded in its restatement that certain transactions may have “involved documentation that did not accurately reflect the true nature of the arrangements … [and] misrepresentations to members of management, regulators and AIG’s independent auditors.” Furthermore, the restatement summarized several transactions that AIG accounted for improperly, including, among others, two sham reinsurance transactions with Gen Re and certain transactions involving Capco and Union Excess. As a result of the restatement, AIG reduced its shareholders’ equity at December 31, 2004 by approximately $2.26 billion or 2.7%.
In the Commission’s settlement, AIG has agreed, without admitting or denying the allegations of the complaint, to the entry of a Court order enjoining it from violating the antifraud, books and records, internal controls, and periodic reporting provisions of the federal securities laws. The order also requires that AIG pay a civil penalty of $100 million and disgorge ill-gotten gains of $700 million, all of which the Commission will seek to distribute to injured investors. AIG has also agreed to certain undertakings designed to assure the Commission that future transactions will be properly accounted for and that senior AIG officers and executives receive adequate training concerning their obligations under the federal securities laws. AIG’s remedial measures include, among other things, (i) appointing a new Chief Executive Officer and Chief Financial Officer; (ii) putting forth a statement of tone and philosophy committed to achieving transparency and clear communication with all stakeholders through effective corporate governance, a strong control environment, high ethical standards and financial reporting integrity; (iii) establishing a Regulatory, Compliance and Legal Committee to provide oversight of AIG’s compliance with applicable laws and regulations; and (iv) enhancing its “Code of Conduct” for employees and mandating that all employees complete special formal ethics training. This proposed settlement is subject to court approval.
The settlement takes into consideration AIG’s cooperation during the investigation and its remediation efforts in response to material weaknesses identified by its internal review. From the outset of the investigation, AIG gave complete cooperation to the investigation by the Commission’s staff. Among other things, AIG (i) promptly provided information regarding any relevant facts and documents uncovered in its internal review; (ii) provided the staff with regular updates on the status of the internal review; and (iii) sent a clear message to its employees that they should cooperate in the staff’s investigation by terminating those employees, including members of AIG’s former senior management, who chose not to cooperate in the staff’s investigation.
The Commission acknowledges the assistance and cooperation of the Office of the New York State Attorney General, the Superintendent of Insurance of the State of New York, the U.S. Department of Justice, Fraud Section, Criminal Division, and the U.S. Postal Inspection Service.
Additional materials: Litigation Release 19560
