The Commission’s action against AIG was brought in the United States District Court for the District of Columbia. Under the terms of the settlement with the Commission, which is subject to court approval, AIG will be permanently enjoined from violating the antifraud provisions of the federal securities laws and from aiding and abetting violations of the reporting and record-keeping provisions of the federal securities laws. In addition, AIG has agreed to the appointment of an independent consultant to examine certain AIG transactions going back to the year 2000, including any transaction that was effected with the primary purpose of enabling a public company to achieve an accounting or financial reporting result. Further, AIG has agreed to establish a Transaction Review Committee to review certain future transactions involving heightened legal, reputational or regulatory risk.
Stephen M. Cutler, Director of the Commission’s Division of Enforcement, said, “This action is a message to insurance companies and others that sell structured finance or other products to public companies that are designed for no purpose other than to improve those companies’ accounting results. In appropriate circumstances, marketers of such products will be held liable for the resulting misstatements in their customers’ financial disclosures.”
The Commission’s action arises out of AIG’s conduct in developing, marketing, and, in the case of one public company – The PNC Financial Services Group, Inc. (PNC) – entering into transactions that were designed to enable the buyer to remove troubled or other potentially volatile assets from its balance sheet. By removing these assets from its balance sheet, the company supposedly would be able to avoid charges to its reported earnings from declines in the value of these assets. As alleged in the Commission’s complaint, AIG was reckless in not knowing that the product it developed did not satisfy the accounting standards for removing the assets from the company’s balance sheet.
According to the complaint, the product that AIG developed was known as C-GAITS, and it was marketed and sold to public companies primarily by AIG’s wholly owned subsidiary, AIG-Financial Products Corp., from at least March 2001 through January 2002. As developed, AIG, for a fee, would establish a special purpose entity (SPE) to which the counter-party would transfer troubled or other potentially volatile assets and, in return, would receive preferred stock in the SPE. AIG represented to prospective counter-parties that, under applicable accounting standards, the SPE would not have to be consolidated on the counter-party’s financial statements and the counter-party would not have to record declines in the value of the transferred assets or the preferred stock as charges to its earnings. As alleged in the Commission’s complaint, while AIG was marketing the C-GAITS product, independent auditors for some potential counter-parties raised issues about whether certain features of the product could violate the accounting requirements for nonconsolidation of SPEs. With one exception, however, AIG did not inform other potential counter-parties of these issues.
In addition to its misrepresentations and omissions while marketing the C-GAITS product, AIG, as alleged in the complaint, entered into three C-GAITS transactions with The PNC Financial Services Group, Inc. By entering into the three C-GAITS transactions, PNC improperly sought to remove $762 million in loan and venture-capital assets from its balance sheet and thus to avoid charges to its income statement from declines in the value of these assets. As a result, PNC made materially false and misleading disclosures about its financial condition and performance in filings with the Commission and in press releases. AIG was reckless in not knowing that the C-GAITS transactions with PNC did not satisfy the standards for nonconsolidation by PNC.
Under the settlement, the disgorgement and prejudgment interest will be paid to a victim restitution fund established in connection with the prior resolution of criminal charges by the Department of Justice against a PNC subsidiary. The independent consultant’s examination will cover transactions that AIG entered into with any public company between Jan. 1, 2000, and the date of the final judgment that involved the use of SPEs or variable interest entities, or that were marketed or entered into by AIG with a primary purpose of enabling a public company to obtain an accounting or financial reporting result. The Transaction Review Committee will review transactions proposed to be undertaken with a public company that were or are developed, marketed, or proposed by AIG or a public company and that involve heightened legal, reputational, or regulatory risk, including transactions with a primary purpose of enabling a public company to obtain an accounting or financial reporting result. The independent consultant also will conduct a review related to certain policies and procedures adopted by the Transaction Review Committee.
Today’s civil and criminal actions are the result of investigations by the Commission, the Fraud Section of the Criminal Division of the Department of Justice, and the Pittsburgh office of the Federal Bureau of Investigation.
