New York – American International Group Inc., one of the world’s largest insurance companies, has agreed to pay $1.64 billion to resolve allegations that it used deceptive accounting practices to mislead investors and regulatory agencies.
The deal – believed to be the biggest concluded by regulators with a single company – also requires the New York-based company to adopt changes in its business practices that will ensure proper future accounting procedures.
The pact announced Thursday settles a civil lawsuit filed last May by New York Attorney General Eliot Spitzer with backing from the New York State Insurance Department and the U.S. Justice Department. The Securities and Exchange Commission, which also worked with Spitzer on the investigation, filed and settled allegations of accounting fraud with the company simultaneously.
The settlement does not cover Maurice “Hank” Greenberg, the company’s former chairman and chief executive, who was named in the suit but who has pledged to fight it in court.
While acknowledging the civil misconduct and facing a huge fine, AIG at the same time escapes the threat that a criminal case could have been brought.
The Justice Department said AIG’s agreement spares the company criminal prosecution in exchange for its cooperation with the federal criminal investigation.
AIG went up 74 cents, or 1.1 percent, with the announcement to close at $67.12 on the New York Stock Exchange.
AIG said that under the settlement it will pay $800 million for investors who were deceived by AIG’s accounting tactics, including a $100 million penalty to the SEC. In addition, it will pay $375 million to AIG policyholders, $344 million to states harmed by AIG’s practices from 1986 to 1995 involving state workers’ compensation funds, and fines of $100 million to the state of New York and $25 million to the Justice Department.
AIG said it would take a $1.15 billion after-tax charge in its upcoming fourth- quarter earnings report to cover the settlement. It also announced it would take a $1.1 billion after-tax charge to increase its reserves to reflect the completion of a recently concluded internal risk study.
AIG said that as part of the deal, it also has agreed “to retain for a period of three years an independent consultant who will conduct a review” of the company’s accounting and internal controls.
Donald Light, senior insurance analyst with Celent, a Boston-based research and consulting company, said the settlement “means AIG’s board and management is off the hook for anything worse … such as a criminal case.”
He added: “They’re paying a lot of money for that, but AIG is huge and this amounts to less than 2 percent of shareholders’ equity.”
Spitzer told The Associated Press, “This is a company that didn’t have to cheat. But once they began, they found it hard to stop. And like an addict, they grew dependent on financial gamesmanship that could ultimately destroy the company.”
He said the new business practices AIG was adopting would improve the market for property and casualty insurance in the United States by creating “a new level of transparency in the market that all consumers will benefit from.”
The SEC’s enforcement director, Linda Thomsen, noted that the investigation looked at the entire industry and centered on misuse of specialized insurance vehicles, such as 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,” she said.
