AIG agrees to $1.6 billion fine to settle fraud, bid-rigging case
NEW YORK — Insurance giant American International Group (AIG) has agreed to pay state and federal regulators more than $1.6 billion and change business practices to settle allegations it engaged in securities fraud and bid-rigging and failed to make contributions to state workers' compensation funds.
The settlement with the Securities and Exchange Commission (SEC) and the office of New York Attorney General Eliot Spitzer is believed the largest in history paid by a single company. AIG and government authorities announced the agreement Thursday.
Marsh & McLennan paid $850 million last year to customers harmed by its actions to settle bid-rigging allegations at its insurance-brokerage subsidiary. In 2003, WorldCom handed over $500 million in cash and $250 million in stock in its successor company to the SEC to compensate investors harmed by its massive accounting-fraud scheme.
The AIG settlement includes $800 million the SEC will use to compensate investors deceived by alleged accounting violations that the company disavowed in a major restatement last year.
Thirty-five states will share in $42 million in tax reimbursements on workers' compensation premiums Spitzer said AIG didn't pay from 1986 to 1995. Washington state is due to receive $63,554.
The settlement focuses primarily on a fall 2000 reinsurance deal that then-AIG Chief Executive Maurice "Hank" Greenberg allegedly initiated with Berkshire Hathaway subsidiary General Re to beef up AIG's long-term loss reserves and help prevent a fall in its stock price.
Last week, federal prosecutors indicted three former top General Re executives and AIG's former head of reinsurance. All four plan to plead not guilty next week.
In a written statement Thursday, AIG Chief Executive Martin Sullivan said the company fully cooperated with the investigations and would continue to do so.
"AIG was and is a solid company that didn't need to cheat," Spitzer said in a statement. "It finds itself in this position solely because some senior managers thought it was acceptable to deceive the investing public and regulators. However," Spitzer said, "by changing management, implementing reforms and providing restitution to injured investors, customers and states, the company has placed itself on a path toward resurgence."
The settlement does not protect Greenberg from personal charges. Spitzer filed civil fraud charges against him last year, and federal prosecutors are still examining his role in the General Re transaction.
Greenberg, forced out after his board learned about the General Re transaction, has denied wrongdoing. His spokesman, Howard Opinsky, criticized the AIG settlement, saying: "Shareholders lose when companies choose to settle investigations motivated by political ambition, fueled by threats and settled out of fear. Even if all the allegations were to be believed, a settlement of this magnitude is totally disproportionate to the impact of the alleged misconduct."
While huge, the $1.6 billion payment is slightly smaller than the $1.72 billion profit AIG reported for the most recent quarter available.
Legal analysts said the AIG investigation may have a particularly strong deterrent effect because the alleged fraud involved tinkering on the margins of a successful company.
"It's much easier for other people at real companies to identify with what happened at AIG," said University of Texas law professor Henry T.C. Hu. "Fines and CEO removals get to people who apply a rational cost-benefit calculation" to the decision to commit white-collar crime.
AIG has already forsworn paying contingent commissions to corporate insurance brokers in exchange for recommending it to customers.
The settlement opens the insurance industry to the possibility of further change, because AIG has agreed to expand the ban on contingent commissions to other kinds of insurance, provided many of its competitors do likewise.
Information from The Associated Press was included in this report.