In one of the largest regulatory settlements ever, American International Group Inc. has agreed to pay more than $1.6 billion to settle allegations that it used deceptive accounting practices to mislead investors and regulators.
The settlement announced Thursday by New York Attorney General Eliot Spitzer’s office also requires the New York-based company, one of the world’s largest insurers, to adopt changes in its business practices to ensure proper accounting procedures in the future.
The pact settles a civil suit filed last May by Spitzer with backing from the New York State Insurance Department. The Securities and Exchange Commission, which also worked with Spitzer on the investigation, was to file and settle allegations of accounting fraud with the company simultaneously.
Spitzer spokesman Darren Dopp said the settlement was final.
The settlement does not cover Maurice “Hank” Greenberg, the company’s former chairman and CEO who was named in the suit but has pledged to fight it in court.
Spitzer told The Associated Press in an interview, “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 that the new business practices AIG was adopting would improve the market for property and casualty insurance in the United States.
“AIG’s obligation to be transparent, its obligation to report honest financials and its obligation to permit consumers to know what fees its agents and brokers will be deriving from sales, are going to define a new level of transparency in the market that all consumers will benefit from,” Spitzer said.
Shareholders welcomed the settlement announcement, sending AIG shares up 22 cents to $66.60 in morning trading on the New York Stock Exchange.
Under the agreement, about $800 million will go to investors who were deceived by AIG’s accounting tactics and about $375 million will go to AIG policyholders. In addition, some $344 million will go to states harmed by AIG’s practices from 1986 to 1995 involving state workers’ compensation funds. New York state and the SEC will share in the penalties too.
The settlement with AIG exceeds many of the fines the SEC imposed following a wave of corporate scandals in 2002, including civil fines and restitution of $750 million for WorldCom Inc., $715 million for Adelphia Communications Corp. and $300 million for Time Warner Inc.
It also surpasses the $850 million settlement Spitzer reached last year with Marsh & McLennan Companies Inc., the nation’s largest property and casualty brokerage, to settle allegations of bid rigging and price fixing. Marsh & McLennan is headquartered in New York.
AIG was among the companies that allegedly participated in the bid-rigging scheme, and four former AIG executives were among 20 insurance executives and officers who have pleaded guilty to charges, Spitzer’s office said.
Besides naming AIG, Spitzer’s suit alleged that former AIG chairman Greenberg and former chief financial officer, Howard I. Smith, orchestrated the scheme.
Greenberg, who resigned from AIG in March, has repeatedly insisted that he followed proper accounting procedures during his 38 years at the helm of AIG. Smith, too, has denied wrongdoing, and neither of the men was involved in the negotiations with the SEC and Spitzer.
Greenberg was replaced as chief executive by Martin Sullivan, who oversaw the restatement of AIG’s earnings back to 2000. The revisions knocked some $2 billion off shareholders’ equity and nearly $4 billion off its profits.
Spitzer said the management change and reforms made Thursday’s settlement possible.
“We all benefit when a company as important and as significant as AIG has leadership and is dedicated to honest management,” he said. “Prior management’s willingness to abuse and deceive was fundamentally detrimental to the integrity of the capital markets.”
He added: “The corrosive effect of their financial gamesmanship could have ultimately brought down the entire company.”
Kathleen Shanley, an analyst with Gimme Credit, said a settlement would represent “a positive milestone” in AIG’s efforts to resolve its past issues.
“Under the new senior management team, the company has taken steps to restore confidence in its operations, and I view the announcement of a formal settlement as another step along the path to putting these issues behind it,” Shanley said.
She noted that while $1.6 billion was a large sum, AIG is a large company. AIG reported earnings of $1.7 billion in the third quarter last year after absorbing $1.6 billion in hurricane losses, mainly from Katrina.