Spitzer Brings Civil Charges Against AIG And Greenberg

by Glen Shapiro, LawAndTax-News.com, New York

31 May 2005

As expected, New York State Attorney General Eliot Spitzer and the New York State Insurance Department have brought civil charges against American International Group, former Chairman Maurice R. "Hank" Greenberg and the insurance company's former chief financial officer, alleging that AIG engaged in sham transactions, hid losses and created false income.

Said Spitzer: "The irony of this case is that AIG was a well-run and profitable company that didn't need to cheat. And yet, the former top management routinely and persistently resorted to deception and fraud in an apparent effort to improve the company's financial results."

AIG said: "We have been cooperating and will continue to cooperate with the attorney general, the superintendent, and other regulatory agencies on all these matters. There are no new claims raised in the complaint."

The suit cites e-mails and other evidence intended to show that Greenberg was personally involved in negotiating some of the fraudulent transactions, and that he directed other AIG staffers to create other misleading transactions.

New York State Insurance Superintendent Howard Mills said, "The charges against AIG and two of its former executives are serious ones and the complaint includes compelling evidence that investors and regulators were misled over an extended period of time. Having said that, however, I believe AIG is taking steps to restore the company's credibility."

Alongside the civil action, the slew of allegations against AIG has led a grand jury investigation of potentially criminal conduct by individuals at the insurance group, which is likely to reach its conclusions in a few weeks' time.

AIG was initially accused of using Barbados and Bermuda companies to park reinsured risks off its balance sheet inappropriately, but the probe led by Eliot Spitzer uncovered alleged accounting improprieties and possibly unlawful stock purchases.

According to the complaint filed last week, AIG sought at first to hide losses in a Brazilian life-insurance unit, but decided later to address other losses in a Taiwanese unit, Nan Shan Life Insurance Co., that was part of the same operating division. In the end, AIG turned the Nan Shan underwriting losses into investment losses using a series of complex transactions with a Barbados insurer, Union Excess Reinsurance Co., that AIG secretly controlled. Mr. Greenberg "personally was apprised of the progress of both" sets of transactions, the lawsuit alleges.

One of the complaint's many allegations is that L. Michael Murphy, a Bermuda-based tax expert for AIG, "removed" a tape recording of a March 2005 board meeting for one of the offshore insurers in the probe. The suit says Mr. Murphy ordered electronic versions of transcripts erased. "Unbeknownst to Murphy, a hard copy draft transcript of the meeting exists" and was given to authorities by AIG management, the suit says. Mr. Murphy isn't named as a defendant. Mr. Murphy's attorney, Sean O'Shea, said he gave a transcript of the meeting to Mr. Spitzer's office on April 8. "Any allegation that Mr. Murphy ordered the transcript destroyed ... is a false and knowingly malicious statement," Mr. O'Shea said.

AIG, which has had major interests in Bermuda for 50 years, has been under investigation since last year. In addition, the SEC, the New York attorney general's office, the New York Insurance Department and the Justice Department have been examining AIG's ex-boss Hank Greenberg's role in initiating a transaction with General Re, a reinsurance subsidiary of Berkshire Hathaway Inc., that allowed AIG to bolster reserves artificially against future claims. AIG said in late March that it did not account correctly for that transaction and others, with a total value of $3bn.

Greenberg, who was 80 last month, resigned as chief executive of AIG on March 14 and as chairman later that month. When sub-poenaed to give evidence by Eliot Spitzer, on 15th April, Greenberg took the 5th amendment in response to some questions.

It is reported that AIG senior executive Joseph Umansky testified to the grand jury, and he is said to have struck a deal to receive immunity from potential charges in return for his testimony. Mr Greenberg and former Chief Financial Officer Howard I. Smith are said to be among the individuals who are the focus of the grand jury. Mr. Smith was dismissed in March for not cooperating with investigators.

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