The Securities and Exchange Commission has announced that American International Group Inc. agreed to pay $10 million to settle fraud charges related to its role in an accounting fraud at Brightpoint, a cell-phone distributor.
In addition, the SEC brought charges against four executives, including former Brightpoint chief financial officer Philip Bounsall.
"This case shows that the Commission will pursue insurance companies and other financial institutions that market or sell so-called financial products that are, in reality, just vehicles to commit financial fraud," said Stephen M. Cutler, director of the SEC's Division of Enforcement, in a statement.
In bringing the fraud charges against AIG, the SEC accused the company with developing and marketing a so-called "non-traditional" insurance product for the stated purpose of "income statement smoothing." Brightpoint used that product to hide $11.9 million in losses and to overstate earnings by 61 percent in 1998, said the commission, adding that the $10 million civil penalty reflects AIG's participation in the Brightpoint fraud, as well as misconduct by AIG during the investigation.
"AIG worked hand in hand with Brightpoint personnel," said Wayne M. Carlin, regional director of the commission's Northeast Regional Office, "to custom-design a purported insurance policy that allowed Brightpoint to overstate its earnings by a staggering 61 percent." Added Carlin: "This transaction was simply a 'round-trip' of cash from Brightpoint to AIG and back to Brightpoint. By disguising the money as 'insurance,' AIG enabled Brightpoint to spread over several years a loss that should have been recognized immediately."
AIG agreed to make it appear that Brightpoint was paying premiums in return for an assumption of risk by AIG, the SEC elaborated in its complaint. "In fact, Brightpoint was merely depositing cash with AIG that AIG refunded to Brightpoint," it added.
In addition to Bounsall, the commission charged John Delaney, Brightpoint's former chief accounting officer; Timothy Harcharik, Brightpoint's former director of risk management; and Louis Lucullo, an AIG assistant vice president.
It claimed that Delaney and Harcharik negotiated the arrangement with Lucullo, and Bounsall approved the insurance transaction without adequately reviewing it.
Without admitting or denying the charges, Brightpoint agreed to pay a $450,000 civil penalty, Bounsall agreed to pay a $45,000 civil penalty, and Delaney consented to the entry of a permanent injunction barring future securities law violations, a permanent bar against his serving as an officer and director of a public company, and a judgment ordering him to pay a $100,000 civil penalty.
SEC Formalizes Raytheon Probe
Raytheon Co. announced that the SEC has launched a formal investigation, which the company first disclosed back in January, into certain accounting practices at its commuter-aircraft unit, Raytheon Aircraft Co. (This spring, CFO.com wondered whether defense contractors might get an easier ride from the SEC.)
The defense and aerospace contractor said it is continuing to cooperate fully with the SEC's inquiry.
Earlier this year the company said the inquiry was mostly related to Raytheon's Beech Jet commuter aircraft business and the timing of revenue recognition at King Air, its aircraft subsidiary, from 1997 to 2001. In 2000, Raytheon voluntarily restated revenue for the prior three years to reflect a change in revenue recognition.
Last November Raytheon was one of three companies — the others were Siebel Systems Inc. and Secure Computing Corp. — against which the SEC brought its first enforcement actions for alleged violations of Regulation FD.
Connecticut Takes a Page from the Eliot Spitzer Playbook
The State Treasury and Attorney General of Connecticut are leading a class action lawsuit on behalf of thousands of shareholders alleging illegal insider trading at fiber-optic components maker JDS Uniphase Corp., according to Reuters.
The lawsuit was advertised in a newspaper in Ottawa, Canada, where the company is headquartered, although it has recently consolidated its head office in San Jose, California. It alleges that JDS insiders knew the company was having problems, but chose to keep them secret and personally profited by more than $3 billion, "and then let average investors lose millions when word got out and the stock collapsed," according to the wire service.
"Some employees may have signed confidentiality agreements, but the court agreed with the Treasurer's Office and the Attorney General that employees cannot be prevented from telling what they know," the advertisement reportedly said.
In response to the allegations, JDS Uniphase spokeswoman Lori Goulet told Reuters that they "are without merit and we will vigorously defend the company in this matter."
As you may recall, JDS was one of the hottest tech stocks during the 1990s bubble. In 2001, however, the company wrote off $45 billion for impairment of assets — a record at the time.
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