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.
Connecticut is the third state whose attorney general has taken the lead in securities-related litigation.
Eliot Spitzer, in New York, spearheaded the settlement with Wall Street over the conflicts between research and investment banking, and he recently took the lead in the investigation into the special trading arrangements between mutual funds and hedge funds. And last month Oklahoma attorney general W. A. Drew Edmondson filed charges against WorldCom and six former executives, including former CEO Bernie Ebbers and former CFO Scott Sullivan.
Are Your Overseas Employees on Their Own?
On the two-year anniversary of the September 11 attacks, few organizations have taken concrete steps to address evacuation planning for their international employees, according to a survey by KPMG.
Of the more than 600 multinational companies that responded to a KPMG survey on global assignment policies and practices, less than one-third have contracted with a vendor for assistance, and fewer than 20 percent have location-specific plans in place.
Even so, companies have lessened their overall risk. Nearly 50 percent reported that they have made reductions in the number of assignees sent to high-risk locations.
On the other hand, last week we reported on a that a recent survey by The Hartford Financial Services Group. The survey found that 97 percent of 225 small and midsize businesses have at least one plan to protect themselves against an emergency.
Another recent survey, conducted by the Society for Human Resource Management, also found substantial changes in the office environment, some of them psychological.
SHRM asked 408 HR professionals, “In your opinion, what lasting changes, if any, have taken place in the workplace as a result of the September 11 terrorist attacks?” Among the results:
- 64 percent of organizations have put higher security provisions in place.
- 31 percent have increased their screening of employees during the hiring process.
- 27 percent have increased training in crisis management.
- 26 percent have curtailed business travel.
- New York Stock Exchange chairman Richard Grasso, under attack for his $140 million pay package, agreed to forgo $48 million in additional benefits even as he defended his deal.
- HR departments’ share of company budgets climbed a bit in 2003, to 0.9 percent of total projected expenditures for this year. That’s an increase from the 0.8 percent for 2002 but still substantially below the 1.1 percent during the mid-1990s.
- The economy is now expected to grow at a 4.5 percent annualized rate in the third quarter, the quickest pace since the first three months of 2002, according to the median estimate of 59 economists surveyed by Bloomberg. Last month, economists had projected third-quarter growth of just 3.6 percent.
- A federal judge has approved Conseco Inc.’s bankruptcy exit plan, freeing the company to emerge from court protection within days as an insurance-only operation, according to Reuters.