Risk Management

SEC Mulls New Charges against AIG

The lawsuit being considered against the insurance giant is reportedly part of a commission crackdown on companies that allegedly abet fraud.
Stephen TaubSeptember 23, 2004

The Securities and Exchange Commission’s staff is thinking about suing American International Group, Inc. for alleged violations of securities laws in connection to deals marketed to PNC Financial Services Group by a unit of the insurer.

AIG announced earlier this week that the insurance giant and its subsidiary AIG Financial Products Corp. (AIGFP) received a Wells Notice, a formal indication that the SEC staff is considering recommending that the SEC bring a civil action against both companies.

The action is part of an SEC crackdown on businesses that allegedly help other companies commit fraud, according to The Wall Street Journal.

AIG’s alleged violations concern transactions marketed to PNC Financial Services Group, Inc. before 2003. The deals include three transactions entered into by a subsidiary of AIGFP with the financial services company between June and November of 2001.

AIG and AIGFP said the proposed action would be “unwarranted” and they would respond to the SEC.

The PNC transactions were the subject of an SEC action against PNC in 2002 and were ended early in 2003. A 2002 probe by the commission found that AIG helped PNC create three special-purpose entities to remove $762 million of under-performing loans and volatile venture-capital investments off PNC’s balance sheet, according to the Associated Press.

Without admitting or denying wrongdoing, the Pittsburgh-based bank agreed to a formal settlement with the SEC, the Federal Reserve, and the Office of the Comptroller of the Currency, according to press reports.

Last year PNC paid $115 million to settle Justice Department criminal charges, according to Bloomberg.

“AIG didn’t really pay anything for the PNC situation, “Stuart Quint, an analyst at Gartmore Global Investments, told Bloomberg. “The SEC wants to revisit it.”

The SEC has also been investigating the role of Ernst & Young, PNC’s auditor, according to Bloomberg. AIG has been accused by regulators of setting up the special-purpose entities in conjunction with E&Y, and both AIG and the accountant said they received subpoenas from the SEC in 2002, according to the wire service.

Bloomberg reported that E&Y spokesman Kenneth Kerrigan didn’t return a phone call seeking comment.

The Wells Notice concerning PNC is the second accounting-related SEC action involving AIG in the past year. In September 2003, AIG, without admitting or denying the charges against it, agreed to pay $10 million to settle fraud charges related to its role in an accounting fraud at cell-phone distributor Brightpoint. The PNC action this week is an “outgrowth” of the Brightpoint action, according to the Journal.

In the Brightpoint case, the SEC accused the insurer 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, according to the commission. The $10 million civil penalty reflected AIG’s participation in the Brightpoint fraud, as well as misconduct by AIG during the investigation, the SEC asserted.

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