Washington, D.C., Nov. 30, 2004 – LAWFUEL – SEC, law, attorney news first – The Securities and Exchange Commission today announced the filing and settlement of charges against American International Group, Inc. (AIG) arising out of AIG’s offer and sale of an earnings management product. In settling the Commission’s action and related, criminal charges by the Department of Justice, AIG has agreed to
pay a total of $126 million, consisting of a penalty of $80 million, and
disgorgement and prejudgment interest of $46 million.
The Commissions action against AIG was brought in the United States
District Court for the District of Columbia. Under the terms of the
settlement with the Commission, which is subject to court approval, AIG will
be permanently enjoined from violating the antifraud provisions of the
federal securities laws and from aiding and abetting violations of the
reporting and record-keeping provisions of the federal securities laws. In
addition, AIG has agreed to the appointment of an independent consultant to
examine certain AIG transactions going back to the year 2000, including any
transaction that was effected with the primary purpose of enabling a public
company to achieve an accounting or financial reporting result. Further,
AIG has agreed to establish a Transaction Review Committee to review certain
future transactions involving heightened legal, reputational or regulatory
risk.
Stephen M. Cutler, Director of the Commissions Division of Enforcement,
said, “This action is a message to insurance companies and others that sell
structured finance or other products to public companies that are designed
for no purpose other than to improve those companies accounting results.
In appropriate circumstances, marketers of such products will be held liable
for the resulting misstatements in their customers financial disclosures.”
The Commissions action arises out of AIGs conduct in developing,
marketing, and, in the case of one public company“ The PNC Financial
Services Group, Inc. (PNC)“ entering into transactions that were designed
to enable the buyer to remove troubled or other potentially volatile assets
from its balance sheet. By removing these assets from its balance sheet,
the company supposedly would be able to avoid charges to its reported
earnings from declines in the value of these assets. As alleged in the
Commissions complaint, AIG was reckless in not knowing that the product it
developed did not satisfy the accounting standards for removing the assets
from the companys balance sheet.
According to the complaint, the product that AIG developed was known as
C-GAITS, and it was marketed and sold to public companies primarily by AIGs
wholly owned subsidiary, AIG-Financial Products Corp., from at least March
2001 through January 2002. As developed, AIG, for a fee, would establish a
special purpose entity (SPE) to which the counter-party would transfer
troubled or other potentially volatile assets and, in return, would receive
preferred stock in the SPE. AIG represented to prospective counter-parties
that, under applicable accounting standards, the SPE would not have to be
consolidated on the counter-partys financial statements and the
counter-party would not have to record declines in the value of the
transferred assets or the preferred stock as charges to its earnings. As
alleged in the Commissions complaint, while AIG was marketing the C-GAITS
product, independent auditors for some potential counter-parties raised
issues about whether certain features of the product could violate the
accounting requirements for nonconsolidation of SPEs. With one exception,
however, AIG did not inform other potential counter-parties of these issues.
In addition to its misrepresentations and omissions while marketing the
C-GAITS product, AIG, as alleged in the complaint, entered into three
C-GAITS transactions with The PNC Financial Services Group, Inc. By
entering into the three C-GAITS transactions, PNC improperly sought to
remove $762 million in loan and venture-capital assets from its balance
sheet and thus to avoid charges to its income statement from declines in the
value of these assets. As a result, PNC made materially false and
misleading disclosures about its financial condition and performance in
filings with the Commission and in press releases. AIG was reckless in not
knowing that the C-GAITS transactions with PNC did not satisfy the standards
for nonconsolidation by PNC.
Under the settlement, the disgorgement and prejudgment interest will be paid
to a victim restitution fund established in connection with the prior
resolution of criminal charges by the Department of Justice against a PNC
subsidiary. The independent consultants examination will cover
transactions that AIG entered into with any public company between Jan. 1,
2000, and the date of the final judgment that involved the use of SPEs or
variable interest entities, or that were marketed or entered into by AIG
with a primary purpose of enabling a public company to obtain an accounting
or financial reporting result. The Transaction Review Committee will review
transactions proposed to be undertaken with a public company that were or
are developed, marketed, or proposed by AIG or a public company and that
involve heightened legal, reputational, or regulatory risk, including
transactions with a primary purpose of enabling a public company to obtain
an accounting or financial reporting result. The independent consultant
also will conduct a review related to certain policies and procedures
adopted by the Transaction Review Committee.
Todays civil and criminal actions are the result of investigations by the
Commission, the Fraud Section of the Criminal Division of the Department of
Justice, and the Pittsburgh office of the Federal Bureau of Investigation.
Contacts: Linda C. Thomsen (202) 942-4501
Laura B. Josephs (202) 942-7872
