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New York Sues AIG Over Accounting Practices

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The attorney general and insurance superintendent of New York announced they have filed a civil suit against American International Group alleging that executives at the company used improper accounting practices to pump up the company’s earnings to deceive investors and regulators.

The suit, filed in Supreme Court of the state of New York, County of New York, against the New York-based insurance giant, claims the company “engaged in misleading accounting and financial reporting, projecting an unduly positive picture of AIG’s underwriting performance for the investing public.”

The suit names AIG, Maurice R. Greenberg, AIG’s former chairman and CEO, and Howard I. Smith, former chief financial officer.

In the suit, Attorney General Eliot Spitzer and Insurance Superintendent Howard Mills allege the company and executives:

o Engaged in “two sham insurance transactions” that gave investors the impression the company had larger reserves for claims than it did. The transactions, personally approved and negotiated by Greenberg, the complaint alleges, involved the CEO of General Reinsurance Corporation, Inc.

o Hid losses from its underwriting business by converting the underwriting losses into capital losses.

o Created false underwriting income that involved false reporting of income from the purchase of life insurance policies as underwriting policies. This scheme was personally approved by both Greenberg and Smith, the suit alleges.

The complaint further claims that Greenberg manipulated AIG’s stock price, instructing traders to “aggressively purchase” the stock and increase the worth of his and Smith’s holdings.

The company is accused of booking workers’ compensation insurance premiums as regular liability insurance revenue, which may have reduced AIG’s contribution to the state’s workers’ comp system and avoided payment of taxes on the premiums.

AIG is also accused of deceiving New York state and other insurance regulators about offshore relationships with reinsurers. Documents related to this investigation were destroyed by AIG, the suit alleges.

The practices alleged in the suit began in the 1980s and continued until Greenberg left the company this year, the suit says.

In one scheme, begun in October 2000 as AIG’s stock dropped after reporting its third quarter financial condition indicated a decrease in reserves, Greenberg set up a scheme with Ronald Ferguson, CEO of General Re aimed at fraudulently increasing AIG’s reserves with the purchase of $500 million in reinsurance from AIG. This scheme, in turn, was meant to improve to company’s financial picture.

Ferguson stepped down as CEO of General Re in October 2001, and remained a consultant. The company recently severed all ties with him.

Another scheme alleges that AIG adjusted its accounting books with unsupported accounting entries to increase the company’s reserve levels before issuing its quarterly reports. Smith is accused of personally supervising the entries, instructing employees to make changes.

Both Greenberg and Smith are accused of creating a shell corporation to hide $210 million in losses from an auto warranty business in 1999. The company used CAPCO Reinsurance Company, Ltd., a Barbados insurance company for their scheme. The company was liquidated in 2002 after serving its purpose.

In another scheme, hatched in 1999, the suit alleges the company disguised underwriting losses from its Brazilian life business as investment losses that involved Nan Shan Life Insurance Company, Ltd, a Taiwanese AIG company.

The complaint seeks payment of punitive damages and court costs, restitution and other payments.

A spokesman at AIG said the company did not have time to review the complaint and could not comment at this time.

Mark E. Ruquet and Michael Ha are assistant editors of NU’s Property & Casualty edition.

A civil suit was filed against former AIG CEO Maurice Greenberg, AIG and former AIG CFO Howard Smith by New York state officials.


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