NEW YORK – In one of the largest regulatory settlements ever, American International Group Inc. (AIG) has agreed to pay $1.64 billion to resolve allegations that it used deceptive accounting practices to mislead investors and regulators.
The deal announced Thursday also requires the New York-based company, one of the world's largest insurers, to adopt changes in its business practices that will ensure proper accounting procedures in the future.
The pact settles a civil suit filed last May by New York Attorney General Eliot Spitzer with backing from the New York State Insurance Department and the U.S. Justice Department. The Securities and Exchange Commission, which also worked with Spitzer on the investigation, filed and settled allegations of accounting fraud with the company simultaneously.
The settlement does not cover Maurice "Hank" Greenberg, the company's former chairman and chief executive who was named in the suit but has pledged to fight it in court.
Spitzer told The Associated Press in an interview, "This is a company that didn't have to cheat. But once they began, they found it hard to stop. And like an addict, they grew dependent on financial gamesmanship that could ultimately destroy the company."
He said that the new business practices AIG was adopting would improve the market for property and casualty insurance in the United States.
"AIG's obligation to be transparent, its obligation to report honest financials and its obligation to permit consumers to know what fees its agents and brokers will be deriving from sales, are going to define a new level of transparency in the market that all consumers will benefit from," Spitzer said.
The SEC's enforcement director, Linda Thomsen, noted that the investigation looked at the entire industry and centered on misuse of specialized insurance vehicles, such as reinsurance.
"While this settlement concludes our investigation of AIG, our investigation continues with respect to others who may have participated in AIG's securities-laws violations," she said.
The Justice Department, meanwhile, said AIG's agreement spares the company criminal prosecution in exchange for its cooperation with the ongoing federal criminal investigation.
Shareholders welcomed the announcement, sending AIG shares up $1.48, or 2.2 percent, to $67.86 in midday trading on the New York Stock Exchange.
AIG said that under the settlement it will pay $800 million for investors who were deceived by AIG's accounting tactics, including a $100 million penalty to the SEC. In addition, it will pay $375 million to AIG policyholders, $344 million to states harmed by AIG's practices from 1986 to 1995 involving state workers' compensation funds, and fines of $100 million to the state of New York and $25 million to the U.S. Justice Department.
AIG said it would take a $1.15 billion after-tax charge in its upcoming fourth-quarter earnings report to cover the settlement. It also announced that it would take a $1.10 billion after-tax charge to increase its reserves to reflect the completion of a recently concluded internal risk study.
AIG said that as part of the deal, it has agreed "to retain for a period of three years an independent consultant who will conduct a review" of the company's accounting and internal controls.
The settlement with AIG exceeds many of the fines the SEC imposed following a wave of corporate scandals in 2002, including civil fines and restitution of $750 million for WorldCom Inc., $715 million for Adelphia Communications Corp. and $300 million for Time Warner Inc.
It also surpasses the $850 million settlement Spitzer reached last year with Marsh & McLennan Companies Inc., the nation's largest property and casualty brokerage, to settle allegations of bid rigging and price fixing. Marsh & McLennan is headquartered in New York.
AIG was among the companies that allegedly participated in the bid-rigging scheme, and four former AIG executives were among 20 insurance executives and officers who have pleaded guilty to charges, Spitzer's office said.
Besides naming AIG, Spitzer's suit alleged that former AIG chairman Greenberg and former chief financial officer, Howard I. Smith, orchestrated the scheme.
Greenberg, who resigned from AIG in March, has repeatedly insisted that he followed proper accounting procedures during his 38 years at the helm of AIG. Smith, too, has denied wrongdoing, and neither of the men was involved in the negotiations with the SEC and Spitzer.
The accounting scandal centered on transactions that AIG under Greenberg concluded with Berkshire Hathaway's General Re. insurance group.
In its filing, the SEC said the $500 million transactions in 2000 and 2001 "were designed to inflate falsely AIG's loss reserves ... in order to quell analyst criticism that AIG's reserves had been declining."
Three former Gen Re executives and one former AIG executive were indicted last week in connection with the deceptive accounting scheme.
Greenberg was replaced as chief executive by Martin Sullivan, who oversaw the restatement of AIG's earnings back to 2000. The revisions knocked some $2 billion off shareholders' equity and nearly $4 billion off its profits.
Sullivan said in a statement Thursday that the settlement marked "a major step forward in resolving the legal and regulatory issues facing AIG." He said the company was "committed to business practices that provide transparency and fairness in the insurance market."
Kathleen Shanley, an analyst with Gimme Credit, said a settlement would represent "a positive milestone" in AIG's efforts to resolve its past issues.
She noted that while $1.6 billion was a large sum, AIG is a large company. AIG reported earnings of $1.7 billion in the third quarter last year after absorbing $1.6 billion in hurricane losses, mainly from Katrina.