New York Attorney General Eliot Spitzer on Thursday filed a civil suit against American International Group Inc., accusing the nation’s largest insurance company and two former top executives of using “deception and fraud” to boost the company’s stock price.
The suit filed in state Supreme Court in Manhattan accused AIG’s former chief executive, Maurice “Hank” Greenberg, and former chief financial officer, Howard I. Smith, of orchestrating an accounting scheme that made AIG’s financial picture appear brighter than it was, misleading both investors and state regulators.
“The irony of this case is that AIG was a well-run and profitable company that didn’t need to cheat,” Spitzer said. “And yet, the former top management routinely and persistently resorted to deception and fraud in an apparent effort to improve the company’s financial results.”
The 37-page suit accuses AIG of employing a variety of questionable accounting devices. The suit said, for example, that AIG “engaged in at least two sham insurance transactions” to give the impression its reserves were higher than they were.
It said Greenberg “personally proposed and negotiated” the deals with General Reinsurance Corp., a unit of billionaire investor Warren Buffett’s holding company Berkshire Hathaway Inc. Buffett has said he was not directly involved in the transaction, and the suit says the deal was worked out between Greenberg and Gen Re’s former chief executive.
The suit also alleges that AIG concealed losses from insurance underwriting through offshore shell companies; mischaracterized income from the purchase of life insurance policies; and repeatedly lied to state insurance regulators about its ties to offshore companies.
The suit suggests that Greenberg and Smith manipulated the stock for their own financial benefit.
“Greenberg and Smith ... both held hundreds of thousands of shares of AIG stock. For example, the value of Greenberg’s holdings increased or decreased approximately $65 million for every dollar AIG stock moved,” the civil suit claimed.
Greenberg’s attorney, David Boies, didn’t immediately respond to a request from comment and Smith couldn’t be reached for comment.
AIG spokesman Joe Norton said that AIG — now operating under new management — was continuing to cooperate with investigators.
“There are no new claims raised in the complaint,” Norton said. “We are pleased that Attorney General Spitzer has recognized our cooperation and has previously indicated his expectations of reaching a civil settlement with AIG.”
Kathleen Shanley, an analyst with Gimme Credit, an independent bond research firm in Chicago, said investors may have reacted positively because “although serious issues were raised, most of them have already been identified by the company in their own filings.”
Meanwhile, a grand jury is probing potentially criminal conduct by individuals at AIG, including former top management, according to sources quoted in The New York Times and The Wall Street Journal.
Spitzer and his staff have refused to confirm or deny that a grand jury is dealing with the case.
Greenberg, 80, resigned as chief executive officer and chairman of AIG in March, ending nearly 40 years at the helm of the insurance company. Smith was fired about a week later for failing to cooperate with investigators.
Called to testify last month before Spitzer’s staff, representatives from the Securities and Exchange Commission and lawyers from the New York state insurance department, Greenberg claimed his Fifth Amendment rights against self-incrimination, saying he had not been given access to AIG documents he needed for his defense.
State Insurance Superintendent Howard Mills said that the complaint “includes compelling evidence that investors and regulators were misled over an extended period of time.”
He added: “Having said that, however, I believe AIG’s current management team has taken steps to restore the company’s credibility.”
The suit says Greenberg repeatedly directed AIG traders to buy AIG stock to prop up its price, once after losses from a natural disasters and again after the company was served with a subpoena.
“I don’t want the stock below $66 so keep buying,” Greenberg told a trader, according to the suit that cites e-mails and testimony. “I wanna push it up a little bit if we can.”
In 1989, two employees said they warned top AIG officials that a practice of shifting the accounting of premiums from worker’s compensation — where a state assessment was charged — to general or auto policies was illegal, according to the lawsuit.
A note from the general counsel stated an employee went to “MRG,” referring to Greenberg. The employee said he was told Greenberg “did not want him to change things to make it legal — he wants to continue as is.”
Another interview witness quoted his notes from a meeting with Greenberg: “‘Are we legal?”’ Greenberg asked. “When an employee responded, ‘If we were legal, we wouldn’t be in business,’ then ‘MRG began laughing and that was the end of it.”’
Greenberg was replaced as CEO by Martin J. Sullivan, 50, who had served as vice chairman and co-chief operating officer. When named in mid-March to the post, he became just the third man to hold the post since AIG’s founding in 1919.
Sullivan and his new management team have been working to prepare the company’s annual report for 2004 and make previously announced accounting adjustments that will cut AIG’s value by some $2.7 billion. The report is expected to be released Tuesday.
AIG is also accused of understating losses from an automobile warranty unit by transferring the losses to an offshore subsidiary.
“Company officials repeatedly lied to state regulators about AIG’s ties to this and other offshore entities,” according to Spitzer’s statement.
The company is also accused of covering up losses in a Brazilian subsidiary by linking those losses to a Taiwan-based subsidiary that had been hit by damage claims from a typhoon and of creating “false underwriting income” through transactions to buy life insurance policies from dying people, Spitzer stated.
The state officials also accuse the company of fraudulently reducing its tax liability.
