When the wheels came off the American economy in the fall of 2008 there was a steady stream of companies lining up for a government bailout and none were of a higher profile than American Insurance Group (AIG). Over a chorus of jeers from the general public the United States Government set out to rescue the “Too Big to Fail” company by setting up an $85 Billion dollar reserve in exchange for 79% ownership of the company. Emotions ran high during this time period and no matter which side of the aisle you were on in regards to the bailout of AIG, the current SECcomplaint against AIG will make most any person angry.
The SEC has taken its lumps for its role, or lack of it, during the economic downturn. But, this case shows the SEC is paying attention and investigating those who play fast and loose with the rules. What this investigation highlights most of all is that AIG was routinely engaged in business practices designed to inflate the company’s worth and misstate earnings, costing investors millions of dollars. All of this was orchestrated through the use of shell companies and investors with the full knowledge of the former executives.
Maurice R. “Hank” Greenberg, Former Chairman and CEO, and Howard I. Smith, Chief Financial Officer settled with the SEC with payments of $15 million and $1.5 million respectively for their roles in this scandal. This is in addition to the fines levied in 2006 against AIG totaling around $800 million dollars for securities fraud and improper accounting. The SEC’s release included this quote from Robert Khuzuai, Director of the SEC’s Division of Enforcement, “Corporate leaders cannot avoid the truth and consequences of their company’s performance by using improper accounting gimmicks and signing off on distorted financial reports.”
While reviewing the SEC complaint several interesting items were found;
- Greenberg made it clear through conversations regarding reduction of stock price due to inadequate loss reserves that AIG was going to use “aggressive accounting techniques”. This was done through a transaction with GenRe which was paid a $5 million dollar fee and refunded $10 million dollar premium back to AIG through an off-shore company. This transaction was not in conformity with GAAP and referred to as “reckless” by the SEC.
- A “sham” transaction was done through what is called a round trip of cash. Basically a transaction was done between two companies which had no economic substance, but was done for the sole purpose of manipulating AIG’s financial statements.
- Materially false statements regarding loan loss reserves were given that were signed off on by Greenberg and Smith.
- Concealed losses through a shell company from Barbados called Capco which AIG acquired through a subsidiary called AIRCO. Using this company, Capco absorbed $210 million in AIG losses so investors would be willing to make capital investments and stock price would not be affected.
- When AIRCO officials raised concerns regarding Howard Smith’s orders to not record an unrealized loss, Howard Smith admonished them for sending their concerns over e-mail and demanded that all evidence of the conversation be destroyed.
This SEC complaint reveals full of sham investments, false investors, manipulation of financial statements and cover-up. These were all designed to hide losses that reached the hundreds of millions of dollars while at the financial statements were inflated and stock prices were manipulated. This is not to mention the damning evidence that a direct order was issued from AIG’s CFO to destroy all e-mail trails of AIG’s wrong doings.
Technology such as Estorian’s LookingGlass allows companies to ensure that e-mail evidence isn’t destroyed. Shareholder value and company reputation should be closely guarded and ensuring all communications regarding the financial viability of a company should be kept in accordance to federal law.
AIG was front and center in the current financial crisis and only survived through a bailout from unearned tax payer dollars. But, when you see this type of unethical and arguably criminal of allegations against Hank Greenberg and Howard Smith, it makes one pause and question whether AIG deserved to be saved and undoubtedly will make it harder to gain public support for further cash infusions.
Companies should be mindful of these types of executives and ensure that e-mail discussions of company financial data is preserved through the use of technology such as LookingGlass. As this case points out, executives who cook the books and destroy evidence will eventually be held accountable. The big difference today between AIG and you is that your company cannot count on a bail out if it happens inside your company.