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    AIG Fraud

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    akashnagar
    This document summarizes an investigation by New York Attorney General Eliot Spitzer into insurance fraud at American International Group (AIG). [1] Spitzer had previously prosecuted cases of bid rigging involving AIG. [2] The investigation found that AIG had helped clients such as Brightpoint and PNC Financial falsify financial statements through the use of fraudulent reinsurance policies and off-balance sheet vehicles. [3] As a result of Spitzer's investigation, AIG paid $126 million in penalties but did not admit wrongdoing. Regulators then began investigating AIG's own accounting and use of "finite risk" insurance products.

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    AIG Fraud

    Uploaded by

    akashnagar
    243 views14 pages
    This document summarizes an investigation by New York Attorney General Eliot Spitzer into insurance fraud at American International Group (AIG). [1] Spitzer had previously prosecuted cases of bid rigging involving AIG. [2] The investigation found that AIG had helped clients such as Brightpoint and PNC Financial falsify financial statements through the use of fraudulent reinsurance policies and off-balance sheet vehicles. [3] As a result of Spitzer's investigation, AIG paid $126 million in penalties but did not admit wrongdoing. Regulators then began investigating AIG's own accounting and use of "finite risk" insurance products.

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    This document summarizes an investigation by New York Attorney General Eliot Spitzer into insurance fraud at American International Group (AIG). [1] Spitzer had previously prosecuted cases of bid rigging involving AIG. [2] The investigation found that AIG had helped clients such as Brightpoint and PNC Financial falsify financial statements through the use of fraudulent reinsurance policies and off-balance sheet vehicles. [3] As a result of Spitzer's investigation, AIG paid $126 million in penalties but did not admit wrongdoing. Regulators then began investigating AIG's own accounting and use of "finite risk" insurance products.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    243 views14 pages

    AIG Fraud

    Uploaded by

    akashnagar
    This document summarizes an investigation by New York Attorney General Eliot Spitzer into insurance fraud at American International Group (AIG). [1] Spitzer had previously prosecuted cases of bid rigging involving AIG. [2] The investigation found that AIG had helped clients such as Brightpoint and PNC Financial falsify financial statements through the use of fraudulent reinsurance policies and off-balance sheet vehicles. [3] As a result of Spitzer's investigation, AIG paid $126 million in penalties but did not admit wrongdoing. Regulators then began investigating AIG's own accounting and use of "finite risk" insurance products.

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    of 14

    Insurance Fraud

    at AIG

    By
    Akash Nagar (4889)
    &
    Rohit Jain (4895)
    BBS – 1C
    Acknowledgement

    We would like to express our deep sense of


    intellectual debt to our mentor and teacher
    Ms. Swati Gupta, who provided valuable
    comments and suggestions from time to
    time as to methodology, style and
    substance. Without her help, able guidance
    and encouragement, the making of this
    project would not have been possible.

    Akash Nagar (4889)


    Rohit Jain (4895)
    BBS – 1C
    Table of Contents
    American International
    Group Inc.
    “We Know Money”

    • Largest U.S. commercial insurer

    • 93,000 employees

    • Does work from insurance to asset


    management in 130 countries
    • Main customers are businesses, but it
    also sells life and property insurance to
    individuals
    • One of the largest, most profitable
    companies in the world
    • Known for its steady earnings growth

    • CEO: Maurice “Hank” Greenberg

    • World’s biggest reinsurance buyer


    Who is Eliot Spitzer?

     He resigned as the Governor of New York


    in 2008
     He was the New York Attorney General
    for 8 years who was brilliant at
    prosecuting Wall Street fraud
     He was also the Client 9 of a prostitution
    ring
     He is also the son of a multimillionaire
    real estate developer
    Initial Warning Signs at
    AIG

     A company founded in 1987 called Coral


    Reinsurance in Barbados only had one
    customer: AIG
     In 1991, Coral Re held more than $1
    billion in estimated losses from AIG but
    only had $15 million in capital
     Regulator’s became convinced that Coral
    Re was under AIG’s control and no real
    risk was being transferred
     AIG eventually agreed to stop its
    business with Coral Re, but AIG never
    admitted Coral Re was an affiliate and
    never was fined
     Eliot Spitzer named AIG as a participant
    in a bid-rigging scheme with other major
    insurers and insurance broker Marsh &
    McLennan Cos.
     2 former AIG employees pleaded guilty
    in the scheme
     Marsh & McLennan’s CEO at the time
    was AIG CEO Maurice R. “Hank”
    Greenberg’s son (Jeffrey Greenberg)

    Eliot Spitzer cited Fortune Brands (sells home/office products,


    wine/spirits, etc.) as a victim of the bid-rigging. Marsh directed
    underwriters at ACE Ltd. (headed by Evan Greenberg, Maurice
    Greenberg’s other son) to raise their quote on excess liability
    coverage for Fortune Brands to keep it from competing with a
    unit of American International Group Inc. In an internal email it
    was stated by ACE "We were more competitive than AIG in
    price and terms. (Marsh) requested we increase premium to
    $1.1 million to be less competitive, so AIG does not (lose) the
    business."

    Mr. Spitzer has charged that insurers intentionally produced


    inflated quotes and lost business in the alleged Marsh bid
    rigging, knowing that they would later win other accounts from
    the broker. New York Attorney General Eliot Spitzer sued MMC,
    charging the broker with steering clients to insurers paying
    Marsh the highest contingent commissions and rigging bids on
    client programs. Mr. Spitzer’s investigation has produced 9
    guilty pleas in total so far. The younger Mr. Greenberg was
    forced from his post as the chief of Marsh & McLennan Cos.
    after Mr. Spitzer publicly said he wouldn't deal with the
    company during a bid- rigging probe of its insurance brokerage
    if Mr. Greenberg was in charge.

    AIG’s Previous Fraudulent Encounters


     Brightpoint
    AIG helped Brightpoint design a retroactive “insurance
    policy” to spread out losses that should have been
    recognized immediately

    SEC accused AIG of both fraud and helping Brightpoint


    falsify its earnings in 1998

    o Overstated earnings by 61%

    o Hid some of Brightpoint’s $29 million in losses

    o Fraud surfaced in 2003

    AIG agreed to pay $10 million fine in a settlement of civil


    charges with the SEC

    AIG worked hand-in-hand with Brightpoint personnel to


    custom design this “insurance policy.” Basically, money
    just transferred from Brightpoint to AIG back to
    Brightpoint, no risk was transferred). By disguising the
    money as insurance AIG enabled Brightpoint to spread a
    loss that should have been recognized immediately out
    over several years (Brightpoint would pay monthly
    premiums to AIG for 3 years, but during the time AIG paid
    the money back in the form of insurance claims,
    Brightpoint recorded the payments as insurance
    receivables to offset its losses). AIG also withheld
    documents and committed other abuses which made its
    misconduct worse. AIG’s profit from this policy was less
    than $100,000.

     PNC Financial Services Group Inc.


    AIG helped PNC Financial Services create 3 special-
    purpose, off-balance-sheet investment vehicles in 2001

    SEC charged that AIG acted as a counterparty to move


    $762 million of underperforming loans or volatile assets
    off PNC’s balance sheet

    AIG again helped clients deceive investors by selling


    insurance products or creating off-balance-sheet vehicles
    that have the effect of downplaying losses or overstating
    earnings. This let PNC show earnings that were 52% more
    then they would have been without these special purpose
    vehicles. These investment vehicles allowed PNC to dump
    assets into them that they expected to deteriorate. AIG
    also contributed funds to these vehicles. AIG resisted
    requests for documents, emails, and other information the
    SEC and Justice Dept. requested and downplayed the
    seriousness of investigations in public statements. AIG,
    from the firm’s management fees for the first year, made
    $8.1 million from the PNC transactions.

    SIMILARITIES in BOTH the Cases

     In both cases, AIG helped these companies hide adverse


    financial developments from their shareholders

     AIG never admitted or denied wrongdoing in either case


     Settlement- AIG pays:

     $80 million penalty to the Justice Department

     $46 million to a SEC restitution fund

    Additional Provision of
    Settlement

     Provision of settlement requires AIG to hire an


    independent consultant jointly chosen by the
    company, the SEC, and the Justice Dept. to review
    certain transactions between 2000 and 2004 to
    determine whether they were used to violate
    accounting rules or manipulate financial results

     When asked about the regulatory environment


    Greenberg said the crackdown was excessive and
    “When you begin to look at foot faults and make
    them into a murder charge, then you have gone
    too far."

    As part of the settlement, the Justice Department


    also said it would defer prosecution on its criminal
    complaint for 13 months and eventually dismiss the
    complaint if AIG and its subsidiaries fully comply with
    the obligations set forth in the agreement. The
    settlement does not apply to Eliot Spitzer's ongoing
    probe of the insurance industry, which includes
    scrutiny of loss mitigation products.
    Spitzer addressed the AIG chief's comments. "Hank
    Greenberg should be very, very careful talking about
    foot faults," he warned. "Too many foot faults, and
    you can lose the match. But more importantly, these
    aren't just foot faults.”Although it wouldn't be
    publicly disclosed for five more days, that very
    evening Spitzer's office was serving AIG with the
    subpoena that would end Greenberg's career.

    AIG’s own accounting goes under review

     New York Attorney General Eliot Spitzer and the SEC had been
    focusing on the relationships between AIG and their clients

     Now focus is shifting to AIG’s own financial statements

     Regulators are interested in whether AIG has aided their own results
    with the techniques they pioneered and marketed in years past

     AIG maintains its own accounting is not an issue

    Starting to investigate nontraditional insurance products and


    certain assumed reinsurance transactions and AIG's
    accounting for such transactions. AIG in February 2005 had
    announced it was subpoenaed by the U.S. Securities and
    Exchange Commission and New York Attorney General Eliot
    Spitzer's Office in an investigation of non-traditional
    insurance products that investigators said might have been
    used to improperly improve the company's financial picture.
    Investigation is beginning to focus on AIG’s own use of finite
    risk coverages. The SEC has also requested information on
    the use of finite risk products from other companies,
    including General Re Corp., Chubb Corp., ACE Ltd. and
    Swiss Reinsurance Co. This may be the first time regulators
    are investigating these products' impact on an insurer's own
    book, rather than on its clients'.
    New Questions encountered….

    Could AIG be manipulating its


    own earnings and/or balance
    sheet?
     Regulators gain interest in AIG and
    transactions it has had with General Re
    possibly dating back 3 or 4 years

    Mr. Spitzer and the SEC subpoenaed Berkshire


    Hathaway Inc., the insurance-holding company
    run by billionaire investor Warren Buffett. The
    Omaha, Neb., company said the subpoenas
    sought documentation and information relating
    to nontraditional or loss-mitigation insurance
    products from its General Re unit and the unit's
    affiliates.
    Some of the "alternative risk" transactions that
    regulators are looking into across the industry
    allow insurers to improve their balance sheets in
    the short run either by moving some of their
    claims reserves to another insurer, or taking on
    another company's reserves. Such arrangements
    can violate accounting rules if sufficient risk isn't
    transferred.

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