NEW YORK, Aug 06, 2009 (A. M. Best via COMTEX) -- Maurice "Hank" Greenberg, former chairman of American International Group, has agreed to pay $15 million to settle regulators' allegations of improper accounting transactions at AIG, a U.S. Securities and Exchange Commission official said.

Howard Smith, AIG's former chief financial officer, also agreed to pay $1.5 million to settle SEC charges of using improper accounting transactions to inflate AIG?s financial results, Robert Khuzami, director of the SEC's Division of Enforcement, said in a statement.

"Greenberg and Smith oversaw various improper transactions that presented a false financial picture and allowed AIG to claim success in meeting its performance goals," said Khuzami.

According to the complaint, while Greenberg publicly described AIG as the leader in the insurance and financial services industry with a history of delivering consistent double-digit growth, "AIG under Greenberg faced a number of financial challenges that, had they been properly reported or accounted for, would have exposed significant missteps in AlG's operations and caused the company to miss certain key earnings and growth targets."

The complaint alleges that Greenberg knew about the impact the transactions would have on AIG's reported financial results, and along with Smith was responsible for false and misleading public statements and material omissions in quarterly reports that AIG filed in the second and third quarters of 2002, and in related press releases and investor conference calls.

The complaint lists "three primary areas of fraud" from 2000 through 2005: "Transactions with General Re Corp. in which AlG purportedly increased its loan loss reserves; transactions with Capco Reinsurance Co. Ltd., a special purpose entity AIG created and used to conceal underwriting losses by converting them improperly to capital losses; and (3) transactions to misstate net investment income or capital gains."

The complaint charges that the Gen Re transactions occurred when Greenberg responded to analysts' criticism of AlG's declining loss reserves, and that by accounting for them improperly as real reinsurance, AlG falsely reported increases to both loss reserves and premiums written.

A former AIG executive and four former General Reinsurance Corp. executives were convicted of securities fraud in connection with the sham reinsurance transactions. Greenberg was not charged with any wrongdoing (BestWire, Feb. 25, 2008).

The SEC complaint says that Greenberg "initiated and approved a reinsurance transaction with Capco, an offshore shell company funded and controlled by AIG, to inaccurately re-characterize and report the underwriting losses as capital losses." The Capco transaction was also the focus of a 2005 New York state investigation (BestWire, May 26, 2005).

Greenberg and Smith consented to the judgment without admitting or denying the allegations in the complaint, the SEC said.

Greenberg consented to paying a penalty of $7.5 million and disgorgement of $7.5 million.

Smith consented to pay a penalty of $750,000 and disgorgement of $750,000, and agreed to a prohibition against him from acting as an officer or director of any public company for three years. Smith also consented to the entry of a commission order that will suspend him from appearing or practicing before the commission as an accountant, with the right to reapply after five years.

A statement issued on Greenberg's behalf by a company he controls, C.V. Starr & Co., said Greenberg "appreciates the SEC's recognition that he personally should not be charged with any fraud, and the limited transactions that are the subject of the SEC's control person claims. With these issues behind him, Mr. Greenberg looks forward to being able to concentrate on building for the future... As the SEC acknowledges, Mr. Greenberg does not admit even this claim, although he acknowledges the obvious fact that he was CEO of AIG at the time of the accounting at issue.

"He believes that this is an appropriate basis to resolve the SEC's investigations and put these issues behind him."

A statement on Smith's behalf was issued by Vincent Sama, a spokesman for the law firm of Winston & Strawn.

"Some of the transactions in the complaint filed by the SEC today are almost 10 years old," Sama said. "Although Mr. Smith was originally inclined to litigate this matter, resolving the SEC matter allows him to move forward with his life without the added legal costs and distraction of this lawsuit."

The SEC's complaint, filed in U.S. District Court for the Southern District of New York, charges the defendants with responsibility for:

-- Sham reinsurance transactions to make it appear that AIG had legitimately increased its general loss reserves;

-- A purported deal with an offshore shell entity to conceal multimillion dollar underwriting losses from AIG's auto-warranty insurance business;

-- Economically senseless round-trip transactions to report improper gains in investment income; and

-- The purported sale of tax exempt municipal bonds owned by AIG's subsidiaries to trusts that AIG controlled in order to improperly recognize realized capital gains.

In 2005, AIG restated its prior accounting for many transactions, including those that are the subject of the charges in the SEC's complaint, the SEC statement said.

In 2006, AIG consented to a final judgment on SEC accounting fraud charges, without admitting or denying allegations that it falsified its financial statements from at least 2000 until 2005 through a variety of sham transactions and entities, and reported materially false and misleading information about its financial condition. AIG paid a total of $800 million, including $100 million in penalties (BestWire, Feb. 10, 2006)

Greenberg led AIG for nearly four decades before being forced out during investigations into AIG's accounting.

AIG nearly fell into bankruptcy in September, and has been kept solvent by a federal rescue that now totals up to $182.5 billion in loans and other aid while trying to restructure its businesses and sell assets to repay the government. This week the company named Robert H. Benmosche, the retired chairman of MetLife Inc., as its new chief executive--the fourth in a little more than a year (BestWire, Aug. 3, 2009).

(By Alyn Ackermann, senior associate editor, BestWeek: Alyn.Ackermann@ambest.com)