The Securities and Exchange Commission (SEC) has charged former American International Group Chairman and CEO Maurice 'Hank' Greenberg and former Vice Chairman and CFO Howard Smith for their involvement in numerous improper accounting transactions that inflated AIG's reported financial results between 2000 and 2005.

The SEC alleges that Greenberg and Smith are liable as control persons for AIG's violations of the antifraud and other provisions of the securities laws. Smith also is charged with direct violations of the antifraud and other provisions of the securities laws.

The SEC alleges that Greenberg and Smith were responsible for material misstatements that enabled AIG to create the false impression that the company consistently met or exceeded key earnings and growth targets. According to the SEC's complaint, Greenberg publicly described AIG as the leader in the insurance and financial services industry with a history of delivering consistent double-digit growth. However, AIG faced numerous financial challenges under Greenberg's leadership that were disguised through improper accounting.

Greenberg and Smith agreed to settle the SEC's charges and pay disgorgement and penalties totaling $15 million and $1.5 million, respectively. The SEC previously charged AIG in 2006 with securities fraud and improper accounting, and the company settled the charges by paying disgorgement of $700 million and a penalty of $100 million, among other remedies.

"Corporate leaders cannot avoid the truth and consequences of their companies' performance by using improper accounting gimmicks and signing off on distorted financial reports," said Robert Khuzami, Director of the SEC's Division of Enforcement. "Greenberg and Smith oversaw various improper transactions that presented a false financial picture and allowed AIG to claim success in meeting its performance goals."

The SEC's complaint, filed in the Southern District court of New York, charges the defendants with:

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 multi-million dollar underwriting losses from AIG's auto-warranty insurance business;



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



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

The SEC's complaint alleges that Greenberg knew about the effects that certain improper 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. In 2005, AIG restated its prior accounting for many transactions, including those that are the subject of the charges in the SEC's complaint.

"Without admitting or denying the SEC's allegations, Greenberg has consented to a judgment enjoining him from violating the antifraud provisions of the Exchange Act, and from controlling any person who violates the reporting, books and records and internal control provisions of the federal securities laws, and directing him to pay a penalty of $7.5 million and disgorgement of $7.5 million," the SEC said in a statement to the media.

"Without admitting or denying the SEC's allegations, Smith has consented to a judgment enjoining him from violating the antifraud and other provision of the securities laws, and from controlling any person who violates the reporting, books and records and internal control provisions, directing him to pay a penalty of $750,000 and disgorgement of $750,000, and prohibiting 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 for five years from appearing or practicing before the Commission as an accountant," the SEC statement added.