AIG in Damage Control

washingtonpost.com
AIG in Damage Control
Cooperation Counts in 3 Investigations

By Carrie Johnson and Ben White
Washington Post Staff Writers
Friday, April 1, 2005; Page E01

American International Group Inc. has warned investors about a $1.7 billion reduction in capital, pushed out its chairman of the past four decades and disclosed that deals under federal investigation were "improper."

And that's only the past four days.

AIG, one of the world's largest insurance companies, is struggling to respond to inquiries from New York's attorney general, the Securities and Exchange Commission and the Justice Department. The investigations span the world and involve some of Wall Street's most prominent figures, including former AIG chairman Maurice R. "Hank" Greenberg and Berkshire Hathaway Inc. leader Warren E. Buffett. Both men will sit down for interviews with investigators this month to talk about a Berkshire Hathaway subsidiary's dealings with AIG.

The investigations also raise questions that have become familiar in the fallout from corporate scandals at Enron Corp., WorldCom Inc. and other companies: Did the company use accounting tricks to hit the numbers investors were looking for? What did top management know?

Investigators are examining Greenberg's involvement in several insurance deals that may have been used to make the company's earnings look better or boost its reserve accounts. AIG said Wednesday that it continues to review transactions that could reduce its net worth by $1.7 billion. Regulators are scrutinizing those and other deals between AIG and several U.S. and offshore insurance companies. An attorney for Greenberg, who is scheduled to be interviewed by regulators April 12, did not return calls.

One transaction under scrutiny is a deal between AIG and General Re Corp., a reinsurance company that is part of Berkshire Hathaway. Regulators have said Buffett is cooperating and is not a subject or target of the investigation.

AIG's managers and board are pursuing a strategy that emphasizes cooperation with government investigators, even at the expense of such figures as Greenberg, who stepped down under pressure from the board Monday after nearly 40 years in charge. Convincing regulators that AIG is a changed company could help reduce any penalties the company is forced to pay.

AIG has fired three employees in the past month, including chief financial officer Howard I. Smith, for refusing to cooperate with investigators and invoking their right against self-incrimination. AIG's board also has hired two law firms to investigate the company's accounting and to represent outside board members. One of the firms, Paul Weiss Rifkind Wharton and Garrison LLP, once employed New York Attorney General Eliot L. Spitzer when he was in private practice.

Christopher D. Winans, an AIG spokesman, said: "We require that employees cooperate with authorities with regard to matters involving the company. If somebody's going to refuse to cooperate, then they're not on the team anymore."

Greenberg was replaced as chairman by former securities industry regulator Frank G. Zarb, an independent director. Of the board's 16 members, 10 are independent. Among them are former defense secretary William S. Cohen, a director since February of last year, and former U.S. ambassador to the United Nations Richard C. Holbrooke, who joined the board in 2001.

Some shareholder advocates and pension fund officials described AIG's recent actions as too little too late from a board that has long been rated one of the least effective in corporate America. The moves have been largely intended to limit board members' personal liability, according to critics of the board, who noted that AIG's accounting revelations came after former directors at Enron and WorldCom agreed to pay millions of dollars of their own money to settle shareholder lawsuits.

"AIG's board has been consistently worst in class," said Nell Minow, a co-founder of the Corporate Library, a research group that rates companies on governance. Minow and others have consistently described AIG's board as dominated by Greenberg and loaded with less-than-vigilant outside directors.

The company's board, advised by the law firm Simpson Thacher & Bartlett LLP, is straining to avoid criminal and civil charges against the company.

In the past few years, after an indictment that essentially put accounting firm Arthur Andersen LLP out of business in 2002, the Justice Department frequently has employed deferred prosecution agreements with companies implicated in wrongdoing. Under the terms of those deals, firms must agree to stay clean for a specified period and hire outside monitors or accounting experts to review their books.

Cooperation generally consists of "doing an internal investigation, getting rid of bad apples and, if appropriate, waiving privilege," said former SEC enforcement official Thomas C. Newkirk. "Most defense counsel believe the wise course is to provide meaningful cooperation and convince regulators you're doing that."

Securities regulators cite the case of Royal Ahold NV, the Dutch company that owns Giant Food Inc., as perhaps the best recent example of cooperation by a company under siege. Ahold fired several top officials, investigated 17 operating units for accounting problems around the globe and made international witnesses available to U.S. prosecutors and investigators. Ahold paid no civil fines in a settlement with the SEC last year, despite maneuvers that led to $830 million in inflated profits.

The investigation is also looking into whether companies that entered into transactions with AIG knew that it was using them to make its earnings look better. Several companies have been penalized for helping others manipulate their books. For example, Time Warner Inc. and its America Online Inc. subsidiary paid $300 million last week to settle SEC charges, including allegations that the company helped Homestore Inc. and PurchasePro.com Inc. exaggerate their revenue using fraudulent online advertising deals.

Holding top executives criminally responsible for helping others manipulate their balance sheets remains a challenge for investigators. But prosecutors have built a few such cases successfully in the past few years.

Former Merrill Lynch & Co. investment banking chairman Daniel H. Bayly will be sentenced this month for colluding with Enron Corp. officials to help Enron meet earnings targets in late 1999. Testimony in Bayly's trial indicated that he participated in a conference call with Enron chief financial officer Andrew S. Fastow, in which Fastow essentially guaranteed that Merrill Lynch would not lose money on an energy deal. The fact that no money was at risk invalidated the business purpose of the deal, making it illegal, prosecutors argued.

That kind of concrete knowledge is necessary to bring criminal indictments and prove to a jury that executives intended to deceive investors, legal experts said.

Investigators are reading e-mail messages and other documents and interviewing witnesses about the Greenberg's role in a 2000 deal the firm struck with General Re. The deal allowed AIG to boost its reserves and keep its stock price high at a time investors were raising questions.

The SEC, the Justice Department, and Spitzer are scheduled to interview Buffett April 11. Buffett is represented by a Berkshire Hathaway lawyer and has not been notified that his interests diverge with his company's. Buffett's spokeswoman did not return calls, but the company issued a statement this week saying he was not briefed on the "structure" of the deals or their purpose. Buffett is a longtime Washington Post Co. board member.

Former General Re chief executive Ronald E. Ferguson and other Berkshire figures already have been interviewed by regulators and have helped them understand the terms of the complex deals. Darren Dopp, a spokesman for Spitzer, said that for now, investigators are approaching Greenberg and Buffett differently, in part because they have no evidence that Buffett intended to help AIG manipulate its books.

"You've got to show that Warren Buffett or anyone else at Berkshire was aware of the purpose of the transactions, that they didn't have any other independent business reality other than the inflation of numbers at AIG," said John C. Coffee Jr., a corporate law professor at Columbia University.

Martin J. Sullivan, a longtime AIG executive who assumed the chief executive role last month, is not a target of the investigations, an AIG spokesman said. "He's clearly in it for the long haul and that's why the company picked him," Winans said.