Aig Case

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Actuarial Accounting: A Cautionary Report
Dan R. Young, Esq. Attorney at Law Law Offices of Dan R. Young Seattle, Washington danryoung@netzero.net

Presented the Spring Meeting of the CAS New Orleans, Louisiana May 6, 2009

The Story of the AIG Accounting Scandal
      

The Companies The Participants Regulatory Scrutiny Intensifies The Prosecution Case The Defense Case Relevant Laws and Regulations The Fate of the Participants

The Companies

AIG Overview (2007)


     

World’s largest insurance and financial services company 93,000 employees Business in 130 countries Led by Maurice (“Hank”) Greenburg Shareholder’s equity 2007: $95.8 billion Net Income 2007: $6.2 billion Premium written 2007: $59.8 billion

GenRe Overview
    



One of World’s largest reinsurers Established 1921 Headquartered in Connecticut Owned by Warren Buffet’s Berkshire Hathaway Led by Ronald Ferguson, FCAS, until he retired in 2002 Premium written 2007: $6.0 billion

The Participants

Hank Greenburg, CEO of AIG
     

Born 1925 Admitted to NY Bar in 1953 Joined AIG in 1962 Named CEO in 1968 Led AIG for 38 years Stepped down March 21, 2005

Ron Ferguson, CEO of Gen Re
      

Born 1942 Fellow of CAS Co-developer of B-F method Joined Gen Re in 1966 Named CEO in 1987 1998 Berkshire Hathaway acquired Gen Re Retired 2002

Others
Christopher Garand, FCAS  Senior VP and Chief Underwriter of GenRe’s Finite Reinsurance in US from 1994 to 2005 Elizabeth Monrad, CPA  CFO of Gen Re 2000 to 2003 Robert Graham, JD  SVP and Assistant General Counsel at GenRe until 2005

Others
Christian Milton  VP of AIG’s Reinsurance until 2005 Richard Napier  SVP responsible for GenRe relationship with AIG John Houldsworth  CEO of Cologne Re Dublin (CRD)

Eliot Spitzer, JD
  



Born 1959 Former Attorney General of NY Notable prosecutions:  Mutual fund scandals (2003)  Insurer bid rigging (2004)  AIG accounting scandal (2005) Elected Governor of NY in 2006

Regulatory Scrutiny Intensifies

How AIG Came under Scrutiny








2001 – SEC learns that AIG has assisted a client company in bolstering its balance sheet through a bogus insurance transaction  investigation ensues 2003 – SEC and Justice Department settle with AIG  $10 Million Civil Penalty  Independent consultant retained 2004 – Federal Grand Jury begins investigation of AIG’s income smoothing products 2004 – Bid rigging complaint filed against AIG and others

AIG Admits to Improper Accounting
 



February 9, 2005 – 2004 earnings released March 30, 2005 – AIG discloses that reinsurance deal with GenRe should have been accounted for as a deposit May 31, 2005 – Restatement amounted to reduction in 2004 net income of $1.32 Billion

The State Authorities Attack
May 27, 2005 – Spitzer files civil suit against AIG  Alleges AIG "engaged in misleading accounting and financial reporting, projecting an unduly positive picture of AIG's underwriting performance for the investing public.“  In particular, engaged in "two sham insurance transactions" that gave investors the impression the company had larger reserves for claims than it did.  Other wrongdoing

Greenberg Fires Back


"For the attorney general to use his office to prosecute, and persecute, people in the press for political gain is wholly against our legal principles," said Greenberg in an interview. "It's outrageous." … "It's simple: He's running for another office," Greenberg said. "It has nothing to do with right or wrong.“ CNBC’s Charles Gasparino reports that in an interview he previously conducted, Greenberg called Spitzer “a thug.”





The Federal Authorities Attack
Feb 2, 2006 – SEC files complaint in US District Court against AIG  "This case is not about the violation of technical accounting rules. It involves the deliberate or extremely reckless efforts by senior corporate officers of a facilitator...
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