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Spitzer sues AIG, ex-CEO for fraud
Civil action filed against insurer and ex-CEO Greenberg on accounting errors; auditors asleep?
May 26, 2005: 6:38 PM EDT
Maurice "Hank" Greenberg is being held directly responsible for fraud at AIG, according to a lawsuit filed by the New York Attorney General and the State Insurance Superintendent.

NEW YORK (CNN/Money) - New York Attorney General Eliot Spitzer sued American International Group Thursday, alleging the firm manipulated its books to deceive regulators and the investing public.

The civil lawsuit, announced in conjunction with the State Insurance Superintendent, comes just days ahead of the embattled insurer's long-awaited annual financial report, which is due to be filed with the Securities and Exchange Commission Tuesday.

The suit charges that the nation's biggest business insurer, ex-CEO Maurice "Hank" Greenberg and former CFO Howard Smith engaged in fraud to falsely exaggerate the strength of the company's business and prop up its stock price.

"The irony of this case is that AIG was a well-run and profitable company that didn't need to cheat," Spitzer said in a statement. "And yet, the former top management routinely and persistently resorted to deception and fraud in an apparent effort to improve the company's financial results."

AIG spokesman Joseph Norton said the company has reviewed the complaint. "We have been cooperating and will continue to cooperate with the attorney general, the superintendent, and other regulatory agencies on all these matters," he said in a written statement. "There are no new claims raised in the complaint."

The lawsuit, filed Thursday afternoon in State Supreme Court in Manhattan, attributes the misconduct at AIG directly to Greenberg, the attorney general's office said.

The suit cites e-mails and other evidence intended to show that Greenberg was personally involved in negotiating some of the fraudulent transactions, and that he directed other AIG staffers to create other misleading transactions, the statement said.

New York State Insurance Superintendent Howard Mills said, "The charges against AIG and two of its former executives are serious ones and the complaint includes compelling evidence that investors and regulators were misled over an extended period of time. Having said that, however, I believe AIG is taking steps to restore the company's credibility."

AIG has already admitted that many of the transactions involved in the case were improper, and to that end has fired some employees and announced plans to restate its earnings. Spitzer's office noted the company is cooperating with authorities.

Auditors asleep at the wheel?

Accounting firm PricewaterhouseCoopers LLP may have missed warning signs of problems at AIG from the insurer's own audit committee, according to a report in The Washington Post Thursday.

The Post said that the AIG audit committee made filings in 2001 and 2002 in which it warned that the committee's oversight did "not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles."

AIG has recently said problems with accounting for some reinsurance transactions will cause it to restate results and reduce net worth by about $2.7 billion.

Some accounting and corporate governance experts said the audit committee's statement should have alerted PWC that it needed to look closer at the accounting practices at AIG, the newspaper report said.

"There were definitely some that went closer to saying, 'Don't blame me,' as opposed to saying, 'This is the process,' " Patrick McGurn, senior vice president at investment advisory firm Institutional Shareholder Services, told the newspaper. "I think that probably should set off more red flags as the language got stronger."

PWC is facing lawsuits from AIG shareholders over its oversight of the insurer's accounting.

A PWC spokesman told the paper he couldn't comment on client matters. But he told the Post the audit committee's language should not have been seen as a warning. (see correction)

"That sort of proxy language was not uncommon pre-Sarbanes-Oxley (Act) and in fact was then used by many other large companies," David Nestor, a spokesman for PWC, was quoted as saying. "Auditors would not have seen this as a 'red flag' or a scope limitation."

The New York Times also reported that AIG's control of a reinsurer Richmond Insurance Company is tighter than had been disclosed. It said that German insurer Munich Re has sold its long-held 49.9 percent stake in the reinsurer back to AIG.

AIG's control over reinsurers with which it did business are part of the investigation into company practices. Reinsurance allows an insurer to spread the risks of loss, but if the insurer actually controls the reinsurer, the reinsurance could be seen as an effort by the firm to possibly manipulate its financial results by only appearing to shift risks that it actually retained.

Spitzer is not the only regulator going after Greenberg. Click here for more.

Correction: In an earlier version of this story the quote by a PWC spokesperson was incorrect. It said the audit committee's language should have been seen as a warning. The correct quote should have said the audit committee's language should not have been seen as a warning. CNN/Money regrets the error.

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