US insurance giant to pay out $725 million in accounting fraud scandal

Written by Ray Clancy

Monday, 19 July 2010 08:17

US insurance giant AIG has agreed to pay $725 million to settle allegations of market fraud brought by three Ohio pension funds, making it one of the biggest class action settlements in the country’s history.

The company was accused of accounting fraud designed to boost AIG’s reserves to cover claims, a bid-rigging scheme with insurance brokers and executives ordering traders to inflate AIG’s stock price.

‘The settlement resolves allegations of AIG’s wide-ranging fraud from October 1999 to April 2005 involving anti-competitive market division, accounting violations and stock price manipulation,’ the office of attorney general Richard Cordray said in a statement.

Cordray declared the class-action settlement a victory for the ‘teachers, fire fighters, police officers, and public employees who were harmed by AIG’s misconduct’.

‘This historic settlement is an excellent result for all shareholders harmed by AIG’s misconduct. Ohio is determined to send a strong message to the marketplace that companies who don't play by the rules will pay a steep price,’ he added.

It is the latest blow to the beleaguered firm, which needed nearly $70 billion in government bailouts to stay afloat after the subprime mortgage crisis. Harvey Golub has resigned as chairman of the board amid rumours about discord among top executives at the firm.

If the fine wins court approval it will mean AIG investors are entitled to slightly more than one billion dollars in compensation, including settlements with AIG partners General Re, owned by billionaire Warren Buffett, PricewaterhouseCoopers and former AIG chief executive Maurice Greenberg, the statement said.

AIG will have to pay $175 million of the settlement within 10 days of court approval. A further $550 million must be paid from the proceeds of one or more stock offerings.

It is the latest in a string of settlements agreed by the firm. In 2008 AIG and four of its former senior executives agreed to pay $115 million to settle fraud claims from the Teachers Retirement System of Louisiana. In 2006 AIG agreed to pay $1.6 billion to settle a probe into allegations that it used misleading accounting to inflate its results.

That settlement, reached between the insurance giant and New York state Attorney General Eliot Spitzer, the Securities and Exchange Commission and the New York State Insurance Department, was at the time one of the largest corporate penalties ever.