AIG AGREES TO PAY $10 MILLION TO SETTLE SEC CHARGES OF FRAUD.

American International Group Inc. agreed Sept. 11 to pay $10 million to settle charges of fraud brought by the Securities and Exchange Commission for allegedly selling a bogus insurance policy to a small mobile-phone distributor to help it hide $12 million in losses.

In the signed consent decree, AIG neither admitted nor denied any wrongdoing.

In a separate statement, AIG said, "The consent decree issued by the SEC relates to a 'non-traditional' insurance product with respect to which a single insurance policy was issued in 1999 by an AIG subsidiary. AIG consented to the SEC Order to settle the matter and neither admitted nor denied the SEC's findings."

AIG acknowledged, however, "mistakes were made in the underwriting of this policy" and said it had taken steps to correct those mistakes.

According to Mark K. Schonfeld, Associate Regional Director of the SEC's Northeast Regional Office, Brightpoint executives asked National Union Fire Insurance Co., one of AIG's principal general insurance company subsidiaries, for help in December 1998 after realizing it had incorrectly stated its quarterly loss in October 1998 as a one-time charge ranging from $13 to $18 million whereas its actual quarterly losses totaled about $29 million.

Schonfeld says the Loss Mitigation Unit of NUFI responded by creating a $15 million purported insurance policy which it backdated to August 1998. Under the policy, NUFI immediately paid Brightpoint $11.9 million, allowing it to take advantage of accounting rules permitting insurance recoveries to be subtracted from insurance losses and not having to increase the $13 million to $18 million charge it already had announced it would take that quarter.

For the next three years, Schonfeld says, Brightpoint paid monthly premiums to AIG but also submitted claims, which totaled the premium amounts, so the transactions should not have been accounted for as insurance but a "round-trip" of cash.

He said Brightpoint announced a restatement on Nov. 13, 2001, which treated the policy as real, but retroactive, insurance.

He said auditors then uncovered evidence showing the day before this restatement was announced Brightpoint had cancelled the retroactive coverage and obtrained a refund from AIG in the full amount of premiums Brightpoint had paid over and above the insurance claim payments made to it by AIG under the retroactive coverage, which prompted Brightpoint to issue a second restatement on Jan. 31, 2002 to reflect the premiums for the retroactive coverage were only deposits with AIG.

During the investigation, which he headed, Schonfeld said AIG failed to produce a large quantity of documents requested by SEC staff and "conducted a woefully deficient document collection effort."

"The $10 million penalty against AIG reflects the gravity of its misconduct," he says. "It also reflects the fact that, in the course of the Commission's investigation, AIG did not come clean."

He said the payment had settled all SEC claims, however, and the agency had no intention of pursuing the matter further.