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N.Y. accuses AIG of fraud scheme

ALBANY, N.Y. - New York Attorney General Eliot Spitzer on Thursday sued American International Group Inc., accusing the nation's largest insurance company and two former top executives of using "deception and fraud" to boost the company's stock price.

The suit filed in state Supreme Court in Manhattan accused AIG's former chief executive, Maurice "Hank" Greenberg, and former chief financial officer, Howard Smith, of orchestrating an accounting scheme that made AIG's financial picture appear brighter than it was, misleading investors and state regulators.

"The irony of this case is that AIG was a well-run and profitable company that didn't need to cheat," Spitzer said. "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."

The 37-page suit accuses AIG of using a variety of questionable accounting devices. The suit said, for example, that AIG "engaged in at least two sham insurance transactions" to give the impression its reserves were higher than they were.

It said Greenberg proposed and negotiated the deals with General Reinsurance Corp., a unit of billionaire investor Warren Buffett's holding company Berkshire Hathaway Inc. Buffett has said he was not directly involved in the transaction, and the suit says the deal was worked out between Greenberg and Gen Re's former chief executive.

The suit also alleges that AIG concealed losses from insurance underwriting through offshore shell companies, mischaracterized income from the purchase of life insurance policies and repeatedly lied to state insurance regulators about its ties to offshore companies.

The suit suggests Greenberg and Smith manipulated the stock for their financial benefit.

"Greenberg and Smith . . . both held hundreds of thousands of shares of AIG stock. For example, the value of Greenberg's holdings increased or decreased approximately $65-million for every dollar AIG stock moved," the suit claimed.

Greenberg's attorney, David Boies, didn't immediately respond to a request for comment, and Smith couldn't be reached for comment.

AIG spokesman Joe Norton said AIG, operating under new management, was continuing to cooperate with investigators.

AIG shares rose $1.63, or 3 percent, to close at $55.71 on the New York Stock Exchange. They are still well below the high end of the 52-week range of $49.91 to $74.98.

Kathleen Shanley, an analyst with Gimme Credit, an independent bond research firm in Chicago, said investors may have reacted positively because "although serious issues were raised, most of them have already been identified by the company in their own filings."

[Last modified May 27, 2005, 00:39:13]