WASHINGTON — American International Group, one of the biggest U.S. insurance companies, agreed on Thursday to pay a $10 million civil fine to settle federal regulators' allegations that it fraudulently helped another company falsify its earnings report and hide losses.
The insurer, known as AIG, also failed to provide documents that were subpoenaed during the government's investigation of the alleged fraud involving financial reports by cellular phone distributor Brightpoint Inc., the Securities and Exchange Commission said.
New York-based AIG neither admitted nor denied the SEC'S allegations in its settlement, in which it also is forfeiting a $100,000 fee paid by Brightpoint.
The SEC also charged Brightpoint, a distributor of wireless phones for companies including Nokia, Sony-Ericsson and Virgin, which agreed to pay a $450,000 civil fine, as well as three former Brightpoint executives and an assistant vice president of AIG. Three of the individuals settled the cases and agreed to pay civil fines of as much as $100,000. Brightpoint and the three individuals neither admitted nor denied wrongdoing.
The SEC alleged that AIG issued a so-called "non-traditional" insurance policy to Brightpoint to help the company hide $11.9 million in losses in 1998. The insurance policy was said to be for the company to smooth out volatility in earnings. AIG agreed to make it appear that Brightpoint was paying premiums in return for AIG assuming risk, but Brightpoint actually was just depositing cash with AIG that it later refunded to Brightpoint, the SEC said.
The ruse, a "round-trip" of money between the two companies disguised as insurance, enabled Brightpoint to overstate its earnings by 61 percent and to spread over several years a loss that should have been reported immediately, according to the SEC.
"This case shows that the (SEC) will pursue insurance companies and other financial institutions that market or sell so-called financial products that are, in reality, just vehicles to commit financial fraud," said SEC Enforcement Director Stephen Cutler.
AIG, in a statement, said it "acknowledges that mistakes were made in the underwriting of this policy."
"Consistent with its long-standing commitment to ensure that it has sound and effective internal controls, AIG has taken steps to correct those mistakes," the insurer said. It noted that its profit from the policy was less than $100,000.
Last February, AIG announced that it was taking a $1.8 billion charge to cover unexpectedly costly insurance claims, blaming the move on soaring increases in jury verdicts and legal settlements. The company is widely seen as an industry leader often ahead of others in responding to changes in the insurance marketplace.
Brightpoint, based in Plainfield, Ind., in late 2001 restated its earnings for the previous 3 1/2 years. That led to shareholder lawsuits against the company.
Jerre Stead, lead independent director of Brightpoint, said the settlement will enable Brightpoint's management "to focus on the company's core business, and represents the final step in resolving all stockholder and regulatory matters relating to the 1998 purchase of the purported insurance policy."
"Brightpoint has instituted best practices in corporate governance and adopted strict internal controls, which are designed to avoid these types of issues in the future," Stead said in the statement.
Shares of AIG were down 43 cents to close at $60.15 on the New York Stock Exchange.