AIG settles fraud case for $2.4b

American International Group, the world's largest insurer by market value, yesterday agreed to pay US$1.64 billion ($2.41 billion) to settle federal and state charges of fraud, bid-rigging and improper accounting.

AIG said it would take a fourth-quarter after-tax charge of about US$1.15 billion for the settlement.

The widely anticipated agreement ends a long-running investigation of the company by New York Attorney General Eliot Spitzer and State Insurance Superintendent Howard Mills, along with federal authorities led by the US Securities and Exchange Commission.

But it does not resolve pending cases against former AIG chief executive Maurice "Hank" Greenberg and former chief financial officer Howard Smith, who were forced out last northern spring two months before charges were announced against the company.

In settling, Spitzer pointed the finger directly at Greenberg and Smith, who have denied they did anything wrong.

"There are some who continue to deny there was any wrongdoing at the company," said Spitzer. He said "transactions were entered into that were false, and there were flagrant violations of state and federal law designed to misrepresent the financial condition of the company."

However, the Attorney-General made a point of saying new management at AIG had done a "spectacular" job, cooperating with the investigation and putting in reforms.

Investors reacted positively to the news, raising its stock price by more than 1 per cent to US$67.20.

"This settlement removes the largest cloud overhanging the company," said Rob Haines, an analyst with CreditSights.

Under the settlement, AIG will pay US$700 million into a fund to aid investors deceived by its false financial statements. An SEC penalty of US$100 million will also go into that fund.

AIG policyholders harmed by bid-rigging will receive US$375 million. A further US$344 million will go to states harmed by AIG's practices of understating workers' compensation premiums.

The state of New York, whose insurance department filed the original suit against AIG in May, will get US$100 million and the US Department of Justice US$25 million.

In a statement AIG said it "regrets and apologises" for its conduct, and agreed not to pay contingent commissions for certain types of insurance, as well as to support legislation to end the practice.

Contingent commissions are a well-established compensation arrangement in which brokers and insurers reward each other for steering business to each other.

- REUTERS