Eliot Spitzer’s AIG Complaint and the Bermuda Caper

NY State attorney general Eliot Spitzer’s complaint that forced Maurice (Hank) Greenberg to exit his company arose from routine checks.


The complaint that forced Maurice (Hank) Greenberg to exit his company arose from routine checks of two reinsurance transactions between an American International Group subsidiary and General Re Corp., the reinsurance behemoth of Berkshire Hathaway, in December 2000 and March 2001.

“The entire AIG–Gen Re transaction was a fraud,” then–New York State attorney general Eliot Spitzer wrote in his civil complaint against AIG, Greenberg and another AIG executive. “It was explicitly designed by Greenberg from the beginning to create no risk for either party — AIG never even created an underwriting file in connection with the deal. Indeed the true nature of the deal is clear if one follows the money: AIG paid Gen Re $5 million for the deal — exactly the opposite of what would happen if AIG were actually taking on potential liabilities from Gen Re.” In its own study of the transactions, AIG had determined the documentation surrounding the transactions with Gen Re was “improper,” with a lack of “risk transfer,” and therefore the deals were improperly “recorded as insurance.” AIG’s books would be changed to record them as “deposits” rather than as “consolidated net premiums.”

[See related article, The Fall of AIG: The Untold Story]

The confusing infraction would, according to AIG’s internal assessment, have a minimal impact on its financial statements — a reduction of loss reserves here and an increase in liabilities there. At the time, AIG’s market capitalization was about $170 billion, so the proposed financial fixes were clearly immaterial. There were disclosures stemming from the Spitzer probe of potential accounting problems at other AIG subsidiaries, including Union Excess Reinsurance Co. (which may eventually result in a write-down of $1.1 billion), Richmond Insurance Co., Capco Reinsurance Co. and International Lease Finance Corp. (where no problems were found). Later revelations showed that an employee at an AIG office in Bermuda tried to thwart the Spitzer investigation by removing “documents and information” without the company’s permission. The employee was fired. Spitzer called this the “document caper” and said it was the reason he pushed for Greenberg to leave as chairman of the AIG board.

All this was richly detailed in a civil complaint filed by Spitzer in New York State Supreme Court on May 25, 2005, and later dropped. In March 2006, AIG paid $800 million to settle with the Securities and Exchange Commission and restated its shareholders’ equity by $2.26 billion for 2004. AIG also paid in excess of $800 million to New York State to settle the civil charges against the company. Spitzer views the $1.6 billion settlement as a major concession by AIG that there were serious problems at the company — and a vindication of his pursuit of Greenberg. “What emerged from our investigation,” Spitzer says, “was not only an open-and-shut case but also overwhelming evidence that Hank had been involved in structuring these sort of fictitious transactions, the importance of which is not the transactions themselves but the lengths he was going to to put capital on the books because he knew the company was grossly undercapitalized. And he was crazily and obsessively worried about how analysts viewed the company and where the stock was every day.”

In August 2009, Greenberg paid $15 million to settle the SEC’s charges against him, without denying or admitting guilt. “I thought it would be good to get it behind us,” he said.

— W.D.C.