Given the tumult of the past year, it's easy to forget that AIG's troubles go back a lot further than the current financial crisis. In August, an SEC complaint alleged former CEO Maurice "Hank" Greenberg and former CFO Howard Smith were ultimately responsible for a series of improper accounting transactions from 2000 to 2005 that were geared to create the false impression the company had met or exceeded critical earnings and growth benchmarks. The four-year fraud investigation concluded when former Greenberg settled with the SEC and paid $15 million in penalties and disgorgement.
Greenberg, whose name was synonymous with the insurance titan for four decades, did not admit guilt, but consented to a judgment Aug. 6, just hours after the charges were announced. Smith also consented to a judgment and agreed to pay $1.5 million.
The settlement reflects the changing tenor of SEC actions under new enforcement director Robert Khuzami. Experts expect the commission to pursue swift and pragmatic resolution to ongoing investigations to free up resources for more pressing concerns, a tack that may have significant implications for companies under investigation now and in the future.
"This is the end of an era," says Michael Mann, a securities partner at Richards Kibbe & Orbe. "The SEC has to move forward on the issues of the day: the short sales over the last year, the failures of Bear Stearns and Lehman Bros., their inability to identify Madoff. That's where their resources are going to be placed. Settlements like this one represent a clearing of the decks."
A Settled Proceeding
According to the complaint, filed in the Southern District of New York, AIG engaged in a variety of shady tactics to manage earnings (see "Shell Games," p. 37). The company settled with the SEC back in 2006 to the tune of $800 million in penalties and disgorged profits. But as often happens, the case against the executives, whom AIG's board ousted in 2005, dragged on.
Such high-profile allegations generally spur parallel criminal and civil investigations. As often as not, the DOJ folds somewhere along the way, unable to meet the higher burden of proof beyond a reasonable doubt. Then begins what can be a long negotiation between the SEC and the investigation target over the charges and settlement terms, which are ultimately announced at about the same time.
"Between 80 percent and 90 percent of the SEC's cases are resolved this way," Mann says. "It is a very typical SEC approach to file, essentially, as a settled proceeding."
The defendants avoid the expense and publicity of a trial, and usually do not admit guilt. The SEC walks away with money and civil restrictions to show for its efforts, as well as the chance to make its charges publicly.
"Corporate leaders cannot avoid the truth and consequences of their companies' performance by using improper accounting gimmicks and signing off on distorted financial reports," Khuzami stated in the settlement announcement. "Greenberg and Smith oversaw various improper transactions that presented a false financial picture and allowed AIG to claim success in meeting its performance goals."
Public censure aside, the real substance of a negotiated settlement is rendered in dollars.
"The fine is usually where the action is and where the debate comes in," says Charles La Bella, a white collar defender at Bartko, Zankel, Tarrant & Miller and a former U.S. attorney. "For an individual, $15 million is pretty hefty. Run-of-the mill cases can go between $25,000 and $200,000. When you start talking about millions, those are significant numbers."
Fines tend to be directly proportionate to the severity of the alleged conduct, so the size of Greenberg's penalty indicates the magnitude of the offenses, at least in the eyes of the SEC.
"Obviously they thought the conduct was egregious, it was sustained over a long period of time, and it wasn't corrected," says La Bella. "Those are the things that the SEC looks to; that and how badly the market was misled."
La Bella, who worked with Khuzami as a prosecutor in the Southern District of New York, says he expects the SEC to adopt its new enforcement director's no-nonsense approach to cases. As a prosecutor, Khuzami was known for efficiency and a clear-eyed prioritization of the most serious, and winnable, cases.
"He is going to pursue cases that are worth pursuing, and he's going to leave those cases that just drain assets from the SEC," La Bella says. "I see new enforcement vigor in the SEC, and it's a very surgical vigor. They're not going to spend five or six years chasing their tails over something that's very difficult to prove."
That approach will apply equally to sifting through the SEC's backlog of ongoing investigations and setting priorities as the enforcement division dissects the behavior that contributed to the financial meltdown.
"In-house counsel need to be attuned to the fact that the SEC is going to be more nimble in going after cases," La Bella says. "The local, regional offices are going to have a little more authority under Khuzami, and there's going to be a less bureaucratic approach to these enforcement actions. The ones they sink their teeth into will be the ones they really believe in."
A more focused SEC may not sound all that appealing to companies or individuals under investigation, but even for them, there may be an upside.
"They're going to have someone to negotiate with, and may be able to resolve cases more quickly than in years past," La Bella says. "Very often, you couldn't even get an overture of a resolution before the case reached its two-year mark. So on the other side of the coin, counsel may be able to get a more timely resolution of the matter."