SEC Alleges AIG Press Releases on PNC Affair Could Violate Securities Laws

The Securities and Exchange Commission has warned American International Group that it is considering recommending that a civil action be brought against AIG alleging violations of the federal securities laws with respect to three AIG press releases dated January 30, 2002, September 21, 2004 and September 29, 2004.

AIG responded – in a carefully worded and detailed press release – that it “believes that any contention that the three press releases are or may be false or misleading is without merit and that any action by the SEC would be unwarranted.”

AIG issued the bulletins in connection with the SEC announcement that its staff was investigating the company and its subsidiary AIG Financial Products Corp (AIGFP) (See IJ Web site Sept. 22). The companies received a “Wells Notice” from the SEC, which is a preliminary to the filing of a civil action alleging violations of the federal securities laws.

The investigation centers on AIGFP’s structuring of three special purpose financial vehicles for the Pittsburgh-based company PNC Financial Services Group, Inc. in 2001. The PNC transactions were the subject of a SEC action against the company in 2002. They were terminated early the next year. Through the use of the derivative vehicles PNC was reportedly able to transfer some $762 million worth of doubtful loans and investments off its books, and on to AIG’s. The SEC has charged that the transactions violated accepted accounting principles and enabled PNC to overstate its 2001 earnings.

AIG said — that the January 30, 2002 release, “which had not previously been indicated to AIG by the SEC Staff as being of concern to the Staff,” discussed the three transactions with PNC. “The release stated that ‘AIG has not entered into any other transactions using this structure'”, the bulletin continued. It then noted that in the opinion of the SEC Staff “the quoted statement was misleading because AIGFP had entered into five other transactions (referred to as GAITS transactions) with two other counterparties. The issue raised by this view is whether and how the GAITS transactions differed from the PNC transactions.” AIG added that in its view “unlike the PNC transactions, none of the GAITS transactions had the primary purpose of moving troubled, volatile or underperforming assets off the balance sheet of the counterparty.”

It admitted, however, that it “understands that the Staff’s view is that, like the PNC transactions, the GAITS transactions failed to qualify for nonconsolidation by the counterparty because the fees paid to AIGFP as part of the transactions should have been netted against AIGFP’s equity contribution to the special purpose entities utilized in the transactions.”

Concerning the September 21 release, which AIG issued after it received the “Wells Notice,” the bulletin said the SEC Staff viewed it as “a continuation of the problem that it perceives with the January 30, 2002 release and that therefore in its view the release was false and misleading in that by identifying only the PNC transactions it provided a false impression.”

AIG said the “September 21, 2004 release stated that the SEC’s Wells Notice ‘involves certain transactions marketed by AIGFP prior to 2003, INCLUDING three transactions entered into by a subsidiary of AIGFP with PNC between June 2001 and November 2001’ (emphasis added).” AIG also said that the SEC Staff had taken the position that the “GAITS counterparties should have been named. The counterparties to the five GAITS transactions were two insurance groups. The Staff also expressed its view that the September 29, 2004 release did not present a fair picture of the scope of the Department of Justice’s target notification and thereby continued the allegedly misleading disclosure that had begun in 2002.”

AIG also noted that it has been “advised by the Department of Justice that, in its view, AIG’s September 29, 2004 press release may be misleading. The Department stated that its target notification described the scope of its investigation as covering possible violations of the securities laws involving, among other matters, AIGFP’s role in the sale and promotion of securities designed to achieve an accounting result which did not conform to GAAP.

“In addressing the scope of its investigation, the Department confirmed that the investigation covers both the GAITS structure and the PNC transaction structure (referred to as C-GAITS) and the alleged failure of AIGFP to ‘timely unwind’ the GAITS transactions, as well as alleged misleading marketing of C-GAITS products to various entities with which transactions were not consummated. The marketing of GAITS and C-GAITS products ceased prior to 2003 and the five GAITS transactions were all either unwound or restructured during 2003.”

Given the detail contained in AIG’s bulletin, it’s clear that the company is taking the allegations seriously. What is less clear is why the SEC, and now the Department of Justice, are targeting AIG in the first place. While the transactions may well have been questionable, they certainly weren’t unique. What’s even more troublesome is the additional charge that by denying civil liability AIG committed another breach of the Securities laws. Since when is saying “I did nothing wrong” an actionable tort?