AIG's War of Words with Watchdogs

The feds say the insurance giant's press releases misled the public by not revealing all the transactions it's being investigated for

By Diane Brady

America's largest insurer is in hot water again with regulators. American International Group (AIG ) said on Oct. 4 that officials at the Securities & Exchange Commission and the Justice Dept. are unhappy with how the company worded its press releases over some ongoing probes. On Sept. 21, AIG had issued a statement saying the SEC may bring civil action against it for its alleged role in helping PNC Financial Services Group (PNC ) cloak bad loans. About a week later, it let investors know that Justice officials were also investigating the matter.

Now, the New York insurance giant may face further action as officials charge that the releases -- and an earlier document -- were allegedly misleading to the public.

While AIG denies wrongdoing on all counts, the spate of embarrassing news has to leave investors wondering what's going on. The issue this time is whether AIG deliberately underplayed the scope of the SEC probe by not mentioning transactions that were under investigation other than the PNC ones.

"FINED AND SLAPPED"?

  In its Oct. 4 statement, AIG argued that the other transactions with two unnamed insurers were unlike what's being alleged about its involvement with PNC: that it helped create special-purpose entities to remove more than $750 million in bad loans and volatile investments from PNC's balance sheet. In particular, AIG said, none of the other transactions "had the primary purpose of moving troubled, volatile or underperforming assets off the balance sheet of the counterparty."

The latest round of accusations didn't do much damage to the stock. It was down a third of a percentage point, to $68.49, on Oct. 4 -- hardly devastating, although not great in a day when the Dow Jones industrials rose 23.89 points. And the likely outcome of this matter, in the mind of analyst Mark Lane of William Blair & Co., won't be devastating financially either. "I expect them to get fined and slapped on the hand," Lane predicts. After all, PNC itself settled the matter with the SEC and paid a $115 million fine to the Justice Dept. last year.

Even if AIG were fined a similar amount for its alleged role in assisting PNC, that would hardly cripple a company with revenues of $81.3 billion last year and net income of $9.3 billion. Without knowing more about the genesis of AIG's involvement, it's hard to predict what kind of fines it will face. But last year, AIG paid $10 million to settle SEC charges that it helped cell-phone distributor Brightpoint (CELL ) hide losses.

HAZY TRANSPARENCY.

  AIG may be guilty of bad judgment in leaving out pertinent details of the SEC and Justice investigations. And even if the latest SEC allegation doesn't deal AIG a financial blow, it raises a moral issue. This is a company that has pledged greater transparency in its operations in recent years and moved to put some form of succession planning in place.

While AIG declined to comment beyond the release, it's clear that investors will be seeking more answers. Even if the company faces few financial risks from the latest wrinkle in the investigation, to be accused of misleading investors is no small matter.

Brady is an associate editor for BusinessWeek in New York

Edited by Patricia O'Connell