Will AIG's Sullivan Survive?
By Diane Brady and Marcia Vickers
More bad news for American International Group: Investigators are looking closely at whether newly installed CEO Martin Sullivan played any role in possibly fraudulent dealings at the $99 billion insurance giant, sources tell BusinessWeek Online. Barely two weeks after replacing Maurice "Hank" Greenberg as chief executive amid a widening regulatory scandal, Sullivan could soon find his job in jeopardy as well, sources close to the company say.
Regulators say they are also calling in Berkshire Hathaway (BRK.A ) chairman and CEO Warren Buffett next month to clarify his role in the controversial transaction with AIG. General Re, a Berkshire unit, designed a product for AIG in 2000 that regulators allege gave the false appearance of boosting AIG's reserves. The SEC is examining other transactions at the unit to see if they were also used inappropriately.
Sullivan, 50, isn't accused of any wrongdoing and is widely regarded as a highly skilled industry executive. Moreover, an insider says, "He sees an opportunity here to change this company to step up the level of transparency." An AIG spokesman said the new CEO would have no comment on his future or the company's direction while AIG cooperates with investigators. But Sullivan is an AIG loyalist who joined the company as a teenager and has close ties to Greenberg, and there is growing concern among insiders that he may have to be removed or have his role marginalized to satisfy regulators.
AIG insiders say that Sullivan's tenure is being debated in light of the widening scope of the investigations by New York Attorney General Eliot Spitzer, state insurance regulators, the Justice Dept., and the Securities & Exchange Commission. "At the very least, it seems unlikely that he [Sullivan] can replace Hank as chairman," says one insider. The 79-year-old Greenberg was forced to step aside earlier this month amid allegations that he had personally initiated a deal with General Re that artificially inflated AIG's reserves.
Greenberg confirmed Mar. 28 that his tenure at AIG as chairman is ending, too. Through his lawyer, David Boies, Greenberg said that he will retire as chairman of the board upon his return from Asia and Europe on Wednesday or Thursday of this week. The duties of chairman will be assumed by independent director Frank Zarb. In a letter to the board from Boies, Greenberg called for a search to identify a person with extensive international and insurance experience to become chairman. He did not say whether Sullivan should or should not get the job. With Sullivan so close to Greenberg, noted one insider, "You have to wonder if they will want an outsider to come in to the CEO job, too." An AIG spokesman declined to comment.
Sources say regulators are growing miffed at the lack of cooperation from private entities like Starr International Co., which decides deferred compensation to AIG employees. The entities are controlled by senior AIG execs and hold a major stake in the company. Over the weekend, Spitzer's office hit both AIG and Starr International with subpoenas to preserve documents.
Investigators believe Starr and another such entity, C.V. Starr & Co., are too secretive and have made it tougher for investors to assess the company's already opaque financial picture. Moreover, Starr International has given Greenberg and his team a great deal of control over the structure of executive compensation -- something that should be transparent and in the hands of the board, investors believe. Sullivan, like Greenberg, is a director in Starr -- though, unlike Greenberg, he hasn't been implicated in the investigation. In his letter announcing the decision to surrender the chairmanship, Greenberg did not address his stake and interest in the private entities.
SLATHER OF SUBPOENAS.
AIG investors point out that Spitzer's wrath can be a powerful force. Not only did his investigation prompt the resignation of AIG's Greenberg as CEO, but Spitzer's previous dissatisfaction with the progress of a probe into Marsh & MacLennan (MMC ) led to the resignation of Jeffrey Greenberg, Hank's son, as its CEO. While Sullivan may be cooperating fully with regulators at AIG, the fact that he is coming under scrutiny may in itself make board members nervous enough to replace him.
People close to the probe say that independent AIG directors pushed to sever all ties with Greenberg on Mar. 28, as further questions emerged about transactions that allegedly gave a false impression of AIG's financial health. "It's about time," says Brandon Rees, an analyst in the AFL-CIO's Office of Investment -- a shareholder that has long been lobbying for governance reform at the insurer. Adds Rees: "It's untenable to have a director serve as board chair when he's deemed a liability as CEO."
It's unclear how directors will resolve the deeper issue of Greenberg's role in the controversial Starr entities that dole out bonuses, do business with AIG, and control a major chunk of company stock. A number of observers feel that those companies will also have to be disbanded to fully satisfy investigators.
While there has not yet been an official announcement of Greenberg's "retirement," board members have become increasingly skittish about his presence as the scale of the investigations has escalated. Over the weekend, the SEC issued subpoenas to about a dozen senior executives as Spitzer's and the SEC's investigators learned that documents crucial to their probes might be removed from AIG and its subsidiaries' offices. The two agencies and lawyers hired by AIG are looking into a range of transactions that may have artificially boosted reserves or otherwise disguised the company's true financial picture.
A source close to the investigation says representatives of some board members contacted Spitzer's office over the weekend because "they knew Hank was the orchestrator of the deals…and they felt the need to distance to themselves from him." Robert Morvillo, another attorney representing Greenberg, declined to comment on the investigation.
While analysts caution that the deals in question are not material to a company with such diverse global operations, they have cast a pall over AIG's once-stellar reputation. The stock is down 15% in the last month alone and some investors are worried whether more shoes will drop. At the very least, they want Greenberg to exit the scene. "Having him there gives the impression that he continues to pull all the strings," argues one institutional investor. "That's what you don't want when your company is engulfed in scandal."
For Martin Sullivan, the question now is whether he, like Greenberg, will have to step aside too, in order put this scandal in the venerable company's past.