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Sarbanes-Oxley News & Developments
For AIG - What Goes Around Comes AroundA round-trip of cash disguised as insurance is too smooth for the SEC.
> > The SEC has announced that American International Group Inc. agreed to pay $10 million to settle fraud charges related to its role in an accounting fraud at Brightpoint, a cell-phone distributor.
In addition, the SEC brought charges against four executives, including former Brightpoint CFO Philip Bounsall.
This case shows that the SEC will pursue insurance companies and other financial institutions that market or sell so-called financial products that are, in reality, just vehicles to commit financial fraud, said Stephen M. Cutler, director of the SEC Division of Enforcement.
In bringing the fraud charges against AIG, the SEC accused the company with developing and marketing a so-called non-traditional insurance product for the stated purpose of income statement smoothing. Brightpoint used that product to hide $11.9 million in losses and to overstate earnings by 61% in 1998, said the commission, adding that the $10 million civil penalty reflects AIGs participation in the Brightpoint fraud, as well as misconduct by AIG during the investigation.
AIG worked hand in hand with Brightpoint personnel to custom-design a purported insurance policy that allowed Brightpoint to overstate its earnings by a staggering 61%. This transaction was simply a round-trip of cash from Brightpoint to AIG and back to Brightpoint. By disguising the money as insurance, AIG enabled Brightpoint to spread over several years a loss that should have been recognized immediately.
AIG agreed to make it appear that Brightpoint was paying premiums in return for an assumption of risk by AIG. Brightpoint was merely depositing cash with AIG that AIG refunded to Brightpoint.
In addition to Bounsall, the commission charged John Delaney, former chief accounting officer for Brightpoint; Timothy Harcharik, former director of risk management for Brightpoint; and Louis Lucullo, an AIG assistant vice president. The commission claimed that Delaney and Harcharik negotiated the arrangement with Lucullo, and Bounsall approved the insurance transaction without adequately reviewing it.
Source: CFO article
Published:2003-09-17
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