By Pam Martens and Russ Martens: February 13, 2017
In 2005 and 2006, Wall Street Journal reporters distinguished themselves in covering the charges of fraud being hurled at the giant insurer AIG and its CEO, Maurice (Hank) Greenberg. At that point, the Bancroft family had owned the Wall Street Journal for more than a century. But in 2007, Rupert Murdoch and his corporate entity, News Corp, bought the newspaper. The paper’s editorial page has subsequently taken bizarre positions on Wall Street’s crimes, refusing to allow the facts to get in their way.
Last evening, hitting a new low in the arena of “alternative facts,” the Wall Street Journal opined that Maurice (Hank) Greenberg, the former Chairman and CEO of the giant bailed-out insurer, AIG, had received a “vindication” by last Friday’s settlement with New York State Attorney General, Eric Schneiderman. The editorial characterized the case against Greenberg as a “revenge campaign” started by former Attorney General Eliot Spitzer for Greenberg having dared to “criticize his prosecutions against business.”
Reading the actual documents that New York State Attorney General Schneiderman released, the Wall Street Journal appeared to have stepped into a serious case of brain fog. Schneiderman’s statement included the following headlines:
“Greenberg And [Howard] Smith [former AIG CFO] Agree To Return Multi-Million Dollar Bonuses They Received While The Frauds Were On AIG’s Books;
“When Combined With Previous SEC Settlement, Greenberg Will Have Disgorged Nearly Every Dollar In Bonuses He Received During The Period Of The Fraud.”
Schneiderman also released the following statement:
“Today’s agreement settles the indisputable fact that Mr. Greenberg has denied for twelve years: that Mr. Greenberg orchestrated two transactions that fundamentally misrepresented AIG’s finances. After over a decade of delays, deflections, and denials by Mr. Greenberg, we are pleased that Mr. Greenberg has finally admitted to his role in these fraudulent transactions and will personally pay $9 million to the State of New York.”
If you add the $9 million to the $15 million Greenberg paid the Securities and Exchange Commission in 2009 to settle similar charges, that’s $24 million. That doesn’t sound like vindication; it sounds like getting off very cheap for securities fraud.
Greenberg started at AIG in 1960 and became CEO in 1967. In 1989, he also became Chairman. Greenberg ran AIG with an iron hand until he was forced to resign in 2005. In 2009, the SEC leveled extremely serious charges against Greenberg and Smith – then accepted payment of monetary fines and no admissions of guilt. The SEC alleged:
“Sham reinsurance transactions to make it appear that AIG had legitimately increased its general loss reserves;
“A purported deal with an offshore shell entity to conceal multi-million dollar underwriting losses from AIG’s auto-warranty insurance business;
“Economically senseless round-trip transactions to report improper gains in investment income;
“The purported sale of tax exempt municipal bonds owned by AIG’s subsidiaries to trusts that AIG controlled in order to improperly recognize realized capital gains.”
The SEC also alleged that “Greenberg knew about the effects that certain improper transactions would have on AIG’s reported financial results, and along with Smith was responsible for false and misleading public statements and material omissions in quarterly reports that AIG filed in the second and third quarters of 2002, and in related press releases and investor conference calls.”
Prior to the SEC charges, AIG had hired outside law firms to investigate the matter. In May 2005, AIG restated five years of financial statements, shaving $3.9 billion off its previously reported profit for those years and reducing its book value by $2.7 billion. The same year, AIG fired Greenberg and in 2006 it settled with Federal and State regulators for $1.6 billion to resolve claims that it had engaged in securities fraud, improper accounting, bid rigging and practices involving workers’ compensation funds. All of the conduct occurred while Hank Greenberg was CEO at the company.
Unfortunately for the investing public, the allegations that Greenberg and AIG have settled are just the tip of the iceberg.
Spitzer had tape recordings of phone calls Greenberg had made to the AIG trading desk. Spitzer stated in his original complaint that Greenberg had authorized AIG traders to buy stock with the company’s money and that Greenberg told the trader: “I don’t want the stock below $66, so keep buying.” The complaint also said Greenberg told the trader in one call to keep buying after 3:50 p.m. Federal securities law on corporate buybacks makes it illegal to trade near the open or close of trading because of the ability to manipulate the stock price. According to the transcript of the phone call provided in the complaint, Greenberg had authorized the trader to buy up to half a million shares.
Criminal charges for stock price manipulation never materialized.
In 2006, the Court of Chancery in Delaware filed a decision allowing a lawsuit by the Teachers’ Retirement System of Louisiana against AIG, Greenberg and others to move forward. The case alleged that Greenberg and other AIG executives had set up a sham operation known as C.V. Starr & Co., Inc. in order to siphon off money from AIG. The Court wrote:
“According to Teachers, Starr did nothing that AIG could not do for itself. Its key employees were all AIG employees. But, by purporting to be a separate entity, Starr was able to secure substantial payments from AIG and from reinsurers dealing with AIG, which generated extremely large compensation for Starr’s stockholders. Teachers alleges that had AIG been operating properly, the hundreds of millions of dollars that flowed from AIG to Starr during the period 1999 to 2004 would have remained with AIG, instead of having been diverted into Starr for the benefit of AIG’s conflicted managers. In other words, Teachers alleges that Starr’s supposedly separate operational status was a sham. All of its know-how and overhead came from AIG itself and there was no need for AIG to use a separate entity to carry out transactions in an insurance industry in which it was the recognized leader. The only reason for the separation was that it permitted Greenberg and his managerial team to reap excess profits in their capacity as Starr stockholders, by siphoning commissions and premiums available to AIG itself into an entity whose profits flowed exclusively to AIG managers.
“The complaint alleges that this pattern of business went on at AIG for at least two decades before the period challenged in the complaint — 1999 to 2004. But, the complaint also makes clear that the decision to continue the practice was one that AIG made annually. According to the complaint, a supine AIG board did not bother to inform itself of the nature of the AIG-Starr relationship. To the extent that it approved the continuation of the Starr relationship, it did so only after cursory presentations from Greenberg himself, who was Starr’s largest stockholder and CEO.”
The Teachers case wore on into the fall of 2008 at which time AIG collapsed from failure to set aside reserves to cover the $400 billion it had issued in Credit Default Swaps to major Wall Street banks. The U.S. taxpayer was forced to bail out AIG to the tune of $185 billion with approximately half of that amount going out the back door to the Wall Street banks and global foreign banks to whom AIG owed mega amounts of money that it had never properly reserved to cover.
Increasingly, it feels like the opinion writers at the Wall Street Journal think we’re all fools with no ability to ferret out the real facts for ourselves.