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CHICAGO-Aon Corp. is confident it has found all the investment losses incurred at Alexander & Alexander Services Inc. before Aon bought the broker in January.
Chicago-based Aon now is focusing on recouping those losses.
During the second quarter, Aon's internal auditors discovered A&A's investment portfolio contained $27 million in unrecognized losses from highly volatile securities. These securities, which included collateralized mortgage obligations involving inverse floaters, were misclassified as high-quality money market instruments on A&A's books. As a result, A&A's financial results, including its earnings and net worth, had been inflated.
Aon immediately sold the securities upon their discovery, initiated an investigation and took a $27 million pretax writedown in the second quarter.
Patrick G. Ryan, Aon's chairman and chief executive officer, said there is no reason to believe more than one person was involved in the incident. He said Aon is cooperating with the Federal Bureau of Investigation.
Mr. Ryan said the person involved apparently engaged in several volatile trades, suffered major losses and tried to cover it up.
Sources say the person worked in A&A's Owings Mills, Md., office and did not take a position with Aon after the acquisition. Mr. Ryan confirmed that the individual does not work at Aon.
"The important thing is, we got it all. We are very convinced of that," Mr. Ryan said. "We don't minimize $27 million."
However, the loss represents roughly 2% of A&A's $1.23 billion purchase price.
Some observers have questioned whether A&A's auditors, Deloitte & Touche L.L.P., should have caught the misclassification. But, according to Mr. Ryan, that is not as easy as it seems.
"People cover things up, and auditors often cannot find fraud right away, because it's difficult to find."
Deloitte & Touche did not return phone calls.
Asked whether Aon should have caught this error in the pre-acquisition due diligence, Mr. Ryan said that when due diligence is done on a public company and there is the risk that any leaked information could affect stock price, "you don't physically see as much as you do when you buy a company that is private. You don't get to physically examine every asset."
Mr. Ryan said the misclassification occurred before Frank G. Zarb came on board at A&A in June 1994.
Mr. Zarb, now chairman and CEO of the National Assn. of Securities Dealers Inc., said in a statement:
"I have been briefed by Aon, who assures me that their investigation shows that only one former A&A employee was involved. I have every confidence in Aon's ability to handle this matter appropriately."