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AIG's $725M settlement raises concern about funding

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COLUMBUS, Ohio—American International Group Inc.'s recent $725 million settlement reached with three Ohio pension plans resolves another legal distraction but has raised questions about the plans for funding the pact.

The settlement, announced this month by Ohio Attorney General Richard Cordray, resolves charges of anti-competitive market division, accounting violations and stock price manipulation that allegedly occurred from October 1999 to April 2005.

Three Ohio public pension funds, represented by the attorney general, led the class action suit: the Ohio Public Employees Retirement System; the State Teachers Retirement System of Ohio, and the Ohio Police and Fire Pension Fund.

An AIG spokesman said in a statement, “We are pleased to have resolved this matter. This settlement ends a long-standing lawsuit, allowing AIG to continue to focus its efforts on paying back taxpayers and restoring the value of our franchise for the benefit of all our stakeholders.”

Total recovery for AIG shareholders related to the charges is expected to be more than $1 billion, Mr. Cordray said in a statement. This includes previous settlements of $72 million with General Reinsurance Corp.; $97.5 million with AIG's auditor PricewaterhouseCoopers L.L.P.; and $115 million with former AIG Chairman and CEO Maurice R. Greenberg, other former AIG executives and C.V. Starr & Co. Inc. and Starr International Co. Inc.—former AIG affiliates associated with Mr. Greenberg.

The case involved charges that former General Re and AIG executives used a bogus finite reinsurance transaction to help AIG manipulate its financial statements to falsely inflate its reported loss reserves by $500 million. Executives from AIG and Gen Re in 2009 were convicted in connection with that deal. AIG also was charged in connection with undisclosed contingent commissions to insurance brokers, a bid-rigging scheme with brokers, and stock price manipulation.

AIG said in a Securities and Exchange Commission filing that $175 million of the $725 million settlement will be paid into escrow within 10 days of preliminary court approval of the deal. No timeline has been set for approval by the federal district court in New York, according to a spokeswoman for the attorney general's office

AIG's obligation to fund the remainder of the settlement amount is conditioned on one or more common stock offerings, raising net proceeds of at least $550 million, prior to final court approval, according to the SEC filing. However, it will be up to AIG's “unilateral discretion” as to whether market conditions are “commercially reasonable,” says the filing.

AIG also will have to pay the $550 million if it raises at least that amount through a secondary offering on behalf of the U.S. Treasury. In addition, the funds may be raised “from other sources,” says the filing.

If AIG does not fund the $550 million before final court approval of the settlement, plaintiffs may terminate the agreement, elect to acquire “freely transferable” shares of AIG common stock with a $550 million market value, or extend the period for the insurer to complete a qualified offering, according to the SEC filing.

Richard Christopher Whalen, senior vp and managing director of Torrance, Calif.-based research firm Institutional Risk Analytics, said: “Right now, the only place they could get that money is from the Treasury. I don't really think AIG could do an equity offering right now. I just can't imagine what the offering would look like. There's so much uncertainty with respect to their future,” he said of AIG. “Where they come up with the money is clearly an issue.”

AIG will have the financial resources through the federal government's support to fund the settlement, said Sean Egan, president of Wynnewood, Pa.-based Egan-Jones Ratings Co., a rating agency, although “it's sort of robbing Peter to pay Paul.”

A spokeswoman for the Federal Reserve Bank referred a question on the settlement to AIG.

Ernest L. Patrikis, a partner with law firm White & Case L.L.P. in New York, and AIG's former general counsel, said: “You don't do a settlement unless you can pay the settlement. I don't regard that as an issue.”

Mark Rouck, senior director at Fitch Ratings in Chicago said, “From a funding and liquidity standpoint, we don't view (the settlement) as a ratings concern.”

“In the broad scheme of things, it's one of several issues they have to deal with,” including repaying the Federal Reserve and AIA's IPO. “Those are probably the more important things from our perspective right now, from a ratings perspective,” Mr. Rouck said.

But the settlement may encourage other states to pursue litigation against AIG, say some observers. “There is no reason why they should not,” said Mr. Egan.

But, Mr. Patrikis said, “There's statutes of limitations...It's a little late for people to start coming in.”

One unknown is the possible effect of ongoing litigation on AIG's bottom line. Its 10-Q for the first quarter ended March 31, for instance, includes more than 10 pages detailing litigation involving the insurer.

“Rest assured, there'll probably be 15 pages the next time the report is issued,” Mr. Egan said. “AIG will slowly work its way out of its problems, but it's going to be a long time, if ever, before it resumes its post at the top of the financial pedestal.”

“You certainly can't handicap these things,” said Mr. Whalen of the pending litigation. “I don't know what's going to happen with them, because if they have to go back to Treasury for more money, I think it becomes a very interesting question what happens...The politics of this is very nasty.”