SEC says AIG and Other Insurance Companys’ Products Used for Earnings Fraud

The Securities and Exchange Commission for the first time proved a company used insurance to hide its losses.

The agency accused an executive of cellphone distributor Brightpoint Inc. of overstating the company’s earnings through improper use of an insurance policy. A New York jury found the company’s director liable for assisting in Brightpoint’s fraud and other violations of securities law said the SEC
In November, the American International Group(AIG) paid $126 million to settle claims by the Department of Justice and SEC that it assisted companies, including Brightpoint and the PNC Financial Services Group, inflate earnings through AIG’s insurance products.

To raise capital, rather than turn to a bank for a traditional loan or sell corporate debt, a company would borrow money from its insurer. The loan would be repaid in the form of increased premiums for traditional insurance, falling into an accounting category of “finite risk insurance”.

“Cracking down on the abuse of so-called finite insurance and reinsurance to cook the books of public companies has been a priority for us,” said SEC Regional Director Mark Schonfeld “This verdict makes clear that such conduct is fraud, plain and simple.”

Several other insurers including Ace, the Chubb Corporation and the Travelers Companies have received inquiries about such practices.

Shepherd Smith and Edwards is a law firm dedicated to representing institutional and individual investors to recover damages. We seek recovery for investment fraud, including damages sustained in life insurance and annuity contracts. If you or your firm has sustained significant losses in securities or insurance products contact us to arrange a free confidential consultation with one of our attorneys.