SF Fund Sues AIG Over $4 million in Losses

May 16, 2005 (PLANSPONSOR.com) - San Francisco's employee pension fund has announced the filing of a lawsuit against giant insurer American International Group (AIG) for causing the fund to lose $4 million.

City Attorney Dennis Herrera announced in a Web statement that the suit was filed on behalf of San Francisco Employees’ Retirement System (“SFERS”) charging New York-based AIG with “egregious business malfeasance” and federal securities laws violations.

The suit, filed in the United States District Court for the Southern District of New York, seeks to recover $4 million losses suffered by SFERS on shares of AIG stock that were purchased between October 1, 1999 and March 30, 2005.

“Stock fraud like that perpetrated by AIG and its executives isn’t just a harmless shell game for Wall Street high-rollers – it’s a despicable crime that preys on the financial security of retirees and working families,” Herrera said. “With our lawsuit on behalf of the San Francisco retirement system today, we intend to recover the funds our public employees were cheated out of; to punish scam artists who defraud their investors; and to send a clear message to anyone who would contemplate similar conduct in the future that we will move aggressively to protect our retirement system from similar injustices.”

A series of investigations prompted AIG to admit that reports of high earnings were artificially inflated by the company’s top executives, according to the official. According to Herrera’s announcement, the company committed “pervasive accounting improprieties” including:

  • the use of offshore affiliates to manipulate financial statements
  • sham reinsurance deals set up solely to bolster reserves
  • bond transactions that allowed AIG to claim gains without actually selling bonds
  • misclassified losses

The suit further alleges that following the initial investigations, the company destroyed evidence, resisted discovery and attempted to shield personal assets.

On May 1, 2005, AIG announced that it would issue restated financial statements from 2000 forward that would reduce AIG’s net worth by $2.7 billion. Since news of the accounting scandal at AIG broke, AIG’s share price has dropped nearly 30%  This decrease in company value has caused “significant injury” to investors like SFERS, according to the charges.

Also named in the suit was General Re Corp., a unit of Berkshire Hathaway, which allegedly helped AIG create a sham insurance transaction.

Ohio‘s attorney general in April added new defendants to his fraud lawsuit against AIG, including AIG’s auditor and General Re, opening that class-action lawsuit up to more defendants.