American International Group/Brightpoint

American International Group /Brightpoint

1. Litigation Files from SEC website (http://www.sec.gov)

 SEC vs. Brightpoint, Inc., American International Group, Inc., Phillip Bounsall, John Delaney and Timothy Harcharik: http://www.sec.gov/litigation/complaints/comp18340.htm  SEC In the Matter of AIG: http://www.sec.gov/litigation/admin/34-48477.htm

2. Media Artilces  SEC Charges AIG With Fraud --- Insurer Agrees to Pay Fine Of $10 Million to Settle Case Involving Brightpoint Brightpoint's 1998 Results – The Wall Street Journal Europe, September 12, 2003  A "round-trip of cash" disguised as "insurance" is too smooth for the Securities and Exchange ... – CFO.com, September 12, 2003  BNA Article (see below)

Friday, September 12, 2003 ISSN 1543-1371 News Financial Fraud AIG to Pay $10 Million to Settle SEC Charges Over Insurance Product American International Group Inc. Sept. 11 agreed to pay $10 million to settle Securities and Exchange Commission charges in the U.S. District Court for the Southern District of New York based on its role in developing a phony insurance product used by Brightpoint Inc. to misrepresent its financial position (SEC v. Brightpoint Inc., S.D.N.Y., Civ. No. 03 CV 7045 (HB), settled 9/11/03).

In a release that day, the SEC said Brightpoint and three former Brightpoint officials also were charged over their alleged roles in the controversy.

AIG and Brightpoint also agreed to the entry of administrative orders requiring them to cease and desist from future securities law violations, and to comply with certain remedial undertakings. One of the former Brightpoint employees, Phillip Bounsall, and an AIG employee, Louis Lucullo, also agreed to the entry of cease and desist orders.

The commission added that the $10 million penalty "reflects AIG's participation in the Brightpoint fraud, as well as misconduct by AIG during the Commission's investigation of this matter." Allegedly, AIG failed to produce relevant documents sought by the commission in its investigation in a timely fashion. Individual Defendants Settle

In addition to AIG, Brightpoint and all of the individual defendants but former Brightpoint employee Timothy Harcharik agreed to settle the civil allegations without admitting or denying misconduct. Harcharik's attorney could not be reached for comment.

According to the commission, AIG, a Delaware corporation headquartered in New York, is one of the world's largest insurance underwriters. Brightpoint, a Delaware corporation based in Plainfield, Ind., provides "outsource services ... in the wireless telecommunications and data industry."

In a statement, AIG acknowledged that "mistakes were made in the underwriting" of the challenged insurance policy. It said it "has taken steps to correct those mistakes." AIG also said its profit from the policy was less than $100,000.

In other matters, AIG said it does not anticipate that the terms of the settlement will have any material impact on its current or future operating results.

Vehicles to Commit Fraud

In the release, SEC Enforcement Director Stephen Cutler stated, "This case shows that the Commission will pursue insurance companies and other financial institutions that market or sell so-called financial products that are, in reality, just vehicles to commit financial fraud."

Similarly, Wayne M. Carlin, regional director of the SEC's Northeast Regional Office, said, "In this case, AIG worked hand in hand with Brightpoint personnel to custom-design a purported insurance policy that allowed Brightpoint to overstate its earnings by a staggering 61 percent. This transaction was simply a 'round-trip' of cash from Brightpoint to AIG and back to Brightpoint. By disguising the money as 'insurance,' AIG enabled Brightpoint to spread over several years a loss that should have been recognized immediately."

According to Mark K. Schonfeld, associate regional director of the Northeast Regional Office, the $10 million penalty against AIG "reflects the gravity of its misconduct. It also reflects the fact that, in the course of the Commission's investigation, AIG did not come clean. On the contrary, AIG withheld documents and committed other abuses, as outlined in the administrative order, compounding its overall misconduct."

In addition to AIG and Brightpoint, the parties included:

Bounsall, Brightpoint's former chief financial officer;

John Delaney, Brightpoint's former chief accounting officer; Harcharik, Brightpoint's former director of risk management; and

Lucullo, an AIG assistant vice president.

Nontraditional Product

According to the commission, AIG "developed and marketed a so-called 'non-traditional' insurance product for the stated purpose of 'income statement smoothing,' i.e., enabling a public reporting company to spread the recognition of known and quantified one-time losses over several future reporting periods. In this case," the agency said, "the key to achieving the desired accounting result was to create the appearance of 'insurance.' "

Specifically, the SEC charged, AIG agreed to make it appear that Brightpoint, the "insured," was paying premiums in return for an assumption of risk by AIG. "In fact, Brightpoint was merely depositing cash with AIG that AIG refunded to Brightpoint. AIG issued the purported insurance policy to Brightpoint for the purpose of assisting Brightpoint to conceal $11.9 million in losses that Brightpoint sustained in 1998," the SEC contended.

As to the roles of the individual defendants and or/respondent, the agency alleged that Brightpoint's chief accounting officer, Delaney, and its director of risk management, Harcharik, negotiated the arrangement with Lucullo, who was then an AIG assistant vice president. For his part, Brightpoint's chief financial officer, Bounsall, "approved the insurance transaction without adequately reviewing it."

As a result of the transaction, Brightpoint's 1998 financial statements overstated Brightpoint's actual net income before taxes by 61 percent, the SEC contended.

In settling the administrative proceeding, AIG agreed to disgorge the $100,000 fee it charged to Brightpoint for putting the challenged policy together, and to retain an independent consultant to make binding recommendations concerning AIG's internal controls to ensure that AIG's insurance products will not be used in the future to violate the securities laws.

In resolving the civil charges, AIG agreed to pay a $10 million civil penalty; Brightpoint agreed to pay a $450,000 civil penalty; Bounsall agreed to pay a $45,000 civil penalty; and Delaney consented to the entry of a permanent injunction against future securities law violations, an officer/director bar, and an order that he pay a $100,000 civil penalty.

For more information, contact Wayne M. Carlin at (646) 428-1510 or Mark K. Schonfeld at (646) 428-1650 in the SEC's Northeast Regional Office.