Promptly after resigning in mid-March 2005, Greenberg directed his lawyers to begin separating AIG from SICO and C.V. Starr & Company, always independent companies but with commercial ties that now needed to be severed. The exercise should have been an ordinary matter of housekeeping, as employees of the two companies had worked together side by side for decades. In a sign of things to come, however, lawyers at Paul Weiss adopted a belligerent attitude. During the weekend of March 27–29, at an office in Bermuda that AIG and Starr International Company (SICO) had shared, SICO’s lawyers were securing SICO corporate documents. A team of AIG lawyers segregating its files accused the SICO lawyers of removing documents illegally. Instead of resolving the matter between the two teams of lawyers, the usual practice, Roberta A. Kaplan of Paul Weiss reported it to Maria Filipakis in Spitzer’s office, who informed the boss.1
Spitzer was livid. From the Vail, Colorado, resort where he was skiing, Spitzer called a lawyer at Paul Weiss, who then called Beattie, the lawyer representing AIG’s outside directors, who called Spitzer to try to calm him down. Spitzer proclaimed this to be “criminal wrongdoing.”2 Screaming into Beattie’s ear at about 10:00 P.M., Spitzer threatened to pursue a criminal case against AIG for obstruction of justice. Beattie contacted Boies and the two lawyers worked out a way to secure the documents and resolve the impasse. Though they patched Spitzer into the call to explain the resolution and calm him down, Spitzer’s office, meanwhile, had threatened to arrest a SICO lawyer involved in the document gathering exercise, at the urging of Paul Weiss lawyers.3
AIG’s board had a previously scheduled meeting planned to discuss whether Greenberg should continue as chairman, which Beattie believed that they would oppose. That meeting turned out to be very short, however, because minutes into it a messenger delivered a copy of Greenberg’s resignation letter to Beattie, ending his nearly 40 years of service at AIG.4
To court public opinion, Spitzer intensified his media campaign. Under one telling headline of April 4, 2005, in the New York Times—“How a Titan of Insurance Ran Afoul of the Government”—an article recounted Spitzer’s allegations and regaled readers with a dramatic tale of corporate wrongdoing.5 But the piece was published before any investigation had occurred, before notice of any charges had been given, and before Greenberg had a chance to rebut the insinuations circulating in the press.
Spitzer’s ambitions soon appeared to extend beyond the state lines of New York, as he went on national television to make more accusations. On Sunday morning, April 10, 2005, Spitzer appeared on ABC’s network talk show, This Week, hosted by George Stephanopoulos. Spitzer asserted that fraud had occurred at AIG and that Greenberg was to blame. Spitzer’s statements shocked many people, including other prosecutors.6 His assertions repudiated the presumption of innocence by vilifying Greenberg, infringed on his constitutional rights to due process, and violated Spitzer’s prosecutorial duty not to speak prejudicially about pending investigations7 or publicly disparage the accused.8 In response, Spitzer’s office denied that he meant what the audience heard.9 The program transcript reads as follows.10
Stephanopoulos: You mentioned Hank Greenberg, the former chairman of AIG. His lawyer, David Boies, was on Charlie Rose just the other day. Here’s what he had to say.
(BEGIN VIDEO CLIP) David Boies: If the accounting’s wrong, the accounting’s wrong. But what I’m trying to make clear is that this is not something where it is a capital offense. It’s not the kind of thing that’s greatly influenced the market or misled people.
Charlie Rose: Do you believe that Mr. Greenberg thought he was violating the law when he made this?
Boies: No, absolutely not . . . .
(END VIDEO CLIP)
Stephanopoulos: Bad accounting, but no crime?
Spitzer: Well, obviously I disagree with that . . . . The evidence is overwhelming that these were transactions created for the purpose of deceiving the market. We call that fraud. It is deceptive. It is wrong. It is illegal.
Stephanopoulos: So does that mean you’re moving toward an indictment?
Spitzer: No, I didn’t say that. It depends what we will prove or can prove that Mr. Greenberg knew at the time. We have powerful evidence . . . . These are very serious offenses, over a billion dollars of accounting frauds . . . . That company was a black box run with an iron fist by a CEO who did not tell the public the truth. That is the problem.11
Fraud is a legal term of art, denoting intent to deceive, so that fraud cannot occur by accident. It requires a conscious mental commitment to mislead. There was not remotely any circumstance under which Greenberg committed fraud. In New York, however, the Martin Act has been seen, especially by Spitzer, to define fraud more loosely, to include not only misstatements intended to deceive, but misstatements that occur unintentionally, due to accident, carelessness, or negligence. That can mean that a senior manager, such as a CEO, can be guilty of “fraud” even for misstatements made by subordinates. Defined that way, “fraud” is not the “four-letter” word that listeners to this program would have heard—akin to financial murder—but something no worse than a traffic violation—akin to foot faults in tennis.
Prompted by Spitzer’s loose allegations on national television, John C. Whitehead, a distinguished diplomat and financier, who had served as deputy secretary of state under President Reagan and chairman of Goldman Sachs before that, published an op-ed in the Wall Street Journal.12 Whitehead was concerned that Spitzer was out of control. His op-ed of April 22, 2005, began:
Something has gone seriously awry when a state attorney general can go on television and charge one of America’s best CEOs and most generous philanthropists with fraud before any charges have been brought, before the possible defendant has even had a chance to know what he personally is alleged to have done, and while the investigation is still under way.
That afternoon, Whitehead and his wife were traveling from New York to Texas to visit friends for the weekend. Spitzer had called Whitehead’s cell phone during the flight so Whitehead returned the call in the taxi from the airport.13 Spitzer opened with a blast, which Whitehead reports as follows:
Mr. Whitehead, it’s now a war between us and you’ve fired the first shot. I will be coming after you. You will pay the price. This is only the beginning and you will pay dearly for what you have done. You will wish you had never written that.14
Whitehead tried to interrupt to say, “See, what you are doing to me now is what I objected to in the piece—threats without charges or proofs.” But Spitzer ranted on. It was a two-minute diatribe, after which Spitzer hung up without giving Whitehead a chance to speak. Unbeknownst to Spitzer, Whitehead’s wife was sitting beside him and heard everything, as Spitzer was shouting into the phone. After the Whiteheads arrived at their destination, they took a half-hour break to write down what Spitzer had said. Whitehead had it typed and sent it to a lawyer for safekeeping.
As time passed, Whitehead was content to leave it at that. But a few months later, as Spitzer ramped up his campaign for governor, a reporter called Whitehead seeking to verify a rumor that Spitzer had made a menacing call to him. Rather than churning the gossip, Whitehead thought he should establish the formal public record. So he wrote a follow-up for the Wall Street Journal explaining what happened and publishing his transcript. The conclusion: “It was a little scary.”15
Spitzer acknowledged making the angry phone call and said he regretted it, but disputed some of the words, including “war.”16 His office said Spitzer ended the call by directing Whitehead to “focus on your day job.”17 Another eyewitness, a Spitzer political aide who was sitting next to Spitzer when he made the call, verified Whitehead’s account: Spitzer spewed exactly the threats Whitehead reported, his “eyes narrowing to slits” as he threatened a citizen for criticizing his prosecutorial excesses.18 Spitzer never apologized.
Spitzer’s nationally televised accusations on April 10 staked out ground that he would not be able to sustain. He was making claims, now quantified at “over a billion dollars,” without having facts to back them up. As the investigation got under way through April and May, Spitzer’s allegations about accounting “deception,” “fraud,” “illegality,” and “not tell[ing] the public the truth” proved incorrect.
The investigation was conducted for Spitzer by Paul Weiss, supposedly representing AIG, and PricewaterhouseCoopers (PwC), with assistance from Simpson Thacher. They would use an increasingly routine procedure in corporate accounting called a “restatement.”19 The restatement would collect and show differences between how AIG, with PwC’s certification, had reported transactions during the previous five years, and how PwC and the others wished to present them after requesting Greenberg’s resignation.
Having PwC run the investigation seems a bit like auditing your own tax returns. PwC had been AIG’s outside auditors for decades and its staff had been spent hundreds of thousands of hours over those years assuring that AIG’s accounting was true and fair. Although PwC used different personnel for the restatement than had been on the account previously, firms such as PwC face competing incentives when corporate clients propose an accounting restatement. On one hand, it is difficult to do a thorough job of second-guessing your own firm and publicly restating positions colleagues have taken in the past; on the other, ceding the investigation to another firm puts the firm’s continued engagement at risk. Ultimately, the optimal self-interested balance may be to pursue an investigation with enough restatement to satisfy incoming management, validating the exercise, while laying all blame on outgoing management, keeping the assignment. Still, if a firm vouches for one treatment one day then repudiates that in favor of a different approach the next, one must wonder which position to believe.
Such conflicting forces seemed to plague PwC in AIG’s case, as it adopted a rule at the outset of the process that it insisted the lawyers and every AIG employee obey: in scouring AIG’s worldwide books, find as many potential accounting anachronisms, errors, or misjudgments as possible, and attribute them to Greenberg and Smith.20 Indeed, some language in drafts of PwC documents was so combative that lawyers involved told them to tone it down.21 Zarb and the board endorsed PwC’s rule22 and company management, led by Sullivan, told employees to cooperate fully with PwC.23 For three months, teams of lawyers and accountants pored over AIG’s books, spending tens of thousands of man-hours studying one million pages of documents and interviewing scores of AIG employees.24
AIG employees reported badgering by PwC partners. One claims manager, Jeff Johnson, received a phone call during this period.25 The caller introduced himself as a PwC partner and got right to the point: “Did Mr. Greenberg or management ever ask you to suppress reserves?”
“No, of course not,” Johnson replied.
The caller paused briefly before saying: “Let me ask you again, did Mr. Greenberg ask you to suppress reserves?”
Johnson considered that insistence odd, but figured the caller may have wanted to be crystal clear. So he repeated: “As I said, no, of course not.”
The caller persisted yet again, however, pressing a third time: “Did Mr. Greenberg ever ask you to suppress reserves.”
Johnson now considered this method of questioning to go beyond mere clarification or confirmation and to become badgering and repeated his answer yet again. As he hung up the phone, Johnson was disturbed and perplexed. He immediately called the company’s chief actuary to report it. The badgering tone had all the earmarks of a witch hunt, Johnson said.
Paul Weiss and Simpson Thacher reported regularly to Spitzer, consistent with instructions from Sullivan and Zarb to cooperate fully with him.26 The firms gave Spitzer chronologies based on their review of documents, provided notes that Paul Weiss attorneys made of interviews with AIG employees and reported on their conversations with Greenberg’s lawyers.27 On May 9, 2005, at the offices of Paul Weiss, lawyers gave Spitzer a “sneak preview” of the contents of the interim accounting report they were compiling.28 The firm refused to let Greenberg see a copy. In the court proceedings where Greenberg sought access to the document, lawyers from Paul Weiss, in formal papers and in open court, wrongly denied giving Spitzer a “sneak preview” of it.29 No judge appreciates such duplicity, as it bears on a firm’s credibility and the opponent’s right to see documents. When ordering Paul Weiss to share it with Greenberg, the judge noted with contained fury: “I know we are in the post-Enron world, but people are entitled to due process.”30
Sharing this information with Spitzer, while hiding it from Greenberg, was characteristic of how Paul Weiss worked concertedly with Spitzer from the outset, though nominally representing AIG. Paul Weiss characterized Spitzer and AIG as “not actual adversaries.”31 In that spirit, Spitzer and Paul Weiss held weekly conference calls together,32 and Paul Weiss performed numerous legal services for Spitzer’s office, drafting legal documents, conducting research, and monitoring court proceedings. Paul Weiss lawyers even gave Spitzer’s office the dial-in numbers to telephonic interviews they conducted with AIG employees.33
At the time, Greenberg’s lawyers objected to Paul Weiss’s actions, stressing that AIG and Spitzer were not on the same side. They believed that Paul Weiss had acted more like Spitzer’s agent than as defense counsel for AIG and said that Spitzer appeared to control AIG’s actions.34 In response, while Kaplan disputed that AIG was controlled by Spitzer, she rejected the rest of the argument, stressing the unique relationship that AIG and Spitzer had that created a shared interest. All agreed, then, that there were not two “sides” to the matter, as one would expect there to be, with the government on one side and the defendant corporation on the other. Rather, as Kaplan repeatedly acknowledged, it was AIG and Spitzer against Greenberg.35
Greenberg was continually kept in the dark about the investigation. On May 25, 2005, while he was on a business trip in Ireland, Spitzer told one of Greenberg’s lawyers that Greenberg would be criminally indicted upon his return to the United States unless Greenberg agreed to settle before he returned by paying a $750 million fine. Remarkably, Spitzer refused to answer questions about what Greenberg had supposedly done or what possible charges he could settle. “Hank Greenberg knows what he did wrong,” was all Spitzer would say.36
When Greenberg was told of this bizarre threat and proposal, reminiscent of Spitzer’s treatment of Langone, Greenberg told the lawyer to respond by requesting that Spitzer name the court where he should appear. Immediately after, Greenberg called each of his four children to say that Spitzer had just threatened to indict him.
Spitzer never followed through on his threat to criminally indict Greenberg. On the contrary, the Friday after Thanksgiving 2005, Spitzer publicly acknowledged that no criminal charges would be brought against Greenberg.37 However, Spitzer never apologized for his public allegations that Greenberg had engaged in criminal conduct, or for his attempt to use the threat of a criminal indictment to coerce a settlement—a tactic which ran afoul of New York ethics rules then in effect, which prohibited prosecutors from threatening criminal action to obtain a settlement in a civil suit.38
On May 27, 2005, AIG released its restatement.39 Beattie had sent Spitzer a highlighted copy, apparently trying to show the legally helpful parts, circled in felt-tip marker.40 But the results affirmed Boies’s point—this was “not the kind of thing that’s greatly influenced the market or misled people.” Despite all efforts, even Spitzer found most of the changes made in the restatement did not amount to a violation of law. They certainly did not provide “probable cause” for a criminal case, which he never filed; Spitzer’s civil case, filed contemporaneously, was initially based solely on seven changes reflected in the restatement, and he soon voluntarily withdrew five of those, leaving solely the Gen Re matter and one other issue.41
Greenberg and his lawyers spent the next two months examining every change made in the restatement. Completed on July 26, 2005, their detailed memorandum challenges every change point by point. (Interested readers can see the full analysis, reproduced as Appendix D on this book’s companion web site.) The following highlights a few of the most consequential points.
In the restatement, the changes added up to reducing shareholders’ equity, cumulatively across five years, by 2.7 percent in total, or $2.26 billion, and net income by 2.1 percent per year, or $4 billion for that entire period. For perspective on the dollar amounts, AIG’s assets totaled $800 billion, annual income exceeded $10 billion and it engaged in 40 million diverse transactions annually concerning premiums, reinsurance, financial exchange, investments, leasing, and other complex matters. Given that many accounting decisions involve judgments, from consolidating subsidiaries to estimating reserves, it would be relatively easy for a competent accountant, scouring AIG’s records, to identify issues of judgment that could go either way and quickly add up to several billion dollars. Concerning the percentages, a long-standing rule of thumb in corporate accounting treated variations of less than 5 percent as immaterial. Although that custom was abandoned in 1999 at the behest of Securities and Exchange Commission (SEC) chairman Arthur Levitt,42 auditors signed off on accounting reports so long as they were within 5 percent of their calculations of a fair financial picture, as AIG’s clearly were.
A look back at the charts in Figures 12.1 and 12.2 (pages 153–154) adds perspective: the figures presented there are those appearing after the restatement, not before. In other words, even after giving effect to the restatement, AIG’s position and performance were that of a fortress of financial prosperity and strength, giving lie to the idea that cutting accounting corners was a part of its master plan.
The item in the restatement that had the least accounting significance imposed the greatest human toll: the Gen Re transaction that Spitzer used to ignite this saga, and that the Department of Justice (DOJ) used to pursue four employees of Gen Re and one AIG employee for six years before settling it, did not affect shareholders’ equity or net income by one cent. It merely required reclassifying one item as a “reserve liability” rather than a “general liability” and the item amounted to one-fiftieth of the total reserves on AIG’s books at the time.
One change in the restatement to net income—12.6 percent of the total—was a decision to treat as an expense the compensation that SICO had for three decades paid to selected AIG employees. That reversed 30 years of well-known AIG practices in which everyone had concurred, including directors, officers and internal and external accountants and lawyers. In all those years, the SEC never raised any questions about this program or its accounting treatment and PwC signed off on this treatment year in and year out. After all, SICO made the payments, not AIG, and they cost AIG nothing, and so were properly treated as an expense of SICO, not AIG. AIG and its auditors and counsel had regularly discussed the accounting treatment and repeatedly decided the amounts were immaterial to AIG, let alone a cost to it, as Winograd reminded AIG’s audit committee on March 7, 2005. Everyone also knew that, if AIG were required to expense SICO’s payments, SICO would simply stop the program, since it was designed to save AIG money not cost it money.
Even so, beginning in 2001, AIG had added disclosure about the SICO plan to its financial statements, including descriptions of the history and amounts. After all, this was one of AIG’s greatest strengths: it provided costless compensation that enabled AIG to attract and retain among the best workforce in the industry, a point about which peer executives were rightly jealous. AIG’s disclosure was prompted by the broader political environment, when executive compensation became a hot button issue at many companies, though never at AIG. Stock option compensation had proliferated in corporate America and, until this time, accounting rules did not require it to be listed as an expense, since it did not cost a company anything, but at best, on exercise, rearranged the ownership of its equity. Further, even if anyone thought that the SICO payments should be AIG expenses, that would be a disagreement of principle, not a violation of accounting or law.43
The wildest entry in the restatement was also the largest single item, reducing shareholders’ equity by $951 million, 42 percent of the total reduction. It addressed whether a special purpose company, Union Excess, should have been consolidated on AIG’s books. The company’s purpose was to take insurance risks from AIG, with SICO backstopping most of the shareholder risk of loss. Either AIG or SICO would have to consolidate Union Excess on their books, according to which of them bore the related risk of loss.44 Since the mid-1990s, both AIG and Union Excess had submitted claims for loss to SICO for payment, which was proof positive that SICO bore the risk, not AIG. In addition, a separate independent audit by outside accountants for SICO confirmed that Union Excess was required to be consolidated on its books,45 which was also the position that PwC had consistently taken as AIG’s auditor. Accordingly, Union Excess properly would and did appear on SICO’s consolidated books, not AIG’s.
Yet the restatement consolidated Union Excess on AIG’s books. At best, the restatement rested on differences of opinion among accountants and a change of opinion within PwC.46 Suggestive of how this item was more a matter of accounting judgment than any clear-cut instance of error or trick, as late into the process as April 21, 2005, at an AIG board meeting, the directors were still scurrying to determine “the appropriate accounting for items such as Union Excess.”47
Another large part of the restatement concerned the level of liability reserves for asbestos and environmental insurance, which was increased by $850 million, resulting in an after-tax drop of $552 million in both net income and shareholders’ equity, a significant percentage of the total. Setting such reserves are judgment-laden exercises and there was nothing about the estimates that AIG had made requiring revision. PwC, as recently as February 8, 2005, had tested and found them appropriate, as they had in every prior year in memory. Again suggestive of what was really going on, it was only in late May that the board chose to inflate these figures, as they continued to debate the item at AIG’s board meeting of May 18, 2005, nine days before the restatement was released.48
Insurance liability reserves are made to reflect a reasonable estimate of claims that may come due under policies; they can only be estimates, never exact figures. AIG had historically used two estimation methods, one based on its market share relative to estimated industry-wide exposure as published by recognized analysts, and one on AIG’s actual claims experience in the period. This is a rigorous actuarial exercise conducted regularly by experts in AIG’s actuarial department in consultation with officers in the relevant claims unit. The goal was to assure that reserves were within a reasonable range defined by the outer limits of these methods. AIG’s chief actuary signed off on these estimates, as did PwC.49
In short, after AIG spent three months and tens of millions of dollars in professional fees, the investigation led to making contextually modest changes in AIG’s shareholders’ equity and net income, based on what amounted to changes of accounting policy or disagreements in accounting judgment. Spitzer had determined as early as June 2005 not to file any criminal charges in the matter, recognizing that he simply had no case; but rather than publicize his lack of evidence, he quietly leaked it to the press in November, over the four-day Thanksgiving weekend.50
Overall, Spitzer ultimately brought only a few high-profile cases, though publicly threatening many more. On the campaign trail when running for governor, Spitzer used the media adulation, and crusading speeches about virtue and morality, to win the New York governorship, which he took over in January 2007. In March 2008, however, Spitzer’s political career came to an abrupt end when he resigned the governorship amid criminal investigations into his patronizing a prostitution ring and attempting to evade federal law by devising a paper trail to disguise the source of funds he used to pay for it.51 Peter Elkind, the business writer, summarized the irony of Spitzer’s downfall:52
Spitzer’s entire political strategy was based on his projection of an image as a moralist. That he broke numerous laws, so furtively and mischievously, to engage in extramarital sex with young [prostitutes] blew his cover. He was not what he portrayed himself to be. At best, he was a hypocrite. His tactics in the cases he brought underscored that he was not, in fact, the devotee of the rule of law or proponent of justice he and his media friends projected. But in their zeal to condemn, Spitzer and his fans overlooked many principles of legal ethics designed to prevent prosecutors from harassing citizens and unfairly or wantonly destroying reputations.*
In the end, the accounting restatement did not vindicate the decision to seek Greenberg’s resignation. And AIG’s board, management and advisers who created it failed to appreciate the immense costs the restatement inflicted on the company and its shareholders. The restatement resulted in AIG’s paying fines to the State of New York, the SEC, and the DOJ—totaling $1.6 billion—giving credibility to unfounded claims in a series of class-action lawsuits, some by shareholders and others by competitors, all of which generated enormous increases in legal fees, fines, and settlements in aggregate exceeding $1 billion.53
The changes prompted rating agencies to downgrade AIG’s credit, driving up its interest costs and impairing all strategic operations that relied on that rating, especially at AIG’s financial products division.54 Total direct costs to shareholders over the short term measured several billion dollars in reduced market capitalization. The long-term costs would prove incalculable. It was easy to wonder: who was watching out for the shareholders’ interest?
The revisions were also a remarkable turnabout for all the directors involved. Every AIG director then in office, from Aidinoff to Zarb, both audit committee members, had repeatedly signed off on many of the accounting treatments they now revised—on SICO’s compensation plan, Union Excess’s consolidation, asbestos and environmental liability reserves. PwC, the company’s outside auditors for decades, also reversed its opinions, many it had consistently held year after year.
Greenberg viewed the entire set of allegations to be trumped up. Most were dropped unilaterally and every one contested vigorously. After all, PwC had certified all the financial statements that reflected all the accounting choices that had been made. In Greenberg’s view, AIG and all its advisors wanted Spitzer to look good and the participants worked toward achieving that optic. For the billions of dollars wasted in this fiasco, Greenberg holds responsible Spitzer, Beattie, Paul Weiss, and the defecting outside directors—Aidinoff and Zarb along with Futter, Holbrooke, and others. For standing up against the onslaught, he commends outside directors Bill Cohen and Carla Hills.
The accounting restatement made a lot of money for the law firms involved—and that was just the beginning of an extremely lucrative engagement. Paul Weiss proceeded to represent AIG in a commercial war against Greenberg. In legal battles over everything from the ownership of fine art to rights to famous insurance names such as American International and C. V. Starr, the war would produce legal fees on AIG’s side alone exceeding $1 billion—more than the amount of any single item in the restatement.55
*Federal prosecutors in the Spitzer case kept it open for nearly eight months before announcing that they would not bring charges. Their reasoning, however, was somewhat curious. Spitzer had admitted guilt and resigned the governorship, yet the prosecutors, in explaining why they were not going to charge him, said “we have determined that there is insufficient evidence to bring charges.” See Danny Hakim and William K. Rashbaum, “No U.S. Prostitution Charges against Spitzer,” New York Times (November 7, 2008).
Notes
1. See e-mail from Mark Pomerantz (Paul Weiss) to Spitzer’s office, March 28, 2005 (chronology of events obtained by the authors under the New York Freedom of Information Law, No. 09777 002904-8).
2. This episode has been widely reported. See, for example, Masters, Spoiling for a Fight, 239 (saying Spitzer “blew his top”); Elkind, Rough Justice, 84–85.
3. Cunningham interview with Lee Wolosky, New York, February 6, 2011.
4. Cunningham interview with Richard I. Beattie, New York, May 8, 2012. Several published sources portray this sequence of events concerning Greenberg’s resignation as chairman differently, including books written by Boyd, Elkind, and Masters. These appear to be otherwise credible and reliable sources.
5. See Eichenwald and Anderson, “How a Titan of Insurance Ran Afoul of the Government,” New York Times (April 4, 2005).
6. Fisher, Coolidge, and Weinberg, “The Battle of the Titans over AIG”; Masters, Spoiling for a Fight, 278. The Forbes article quotes Hofstra University law professor Monroe Freedman, an ethics expert, calling Spitzer’s television appearance “reprehensible conduct” and a “very serious violation of due process, in my view.”
7. See New York Rules of Professional Conduct, 4-109.
8. American Bar Association, Model Rule 3.8(f) (criminal prosecutors “shall refrain from making extrajudicial comments that have a substantial likelihood of heightening public condemnation of the accused.”).
9. See Timothy L. O’Brien and Jenny Anderson, “Greenberg, In Exile, Plots His Next Move,” New York Times (May 22, 2005) (quoting Spitzer spokesman Darren Dopp as interpreting Spitzer’s remarks as “not commenting on Mr. Greenberg specifically” but on “improper conduct” at AIG that they said the company had acknowledged).
10. Transcript of This Week with George Stephanopoulos, FDCH-eMedia, Inc. (April 10, 2005).
11. This dialogue continued to advance another characteristic of Spitzer’s approach to the attorney general’s office noted in the previous chapter:
Stephanopoulos: In so many of your cases, you get to settlement before you go to court. Is that what you expect here?
Spitzer: . . . I would certainly hope so. . . . Hank Greenberg had been one of the most powerful CEOs in America with a board that did what he wanted. The board looked at the evidence, forced him out [as] CEO, forced him out of the chair. The new board, the new leadership wants to reform the company . . . .
The board, of course, had not “looked at the evidence,” because no one had conducted an investigation up to that point.
12. John C. Whitehead, “Mr. Spitzer Has Gone Too Far,” Wall Street Journal (April 22, 2005). Whitehead had submitted the piece to the New York Times as well, but that newspaper turned it down. Cunningham interview with John C. Whitehead, New York, October 3, 2011.
13. These passages are based on Cunningham’s interview with John C. Whitehead, New York, October 3, 2011.
14. John C. Whitehead, “Scary,” Wall Street Journal (December 22, 2005).
15. Ibid.
16. See Patrick D. Healy, “G.O.P. Finds Hope in Spitzer’s Hard Edge,” New York Times (January 8, 2006).
17. Jonathan D. Glater, “Executive’s Article Revives Feud with Prosecutor,” New York Times (December 23, 2005) (quoting Spitzer spokesman Darren Dopp).
18. See Elkind, Rough Justice, 93–94:
[E]verything Whitehead had claimed about his conversation with Spitzer was true. Kristie Stiles, Spitzer’s young national fundraiser, had been with him . . . on the day he spoke with Whitehead and had watched it all unfold. Shocked, she called Ryan Toohey, the AG’s campaign manager, to tell him about it afterward. Eliot’s eyes had suddenly narrowed to slits before he let loose. You’ll wish you had never crossed me! “Eliot really lost it in the car,” Stiles reported. “It was like Gunsmoke.” Whitehead’s account was verbatim.
These reports seem corroborative in substance and tenor if not quite verbatim (compare “never written that” versus “never crossed me”).
19. Accounting restatements became so increasingly common and ultimately routine during the mid-2000s, that officials cautioned about restatements that were themselves suspect. For example, speech of John White, SEC Director of the Division of Corporation Finance, “Corporation Finance in 2008: A Focus on Financial Reporting” (San Diego, 2008), 5–6, available at www.sec.gov/news/speech/2008/spch012308jww.htm (commenting on concern and proposals made by an SEC Advisory Committee); see also Marlene Plumlee and Teri Lombardi Yohn, “An Analysis of the Underlying Causes Attributed to Restatements” (June 2009) (noting growth in number of restatements during this period, up from 475 in 2003 to 1,538 in 2006).
20. Cunningham interview with Ernest Patrikis, New York, January 23, 2012.
21. Cunningham interview with Richard I. Beattie, New York, May 2, 2012.
22. See Ian McDonald and Theo Francis, “Spitzer Expects a Civil Settlement with AIG,” Wall Street Journal (April 5, 2005) (“The company has told regulators it will hire forensic accountants to give the company’s books an in depth scouring.”).
23. See Monica Langley, “CEO School: Flung into Top Job, Sullivan of AIG Learns on the Fly,” Wall Street Journal (July 21, 2005).
24. Defendant American International Group, Inc.’s Memorandum of Law in Opposition to [Greenberg’s] Motion to Compel Production of Documents (September 12, 2005), 3.
25. Cunningham telephone interview with Jeff Johnson, July 12, 2012. Johnson continued to work at AIG for several years, through 2012, when he left to join the Starr Companies.
26. See McDonald and Francis, “Spitzer Expects a Civil Settlement with AIG.”
27. Freedom of Information Law (FOIL) requests under New York law revealed extensive evidence of how Paul Weiss and Simpson Thacher did Spitzer’s work. In addition to those cited elsewhere, examples include the following. On March 28, 2005, Mark Pomerantz of Paul Weiss emailed Spitzer’s office a chronology that Paul Weiss prepared concerning what he called the “Bermuda documents,” a reference to the events noted in the beginning of this chapter. FOIL 09777 002904-8. On April 4, 2005, James Gamble of Simpson Thacher sent a detailed seven-page letter to Michele Hirshman, Spitzer’s top deputy, outlining “our understanding of SICO as of this time.” FOIL 09777 002754-62. On April 6, 2005, John Carroll of Spitzer’s office emailed Roberta Kaplan of Paul Weiss telling her that if she had any more discussions with other parties in the case, to call to discuss what was said. FOIL 09777 006712. On April 15, 2005, Paul Weiss sent David Brown in Spitzer’s office extensive notes that Paul Weiss attorneys had recorded of their interviews with AIG employees. FOIL 09777 002763-5.
28. SICO Reply Memorandum in Further Support of Its Motion to Compel the Production of Documents, p. 6 (citing Declaration of Roberta A. Kaplan (January 12, 2006) (“On May 9, 2005, AIG permitted members of the Attorney General’s Office to review a preliminary draft of the report in a conference room at Paul, Weiss’ offices.”), FOIL 09777 002478 (January 17, 2006).
29. Defendant American International Group, Inc.’s Memorandum of Law in Opposition to [Greenberg’s] Motion to Compel Production of Documents (September 12, 2005) (repeatedly stressing delivery of the report on July 1 without mentioning earlier preview in May); Kaplan Reply Declaration; Transcript of Hearing in People v. Greenberg (Jan. 5, 2006), pp. 33-37, FOIL No. 09777 002453-09777 002457.
30. Transcript of hearing in People v. Greenberg (January 5, 2006), p. 40, FOIL No. 09777 002458 (statement of the Honorable Charles E. Ramos).
31. Defendant American International Group, Inc.’s Memorandum of Law in Opposition to [Greenberg’s] Motion to Compel Production of Documents (September 12, 2005), 22; see also ibid., p. 2 (“AIG shared a common interest with the NYAG”).
32. See e-mail from Spitzer’s office to Paul Weiss attorneys, August 1, 2005 (“We have nothing that needs to be discussed tomorrow, and some people are out of the office. So, I thought we could just cancel this week’s conference call. We will do it again next Tuesday.”); FOIL 09777 006515.
33. For example, e-mail from Keeley Wettan of Simpson Thacher to David Szuchman of Spitzer’s office, July 8, 2005; FOIL 09777 005008; FOIL 09777 006336.
34. SICO Reply Brief, 28–29.
35. For example, e-mail from Roberta A. Kaplan, Paul Weiss, to Peter Pope, Spitzer’s office, August 30, 2005; FOIL 09777 004694–004721.
36. Cunningham interviews and correspondence with David Boies, September 2012.
37. See Ian McDonald and Leslie Scism, “AIG’s Ex Chief Clears a Hurdle but Faces More,” Wall Street Journal (November 25, 2005); Masters, Spoiling for a Fight, 278.
38. See New York Code of Professional Responsibility, Disciplinary Rule 7-105 (“A lawyer shall not present, participate in presenting, or threaten to present criminal charges solely to obtain an advantage in a civil matter.”). The New York code of legal ethics was revamped in 2009, omitting this prohibition, but did not change the law retroactively. One critical issue is “probable cause.” See New York Code of Professional Responsibility, Disciplinary Rule 7-103 (“A public prosecutor or other government lawyer shall not institute or cause to be instituted criminal charges when he or she knows or it is obvious that the charges are not supported by probable cause.”). If a prosecutor has probable cause to believe that a defendant committed a crime, it is consistent with the prosecutor’s public trust to threaten criminal charges. But absent probable cause, such threats are an abuse of public trust that border on misrepresentation and conduct prejudicial to the administration of justice, both prohibited by prosecutorial ethics. See American Bar Association, Model Rules of Professional Conduct, Rule 8.4 (“It is professional misconduct for a lawyer to . . . (c) engage in conduct involving dishonesty [or misrepresentation] [or] (d) engage in conduct that is prejudicial to the administration of justice.”).
39. Defendant American International Group, Inc.’s Memorandum of Law in Opposition to [Greenberg’s] Motion to Compel Production of Documents (draft of August 30, 2005), 3.
40. Letter dated June 27, 2005 from Richard I. Beattie to Eliot Spitzer (obtained under New York State’s Freedom of Information Law, No. 09777, 002886–002896). This document is included as Appendix C on the companion web site for this book, at www.wiley.com/go/theaigstory.
41. People v. Greenberg, No. 401720/2005 (Sup. Ct. N.Y. May 2005).
42. See SEC, Staff Accounting Bulletin No. 99 (August 12, 1999).
43. Some read some provisions of an accounting standard adopted in 2004 to support the restatement’s stance. Financial Accounting Standards Board, Statement 123R (2004).
44. Financial Accounting Standards Board, FIN 46R.
45. See Jenny Anderson, “A.I.G. and Related Insurer Set to Fight for Big Liability,” New York Times (August 3, 2005) (noting independent audit of SICO by Lazard Levine & Felix).
46. Ibid. (quoting Robert Willens, an accounting policy expert with Lehman Brothers).
47. AIG Board Minutes (April 21, 2005), 9 (referencing report of Hoenemeyer).
48. Ibid., 5 (statement of Bensinger in response to question from Hoenemeyer).
49. For example, AIG Audit Committee Meeting Minutes (March 7, 2005).
50. See McDonald and Scism, “AIG’s Ex Chief Clears a Hurdle but Faces More”; Masters, Spoiling for a Fight, 278.
51. For details, see Elkind, Rough Justice, 200–201.
52. Ibid. 260.
53. See In re American International Group Inc. Securities Litigation (S.D.N.Y. February 22, 2010). For details, see Labaton & Sucharow, Settled Cases, www.labaton.com/en/cases/In-re-American-International-Group-Inc-Securities-Litigation.cfm. In addition, Greenberg personally settled an SEC case asserting that, as a “controlling person” of AIG, he shared legal responsibility for some infractions. See SEC, Accounting and Auditing Release No. 3032 (August 6, 2009). He paid $15 million.
During the investigation leading to the restatement in 2005, Spitzer reopened another subject, unrelated to accounting matters, dealing with the taxation of workers’ compensation insurance policies. In 1992, AIG’s general counsel had told Greenberg of potential problems in this line of insurance. Greenberg reported this concern to AIG’s board, which authorized hiring two law firms—Sullivan & Cromwell and Cahill Gordon & Reindel—to investigate. The firms concluded that the concerns were exaggerated and in some instances erroneous but AIG nevertheless implemented additional controls to assure compliance with state laws.
States impose taxes and assessments on workers’ compensation policies. To calculate the correct amount, a company must classify policies internally. Not all policies are clearly delineated as workers’ compensation and some may encompass general liability obligations. If classified as general liabilities, workers’ compensation taxes or assessments would not be due, though other taxes may be—and these could be higher or lower.
Despite thus resolving the matter internally a decade earlier, Spitzer included it in his charges against AIG. He made a state-by-state analysis for the period from 1985 to 1996 to identify errors and demanded that AIG create a special fund to pay those—totaling $343 million. State insurance regulators in other states were baffled by this, some observing that AIG had actually overpaid and others preferring to conduct their own investigation.
54. See “AIG Downgraded,” Insurance Journal (June 30, 2005), available at www.insurancejournal.com/magazines/features/2005/06/20/150287.htm.
55. Cunningham interview with Lee Wolosky, New York, February 6, 2011.