New York, NYA funny thing happened when
AIG played fast and loose with its accounting: the
stock dropped, which in turns
hurts investors, and those enrolled in any AIG savings plan. Such an event can constitute a
breach in fiduciary duties under ERISA guidelines, which dictates that AIG savings plan managers and administrators have a responsibility to conduct the plan(s) with the best interests of investors at heart.
As is often the case in such matters, many of those who stood accused of questionable accounting practices had their own best interests at heart, rather than well-meaning investors.
AIG, also known as American International Group, has suffered drops in stock value to various degrees from November 10th 2006 until now. In fact, 2006 proved a watershed year for AIG and, specifically, the five defendants variously charged with 16 counts of conspiracy including, but not limited to securities fraud, mail fraud, and submitting false statements to the Securities and Exchange Commission (SEC) from 2000 to 2003.
Central to the case was a transaction between General Re, a firm controlled by Warren Buffett, and AIG allegedly designed to improperly inflate AIG's loss reserves by $500 million between 2000, and 2001. The transaction included a $5 million fee paid to Gen Re by AIG, which has been described as an unusual arrangement—and AIG has already acknowledged that the accounting of the transaction, if not the transaction itself, was improper.
It should be noted that Mr. Buffett was not implicated in the alleged wrongdoing.
The ultimate goal of the questionable practice was to assuage analysts that AIG loss reserves were, contrary to reality, not too low—which in turn bolstered its flagging share price.
Naturally, once all this came to light—with accusations, charges and ultimately the five-week trial—share price for AIG investors and 401(k) participants tumbled.
Such activity makes for interesting headlines, but at the end of the day fosters troubling times for investors with their eye on retirement. Costs are going through the roof, starting with fuel prices. The skyrocketing price of gas is driving food prices up as suppliers are passing higher shipping costs to consumers. What's more, record levels for the world price of oil will mean much higher heating bills for those living in the colder States.
All this means even more will be required to fund a comfortable retirement—and as investors struggle with the higher cost of living and the increased difficulty in finding additional dollars for investing, they abhor the thought of their current portfolios dropping in value, and can ill-afford the loss.
The Employment Retirement Income Security Act, or ERISA, was passed decades ago and amended in 1974 to serve as a code of conduct for those charged with the responsibility to manage and administer assets in savings plans and 401(k) plans with the best interests of plan holders and investors at heart. Any investment decision on behalf of investors and plan holders that could be interpreted as imprudent could be considered a breach.
In this instance, the attempt to mislead investors by allegedly assuring clients that plans were secure while in reality portfolios were suffering massive losses, is not only a potential violation of ERISA, but could also lead to litigation.
The last word goes to one of the members of the legal team representing one of the defendants embroiled in the trial:
"You think that's the first time (such a questionable transaction) happened in the economic world of America? There's a whole industry that does it."