New York AG Goes After AIG Exec Compensation, Event Expenses

By | October 16, 2008

During recent Congressional hearings into the financial crisis at American International Group (AIG) and the resulting $85 billion federal bailout for the financial giant, Rep. Elijah Cummings, D-Md., asked former AIG CEO Martin Sullivan whether, given the firm’s troubles, he was interested in forfeiting any of the considerable compensation he received from AIG.

“No, I’m not, sir,” replied Sullivan.

Sullivan may have to reconsider.

New York Attorney General Andrew Cuomo has begun an investigation that he hopes will force AIG’s board of directors to recover “all past unreasonable expenditures” including some compensation paid to executives and any funds spent on expensive retreats. Cuomo alleges that payment of these sums while the company was on the brink of filing for bankruptcy violates a New York law on fraudulent conveyances.

“The party is over,” Cuomo said in New York. “No more hunting trips, no more luxury resorts. They are not going to have the party and leave the hangover for the taxpayers.”

Cuomo has written to AIG’s board demanding that the company cease the “improper and extravagant expenditures which exploit the taxpayers of this nation” and institute new policies to prevent future abuses.

“In the last several months, as AIG was teetering toward bankruptcy, and operating with unreasonable small capital, AIG nevertheless made numerous extraordinary expenditures in the form of executive compensation payments, junkets and perks for its executives,” Cuomo charged.

As examples, Cuomo cited a cash bonus of more than $5 million and a golden parachute worth $15 million — on top of a $1 million annual salary– paid to former CEO Sullivan, who was ousted in March as losses on troubled credit default swap products sold by its London-based AIG Financial Products unit began to multiply.

Cuomo also criticized $34 million in bonuses paid to Joseph Cassano, president of the London operation and the person in charge of the credit default swaps that precipitated the company’s near bankruptcy. Cassano was fired in February but in addition to getting the $34 million, he was awarded a $1 million a month consulting contract when he left.

Cuomo further alleged that AIG has spent hundreds of thousands of dollars for “luxurious retreats for its executives, including an overseas hunting party and golf outing” since the federal bailout.

Cuomo ordered AIG to “review, rescind and recover all improper payments where appropriate” and provide his office with an accounting of all executive compensation including but not limited to “bonuses, stock options, severance payments, gratuities, benefits, junkets, and any and all other perks” from Jan. 1, 2007 to date.

He warned that if the board does not take these actions, his office will do so.

“We believe these expenditures and payments, made in the absence of fair consideration, violated New York law,” Cuomo wrote.

In response, AIG issued a statement in which it vowed to fully cooperate with Cuomo’s office:

“On October 10, we issued a clear directive ending all activities that are not essential to the conduct of our business. We will continue to take all measures necessary to ensure that these activities cease immediately.”

The statement did not specifically address executive compensation.

In an Oct. 8, statement, Edward Liddy, current AIG CEO, pointed out that one expensive meeting that Congressional members blasted as an “executive retreat” at a fancy California resort and spa was not actually for AIG employees or executives but for top independent life insurance agents. The meeting was planned months before the government’s loan to AIG, Liddy explained.

At that time, Liddy assured Treasury Secretary Hank Paulson that AIG is “reevaluating the costs of all aspects of our operations in light of the new circumstances in which we are all operating.”

The man who succeeded Sullivan as CEO in March, Robert Willumstad, told Congress he thought such meeting expenditures were inappropriate under the circumstances and he would have stopped them had he known about them.

Sullivan came under heated questioning during the Congressional hearings when he acknowledged that his 2007 compensation was made possible despite the losses at AIGFP because he recommended that those AIGFP losses be excluded from consideration in calculating the bonuses for all top executives.

Sullivan also defended the $1 million a month consulting contract awarded Cassano after he was terminated. “I wanted to retain the 20-year knowledge that Mr. Cassano had,” Sullivan told lawmakers.

Lawmakers dismissed Sullivan’s explanation. “It appears to me that he (Cassano) single-handedly brought AIG to its knees and is the reason taxpayers had to step in,” said Rep. John Sarbanes, D.- Md.

Willumstad, the former board chairman who served as CEO from March until the government loan in mid-September, announced when he left that he would forfeit an estimated $22 million severance payment because he was unable to implement a restructuring plan he developed.

Meanwhile, AIG said it is focused on selling certain assets and taking other actions “necessary to repay the Federal Reserve loan and emerge as a vital, ongoing business.”

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