Where Do the Big Fines Go?

Today's WSJ announced that AIG will pay $1.6 billion for alleged accounting improprieties. This settlement will be the largest in U.S. history for a single company. The settlement will be divided between the SEC and New York authorities. What will happen with the money?

The SEC will receive $800 million, of which $700 million is disgorgement and $100 million is penalties. This money will "go to a fund designed to compensate investors who may have been injured or misled." Huh?

AIG's "alleged accounting improprieties" caused the earnings of the company to be smoother, but did not misstate the value of the company. So how are these "injured or misled" investors to be identified? How do they prove that they were "misled?" Is their investment incompetence alone adequate proof of injury? (This reminds me of the person injured by McDonald's for spilling coffee on himself.)

Next, about $375 million will go to AIG policyholders who may have been injured by the alleged bid-rigging in commercial insurance contracts. Huh? How does AIG's "alleged accounting improprieties" translate to paying their clients this vast sum? If my dry cleaners had false accounting that provided them with cheaper rent, should I get my shirts cleaned for free?

Then, about $344 million "is expected to be paid to state workers' compensation funds." Authorities allege that AIG short changed these funds in the 1990s. Rhode Island will get $100 million. Huh? So the poorly state run workers' compensation funds get replenishment for the mere allegation against AIG? What does state incompetence have to do with "alleged accounting improprieties?"

The remaining $81 million "will constitute fines." Where does it go? The Spitzer sue-more-companies and get elected-to-some-office fund?

The more I review this process, the more I admire Hank Greenberg's backbone for fighting these charges in court. If he had put directors on his board with similar backbone, AIG probably wouldn't be paying this ranson. Further, if these allegations were accurate (which is arguable), the resulting funds ought to be dedicated to strengthening accounting practices in the insurance industry and funding appropriate supervision.