Insurance giant American International Group Inc. has agreed to pay US$126 and appoint an independent monitor to settle allegations it helped two companies fraudulently inflate earnings.

The Securities and Exchange Commission announced today the filing and settlement of charges against AIG. In settling the SEC’s action and related, criminal charges by the Department of Justice, AIG has agreed to pay a total of US$126 million, consisting of a penalty of US$80 million, and disgorgement and prejudgment interest of US$46 million.

The commission’s action arises out of AIG’s conduct in developing, marketing, and, in the case of one public company — The PNC Financial Services Group Inc. — entering into transactions that were designed to enable the buyer to remove troubled or other potentially volatile assets from its balance sheet. By removing these assets from its balance sheet, the company supposedly would be able to avoid charges to its reported earnings from declines in the value of these assets. As alleged in the commission’s complaint, AIG was reckless in not knowing that the product it developed did not satisfy the accounting standards for removing the assets from the company’s balance sheet.

Under the settlement, which is subject to court approval, the disgorgement and prejudgment interest will be paid to a victim restitution fund established in connection with the prior resolution of criminal charges by the Department of Justice against a PNC subsidiary.

Also, AIG will be permanently enjoined from violating the antifraud provisions of the federal securities laws and from aiding and abetting violations of the reporting and record-keeping provisions of the securities laws.

In addition, AIG has agreed to appoint an independent consultant to examine certain transactions going back to 2000, including any transaction that was effected with the primary purpose of enabling a public company to achieve an accounting or financial reporting result.

Further, AIG has agreed to establish a Transaction Review Committee to review certain future transactions involving heightened legal, reputational or regulatory risk.

Stephen Cutler, director of the commission’s Division of Enforcement, said, “This action is a message to insurance companies and others that sell structured finance or other products to public companies that are designed for no purpose other than to improve those companies’ accounting results. In appropriate circumstances, marketers of such products will be held liable for the resulting misstatements in their customers’ financial disclosures.”