The Securities and Exchange Commission has settled cease-and-desist proceedings against insurance giant American International Group Inc. alleging that it created an insurance product designed specifically to allow issuers to fiddle their books.

The charges against AIG relate to Brightpoint Inc., and also involve former Brightpoint chief financial officer Philip Bounsall, and Louis Lucullo , an AIG assistant vice president.

In a separately filed civil action, the commission also charged Brightpoint’s former chief accounting officer, John Delaney, and its former director of risk management, Timothy Harcharik with securities fraud and other violations.

Delaney has settled those charges. Harcharik has not settled. The commission’s complaint seeks a judgment permanently enjoining him from future violations of the federal securities laws and ordering him to pay civil penalties in an unspecified amount.

The settled administrative orders involve the role played by AIG in enabling Brightpoint to commit securities fraud.

The SEC says that as a sophisticated financial services provider, AIG played an indispensable part in the fraudulent transaction by selling Brightpoint a new “insurance” product that AIG had developed and marketed for the specific purpose of helping issuers to report false financial information to the public.

In a separate civil action brought by the commission, AIG has consented to the entry of a judgment awarding a US$10 million penalty against it for its violations of the securities laws and the manner in which it conducted itself in the commission’s investigation.

Beginning in 1997, AIG developed and marketed a so-called “non-traditional” insurance product for the stated purpose of “income statement smoothing”. The key to achieving the desired accounting result was to create the appearance of “insurance,” i.e., that the “insured” (Brightpoint) was paying premiums in return for an assumption of risk by AIG, when, in fact, Brightpoint was merely depositing cash with AIG that AIG refunded to Brightpoint.

In this case, AIG issued such a purported insurance policy to Brightpoint for the purpose of assisting Brightpoint to conceal US$11.9 million in losses that Brightpoint sustained in 1998.