AIG Fraud Payout of $1.5 Billion Expected

American International Group Inc., the world’s largest insurer, is on the verge of settling federal and state charges of fraud and other misconduct for a record payment of at least $1.5 billion, sources close to the case said Monday.

Moving to end a long-running investigation of the company, AIG is expected to say -- possibly as soon as Thursday -- that it has settled with New York Atty. Gen. Eliot Spitzer, the Securities and Exchange Commission and the New York State Department of Insurance, the sources said.

At roughly $1.5 billion, to be divided about equally between New York and the SEC, the AIG outlay would be one of the largest fraud settlements ever.

The settlement would not cover a state lawsuit pending against former AIG Chairman Maurice “Hank” Greenberg and former Chief Financial Officer Howard Smith, nor any possible federal charges against the two men, the sources said.

Spitzer and New York Insurance Supt. Howard Mills sued AIG, Greenberg and Smith in May, alleging that AIG “manipulated its books to deceive regulators and the investing public.”

The Spitzer lawsuit, filed in Manhattan, accused Greenberg and Smith of engaging in “numerous fraudulent business transactions that exaggerated the strength of the company’s core underwriting business to prop up its stock price.”

Marc Violette, spokesman for Spitzer, declined to comment, as did AIG spokesman Christopher Winans and an SEC spokesman.

Howard Opinsky, a spokesman for Greenberg, said that even if the allegations made by the government were to be believed, “a settlement of this magnitude is totally disproportionate to the impact of the alleged misconduct.”

An attorney for Smith could not immediately be reached.

Federal authorities have been investigating New York-based AIG and former executives for months over a variety of issues.

Last week the Justice Department and the SEC charged Christian Milton, former head of AIG’s reinsurance operations, with aiding and abetting in securities fraud. Milton’s lawyer has said his client will vigorously contest the charges.

Also charged by the Justice Department and the SEC last week were three former executives of a unit of Warren Buffett’s Berkshire Hathaway Inc. The three, along with Milton, were accused of playing a role in a $500-million book-cooking scheme to inflate AIG’s reserves and support its stock price.

The SEC also brought a civil action against another former executive of the Berkshire reinsurance unit, General Re Corp.

In June, two former General Re executives pleaded guilty to charges that they helped AIG misstate financial results.

AIG has admitted that it accounted improperly for the deal involved in last week’s charges and has restated $3.5 billion of earnings over five years.