Criminal authorities are focusing on at least three men, two of whom are still at the company, according to people familiar with the matter. Also, investigators are looking at multiple ways these executives may have misled the company's auditors and investors about the value of derivatives the firm sold, these people said.
Authorities at the Department of Justice and Securities and Exchange Commission are looking at the actions of Joseph Cassano, who ran the firm's London-based Financial Products group, as well as another top executive of the unit, Andrew Forster, and a Connecticut-based Financial Products employee, Tom Athan, according to people familiar with the case. They haven't been charged with wrongdoing.
Lawyers for Messrs. Cassano, Forster and Athan declined to comment about the case.
Mr. Cassano left AIG last year. Messrs. Forster and Athan are still at the company and are among those who received retention bonuses in March, said people familiar with the matter. Bonuses to Financial Products employees generated a public controversy; both men are among those who have agreed to give their bonuses back, these people said.
A spokeswoman at the Justice Department and a spokesman at the SEC declined to comment. AIG said in a statement that it is cooperating with authorities.
AIG former Chief Executive Martin Sullivan, who left the firm amid its woes last year, isn't a target of the probe, people familiar with the matter said. A lawyer for Mr. Sullivan didn't respond to requests for comment.
Credit-default swaps are private contracts that investors can buy to insure against losses on debt securities. AIG sold credit-default swaps to holders of investments called collateralized-debt obligations, or CDOs, backed in part by subprime mortgages.
One issue for investigators concerns how AIG valued the CDOs, which drives both the value of the credit default swaps and the amount of collateral AIG must essentially hand over to the buyer of the swap if the value of the CDO declines, according to people familiar with the matter. A key question is whether executives, amid the credit crisis, made improper adjustments to the model they used to value the firm's swaps after receiving indications that the value should be lowered, these people said.
Federal prosecutors are also focusing on a December 2007 investor presentation in which Mr. Cassano said write-downs tied to the swaps had reached an estimated $1.6 billion.
Authorities are looking at whether Mr. Cassano should have disclosed to investors that the figure would have been higher by several billion dollars if not for the aid of a value adjustment known as "negative basis," according to people familiar with the matter. Several months later, when AIG disclosed that its auditor, PriceWaterhouseCoopers, found a "material weakness" in its accounting of the swaps, it said it would abandon the adjustment, according to company filings
PwC, which declined to comment, isn't a target of the probe, people familiar with the matter say.
Investigators are also focusing on whether people at AIG failed to disclose to PwC market indications that the credit-default swaps' value should have been lower, people familiar with the matter said. Those indications came in the form of price quotes for the CDOs that people at AIG attempted to get in November 2007 as well as demands for AIG to hand over collateral around that time, the people said.
If charged, executives could say in their defense that they believed the swaps would keep their value, that market indications gave mixed signals about their value, and that adjustments they made to the valuation model were appropriate, said lawyers familiar with the case.