AIG Finds Itself In More Trouble –

David Pinkerton, managing director and head of developed alternative markets for AIG Global Investment Corp., has been indicted by a federal grand jury on charges that he conspired to bribe senior government officials in Azerbaijan. The indictment is just the latest black eye for AIG’s private equity operation, and some limited partners are suggesting that it is their final straw.

Pinkerton’s troubles began in July 1997, when Azerbaijan was in the midst of privatizing a variety of state-owned industrial assets. Azeri citizens were allowed to bid on portions of the assets via the use of government-issued vouchers. Each voucher was freely tradable to both Azeri citizens and to foreigners, but foreigners were required to purchase a government-issued “option” for each voucher they held. Among those wanting to participate was Victor Kozeny, a semi-notorious Czech businessman sometimes referred to as the “Pirate of Prague.” Kozeny was particularly interested in the anticipated privatization of state-owned oil company SOCAR, and began pitching U.S. investors on the idea of a co-investment.

The first group to bite was New York-based hedge fund management company Omega Advisors Inc., and its Pharos Capital Management affiliate. Omega then asked AIG to also participate.

According to sources close to the situation, Pinkerton brought the proposal to Peter Yu, a onetime White House economic advisor who was running AIG’s global emerging markets private equity program (GEM). Yu and his fellow managers balked, telling Pinkerton that AIG and its clients (i.e., limited partners) should not be in business with someone like Kozeny. Rather than just moving on, however, Pinkerton kept pushing for the deal, suggesting that Yu’s reticence was the result of “professional jealousy” and a long-running feud between the two men. Win Neuger, to whom both Pinkerton and Yu officially reported, split the baby, allowing the $15 million investment to occur, but for the money to come from AIG coffers, not from GEM limited partners.

The indictment, however, alleges that the deal went criminal just one month later. According to a press release issued by U.S. Attorney Michael Garcia, Kozeny began making “corrupt payments and promises” to a senior government official in Azerbaijan, a senior official of SOCAR and two senior officials of the Azeri agency responsible for administering the privatization program. Among the alleged bribes was a promise to transfer two-thirds of SOCAR profits to the involved Azeri officials, once Kozeny had obtained majority control. Another was a payment of $300 million worth of shares in one of the holding vehicles Kozeny had formed to bid on SOCAR, while Kozeny also allegedly flew a London jeweler to Azerbaijan to lavish the Azeri officials with various gifts.

The indictment accuses Pinkerton not only about knowing of the bribes, but of lying about that knowledge during subsequent interviews with the FBI. He also is charged with money laundering conspiracy, and one count of violating both the Foreign Corrupt Practices Act (FCPA) and the Travel Act. The FCPA “makes it illegal to offer to pay or to pay money or anything of value to a foreign government official to obtain or retain business” while The Travel Act “makes it illegal to travel or use the mails or other interstate facilities to carry on certain unlawful activity, including violations of the FCPA’s anti-bribery provisions.”

All together, Pinkerton could be facing up to 25 years in federal prison, up to $750,000 in fines. The U.S. Attorney also is asking the defendants to forfeit a combined $174 million involved in the money laundering charges.

Pinkerton has plead “not guilty” to all counts, and AIG has placed him on administrative leave, pending resolution of the charges. In a formal statement, AIG said it regretted the indictment, and noted that no AIG client money had been used in the deal. It also stressed that AIG and Omega had been defrauded by Kozeny, pointing out that the firms had tried recovering their investment via a joint lawsuit in 1999 (Kozeny actually has been under indictment since 2003, and soon may be extradited from The Bahamas).

Buyouts asked a spokeswoman for the U.S. Attorney’s office if any charges against AIG itself could be forthcoming, but she declined to comment on what she termed an ongoing investigation.”

Internal Repercussions
While AIG itself has not been charged in connection with the Azerbaijan deal, the Pinkerton indictment is just another in a long line of reasons for LPs to be nervous about investing in AIG-sponsored private equity funds.

Back in April, AIG dismissed emerging markets managers Yu and William Jarosz, after they complained loudly about the company reneging on an agreed-upon buyout of its global emerging markets operation. The move resulted in the resignations of investor relations pro Charles Mixon and senior advisor Thomas Armstrong, plus the triggering of a key-man provision on GEM II, which took a 90% haircut on its $900 million fund capitalization.

A few months later, Cesar Zalamea retired from his post as president and CEO of AIG Global Investment Group, in order to launch an Asia-focused private equity fund. More recently, AIG fired Taipei-based managing director Stephen Tseiu, after discovering what a limited partner charitably referred to as “trading improprieties.” Tseiu had been a managing director of AIG’s original Asian Opportunity Fund, and was listed in offering documents for its second Asian Opportunity Fund. Those documents since have been amended, but the fund-raising process has suffered a severe detour.

“There are a laundry list of issues for us in terms of the [second] fund, and Tseui is up at the top of that list,” said a Fund I limited partner who preferred to remain anonymous. “If you add in their losing Yu, it’s just not something I feel very comfortable with right now, even though there are a lot of great people left.”

AIG spokesman Joe Norton declined to confirm, deny or comment on Tseui’s dismissal, saying only that he no longer is an AIG employee. He also declined to discuss the original conflict over whether or not AIG should co-invest alongside Kozeny.

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