Feds Indict AIG Managing Director

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 the latest incident affecting AIG’s private equity operation, and some LPs 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. Citizens of the country – located between Russia and Iran – were allowed to bid on portions of the assets via the use of government-issued vouchers. Each voucher was freely tradable to Azeri citizens and to foreigners, but foreigners were required to purchase a government-issued “option” for each voucher they held.

Among those participating was Czech businessman Victor Kozeny, 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 at the investment opportunity. Sources say that 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, allowed the $15 million investment to occur, but the money was to come from AIG coffers, not from GEM LPs.

The indictment 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 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 of knowing of the bribes and of lying about that knowledge during interviews with the FBI. He also is charged with money laundering conspiracy and one count of violating the Foreign Corrupt Practices Act (FCPA) and the Travel Act.

The FCPA prohibits paying “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.”

Pinkerton could face up to 25 years in federal prison and up to $750,000 in fines. The U.S. Attorney’s office also is asking the defendants to forfeit a combined $174 million involved in the alleged money laundering.

Pinkerton pled “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 was used in the deal. AIG stressed that Kozeny defrauded it and Omega and that the firms had tried to recover their investment via a joint lawsuit in 1999. (Kozeny has been under indictment since 2003, and soon may be extradited from the Bahamas.)

PE Week asked a spokeswoman for the U.S. Attorney’s office if charges against AIG could be forthcoming, but she declined to comment, citing an ongoing investigation.

Internal Repercussions

While AIG has not been charged in connection with the Azerbaijan deal, the Pinkerton indictment is just another reason AIG LPs to be concerned about the firm.

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% cut 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 to launch an Asia-focused private equity fund. More recently, AIG fired Taipei-based managing director Stephen Tseiu, after discovering what an LP source referred to as alleged “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,” says an LP who prefers to remain anonymous. “If you add in their losing Peter 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 comment on Tseui’s dismissal, saying only that he no longer is an AIG employee. He also declined to discuss whether or not AIG should have co-invested with Kozeny.