GAP has obtained the reports of the Independent Consultant (IC) stationed at AIG as a result of a deferred prosecution agreement (DPA) between the corporation, the SEC, the Department of Justice, and the NY State Department of Insurance in 2006. James Cole, the IC (from Bryan Cave, LLP), and current would-be nominee for Deputy Attorney General, reviewed the adequacy of AIG’s internal controls over financial reporting and recommended best practices for strengthening legal compliance. For his trouble, he and Bryan Cave were paid upwards of $20 million by AIG. In exchange for this arrangement and a $1.6 billion settlement, the charges against AIG for fraud, bid-rigging and ‘improper’ accounting practices were resolved.

In keeping with the DPA, Cole developed his “Best Practice” recommendations, presumably to ensure that AIG ran with some facsimile of compliance with its regulatory environments. In August and September 2007, Cole issued 215 total pages of mind-numbing detail on Blackout Trading Restrictions, Fair Disclosure requirements, Anti-Money Laundering and Combating Finance for Terrorism regulations, and on and on.

For reasons thus far unexplained, on p. 87 of the September 30 list of recommendations for AIG, however, Cole wrote:

The Derivatives Committee [of AIG] should be responsible for providing an independent review of proposed derivative transactions or programs entered into by all AIG entities other than AIG Financial Products Corp. (“AIG-FP”).

The exemption is further elaborated:

For derivative transactions or programs entered into by AIG-FP, the appropriate independent review of the proposed derivative transactions or programs should be conducted by AIG-FP.

But then, if AIG-FP reviews AIG-FP’s transactions, that wouldn’t be independent, would it?

Well, no. And it’s not as if AIG-FP had a clean record. This division – and division director – had caused the potentially criminal unpleasantness that James Cole, in his first incarnation as the IC at AIG, was to clean up before. In 2004, AIG signed its first DPA concerning its unseemly habits of “Aiding and Abetting Securities Fraud.” The agreement allowed managers in the AIG-FP to avoid criminal prosecution in exchange for paying an $80 million fine and installing an Independent Consultant (also Cole) at the corporation to oversee compliance and governance function.

In the Justice Department’s 2004 press release about this first DPA, then-Deputy Attorney General James B. Comey optimistically announced, “These agreements, including significant penalties and corporate reforms, will ensure AIG’s compliance with the law while minimizing the collateral consequences to its employees and shareholders.”

Unhappily, neither deferred Prosecution Agreement actually had this constructive effect. As we now know, of course, AIG crashed in September 2008, brought down by derivative transactions and programs in AIG-FP – the same transactions in the same division that were specifically and uniquely exempted from independent review by Cole the previous year.

All of this begs the question: why was the AIG-FP division exempted from independent review by Cole after it admitted committing securities fraud three years before?