The Securities and Exchange Commission announced that it has approved an agreement with RenaissanceRe Holdings in which the company agreed to pay $15 million to settle civil securities fraud charges stemming from a sham reinsurance transaction.
The SEC maintained that the transaction had no economic substance and no purpose other than to smooth over and defer $26 million of earnings from 2001 to 2002 and 2003. The transaction created a “cookie jar,” elaborated the commission, that enabled the reinsurance company to store excess revenue in a good year so it could be withdrawn to increase income in a future year.
RenaissanceRe, which neither admitted nor denied the SEC allegations, agreed to an injunction against future violations of the securities laws. In addition, the company will retain an independent consultant, whose duties will include making recommendations about the adequacy of the company’s internal controls, audit department, and compliance function.
“We are pleased to have put this difficult chapter in our company’s history behind us,” said RenaissanceRe’s chief executive officer, Neill A. Currie, in a statement.
Last September, the SEC filed civil charges of securities fraud against three former RenaissanceRe executives: chairman and chief executive officer James N. Stanard, controller Martin J. Merritt, and senior vice president Michael W. Cash. Those charges remain pending in federal court in Manhattan.
Attorneys for Stanard, Merritt, and Cash could not immediately be reached for comment.
“This is yet another action arising from our ongoing investigation of the misuse of finite reinsurance products to commit securities fraud,” said Mark K. Schonfeld, director of the SEC’s Northeast Regional Office, in a statement. “RenRe essentially played a shell game with its revenue — hiding it in one year when it was not needed, only to reveal it in a later year when it would improve the bottom line.”
The commission alleged that RenRe used two seemingly unrelated contracts that were, in fact, intertwined to conceal what was simply a round trip of cash.
In the first contract, alleged the SEC, RenRe purported to assign $50 million of receivables at a discount to Inter-Ocean Reinsurance in exchange for $30 million in cash, for a net transfer to Inter-Ocean of $20 million. RenRe recorded income of $30 million and put the remaining $20 million of the $50 million assignment into its “cookie jar,” to be used to bolster income in a later period.
The second contract, according to the commission, purported to be a reinsurance agreement but in fact was a vehicle to refund to RenRe the $20 million transferred under the assignment agreement, as well as the purported insurance premium paid under the reinsurance agreement. In short, asserted the SEC, “this reinsurance agreement was also a sham.”
The regulator elaborated, “Not only was RenRe certain to meet the conditions for coverage, it also would receive back all of the money paid to Inter-Ocean under the agreements plus investment income earned on the money in the interim, less transactional fees and costs.”
The SEC also observed that RenRe accounted for the sham transaction as if it involved a real reinsurance contract that transferred risk from RenRe to Inter-Ocean when, in fact, certain RenRe senior officers knew this was not true.