Risk Management

Trial Begins in AIG Fraud Case

"Sham transactions" could sink five ex-executives of AIG and reinsurance provider General Re.
Stephen TaubJanuary 8, 2008

The trial of five executives in American International Group’s financial fraud case got under way Monday, with the prosecutor saying that AIG patriarch Maurice “Hank” Greenberg set the scheme in motion in 2000.

Greenberg was never charged, but four former executives of General Re — whose loss-portfolio transactions with AIG are at the heart of the case — and one former AIG executive are on the hook for allegedly conspiring to manipulate AIG’s financial statements.

The defendants include Elizabeth Monrad, a former CFO of Gen Re; Ronald Ferguson, at one time that company’s CEO; Christian Milton, AIG’s former vice president of reinsurance; Robert Graham, a one-time Gen Re senior vice president; and Christopher Garand, who was chief underwriter of Gen Re’s finite reinsurance operations.

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Prosecutor Raymond Patricco said in opening arguments that Greenberg, who headed AIG for 40 years, initiated the questionable transactions in 2000 after AIG’s stock lost $12 billion because loss reserves had declined, the Associated Press reported. “Greenberg and AIG came to Gen Re for this deal,” Patricco said.

While Greenberg denied any wrongdoing, allegations of accounting irregularities led to his resignation in 2005, the AP noted.

Greenberg spokeswoman Amy Foote said in a statement, “There is no evidence that Mr. Greenberg initiated, participated in, or knew of a conspiracy or fraudulent scheme involving the Gen Re loss portfolio transaction. Mr. Greenberg inquired as to whether Gen Re had a loss portfolio which could be ceded to AIG.”

Four of the defendants — all except Garand — were charged with one count of conspiracy to violate federal securities laws and commit mail fraud, seven counts of securities fraud, five counts of making false statements to the Securities and Exchange Commission, and three counts of mail fraud.

Garand was charged with one count of conspiracy to violate federal securities laws and commit mail fraud, three counts of securities fraud, three counts of making false statements to the SEC, and three counts of mail fraud.

The five executives were accused of scheming to make it appear as though AIG increased its loss reserves, a key financial indicator to analysts and investors. The Justice Deptarment said in a press release that the indictment includes “two sham reinsurance transactions” between subsidiaries of AIG and Gen Re that were initiated by an AIG senior executive to quell criticism by analysts related to a $59 million reduction in AIG’s loss reserves in the third quarter of 2000.

According to the DOJ, these reportedly phony transactions made it falsely appear as though AIG had increased its loss reserves by $250 million in the fourth quarter of 2000, and by an additional $250 million in the first quarter of 2001.

The indictment further alleges that the defendants designed the transactions solely for the purpose of aiding AIG in manipulating its financial statements.

If they are convicted of all the charges, Ferguson, Monrad, Milton, and Graham each face a maximum of 230 years in prison and a fine of up to $46 million. Garand faces as many as 160 years in prison and a $29.5 million fine.

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