A federal judge sentenced a former American International Group executive to four years in prison for his role in a $500-million fraudulent scheme to manipulate AIG’s financial statements. The ex-AIG vice president of reinsurance, Christian M. Milton, together with four former officials of AIG’s General Re unit, were convicted a year ago in the case.

Milton, who served in the reinsurance post from April 1982 until March 2005, had two years of supervised release added to the four-year sentence by the judge in Hartford, Conn. Milton also was ordered to pay a $200,000 fine. Last February, he was found guilty of conspiracy, securities fraud, making false statements to the Securities and Exchange Commission, and mail fraud.

One of the former General Re executives convicted with him, ex-CEO Ronald E. Ferguson, was sentenced to two years in prison and ordered to pay a $200,000 fine. Ferguson had been chief executive from 1978 through September 2001. Still awaiting sentencing are ex-CFO Elizabeth A. Monrad and former senior vice presidents Robert D. Graham and Christopher P. Garand. The five were convicted on all counts presented in the 16-count superseding indictment.

Monrad, who is scheduled to be sentenced on Feb. 12, was Gen Re’s chief financial officer from June 2000 through July 2003. Graham was its senior vice president and assistant general counsel from 1986 through October 2005. Garand, a Gen Re senior vice president and the head and chief underwriter of Gen Re’s finite reinsurance operations in the U.S. from 1994 until August 2005, also was a directors of Cologne Re Dublin, a Gen Re entity.

According to trial evidence, the fraud was carried out through use of two sham reinsurance transactions between subsidiaries of AIG and Gen Re in response to analysts’ criticism of a $59 million decrease in AIG’s loss reserves for the third quarter of 2000, according to the Department of Justice. Evidence showed that the transactions increased AIG’s loss reserves by $250 million in the 2000 fourth quarter, and by $250 million in the 2001 first quarter, masking a declining trend in loss reserves in the face of premium growth, acc the government notes in a press release announcing Milton’s sentencing, according to the DOJ.

AIG restated the transactions in SEC filings in May 2005.  When the investigation was disclosed to investors by AIG and through various media outlets between Feb. 14 and March 14, 2005, shares of AIG stock dropped from $73.12 to $61.92, according to the government. 

Evidence at trial showed that the defendants knew that the true purpose of the transactions was to permit AIG to falsely report increasing loss reserves in its statements to analysts, investors and in its SEC filings, according to the government. It noted that the five individuals structured a sham reinsurance transaction and created a phony paper trail to make it appear as though Gen Re had solicited reinsurance from AIG when the evidence demonstrated that the parties knew AIG wanted the transaction to manipulate its financial statements. 

In addition, the five individuals entered into a secret side deal whereby AIG would never have to pay any losses under the contracts; AIG would return to Gen Re the $10 million in premiums Gen Re paid to AIG and AIG paid Gen Re a $5 million fee for entering into the transaction.

According to the Associated Press, an attorney for Milton told the court that his client did not benefit personally from the fraud. The attorney did not immediately answer a query from CFO.com seeking comment.