Risk Management

DOJ, SEC Charge Five in Gen Re Case

SEC claims it has "sham" transaction disucssion on tape.
Stephen TaubFebruary 2, 2006

The former chief financial officer, and two other former top executives of Berkshire Hathaway Inc.’s General Re subsidiary, and a one-time American International Group Inc. official, were indicted in Virginia Wednesday for their roles in a reinsurance transaction five years ago, according to The Wall Street Journal.

The executives are former General Re CFO Elizabeth Monrad, one-time Chief Executive Ronald Ferguson, and former Assistant General Counsel Robert Graham, according to the paper. Christian Milton, the one-time head of AIG’s reinsurance operations, was also indicted.

On Thursday, the Securities and Exchange Commission filed an enforcement action against the four individuals, as well as former General Re executive Christopher Garand, for allegedly helping AIG mislead investors by setting up fraudulent reinsurance transactions. The Journal said Milton is the first former AIG executive to have been charged in the probe.

Last year, former General Re employees John Houldsworth and Richard Napier pleaded guilty to the criminal charge of conspiracy to commit fraud and agreed to cooperate with prosecutors. They face up to five years in prison, but have not yet been sentenced, added the paper.

According to court documents filed in the criminal suits against Houldsworth and Napier, Ferguson allegedly agreed in 2000 to structure a reinsurance deal for AIG that would ultimately boost the insurer’s loss reserves, reported The Journal. The paper noted that AIG officials admitted that the company accounted for that deal improperly and subsequently restated some financial filings.

However, the new indictments may trigger guilty pleas, which in turn would help prosecutors build cases against others involved in the questionable reinsurance transaction, speculated Bloomberg. “Sometimes it takes the filing of an indictment to induce a plea and cooperation,” said Jacob Frenkel, a former Federal prosecutor who now practices law at Shulman, Rogers, Gandal, Pordy and Ecker, noted the wire service.

The SEC’s complaint claims that the five individuals, as well as others, aided and abetted AIG’s violations of the antifraud and other provisions of federal securities laws by helping the insurer to structure two sham reinsurance transactions. Allegedly, those transactions falsely increased AIG’s loss reserves in the fourth quarter of 2000 and first quarter of 2001 by a total of $500 million.

The regulator charges that the transactions were initiated by AIG to quell criticism by analysts concerning a reduction in the company’s loss reserves in the third quarter of 2000. “It is particularly troubling when senior executives knowingly and substantially participate in securities fraud,” stated Linda Chatman Thomsen, director of the Commission’s Division of Enforcement.”

In its complaint, the SEC alleges that Ferguson, Monrad, Graham, Garand, and others at Gen Re worked with Milton, and others at AIG, to fashion two disingenuous reinsurance contracts between Cologne Re Dublin, a Gen Re subsidiary in Dublin, Ireland, and an AIG subsidiary.

The complaint also details recorded conversations among the individuals and other evidence reflecting the planning and implementation of the sham transaction. “On the basis of this evidence, the complaint charges that the defendants understood from the beginning that they were structuring a sham transaction,” the SEC stated in its announcement.

The Commission’s complaint seeks permanent injunctive relief, disgorgement of ill-gotten gains—if any—plus prejudgment interest, civil money penalties, and orders barring each defendant from acting as an officer or director of any public company.

The SEC also said its investigation will continue.