Risk & Compliance

SEC Charges Ex-RenaissanceRe Controller

The former controller of RenaissanceRe and two others used finite insurance to "park" excess revenue until it was needed to boost financial stateme...
Tim ReasonSeptember 27, 2006

The Securities and Exchange Commission has filed civil fraud charges against three former top executives RenaissanceRe Holdings Ltd. — including the former controller — for misusing finite insurance.

The complaint alleges that James N. Stanard and Martin J. Merritt, the former CEO and former controller, respectively, of RenaissanceRe Holdings Ltd., and Michael W. Cash, a former senior executive of RenRe’s wholly-owned subsidiary, Renaissance Reinsurance Ltd., executed a sham transaction that had no economic substance and no purpose other than to smooth and defer over $26 million of RenRe’s earnings from 2001 through 2003. CFO.com was unable to immediately locate the former RenaissanceRe executives for comment.

Merritt agreed to a partial settlement, consenting to the entry of an antifraud injunction and other relief.

“The defendants enabled RenRe to take excess revenue from one good year and, in effect, ‘park’ it with a counterparty so it would be available to bring back in a future year when the company’s financial picture was not as bright,” said Mark Schonfeld, director of the commission’s Northeast Regional Office, in a statement.

Under his deal, Merritt agreed to cooperate fully with the SEC, and without admitting or denying the allegations in the complaint, consented to a partial final judgment that will permanently enjoin him from violating or aiding or abetting future violations of the securities laws, bar him from serving as an officer or director of a public company, and defer the determination of civil penalties and disgorgement to a later date.

Merritt also agreed to an SEC administrative order, based on the injunction, barring him from appearing or practicing before the SEC as an accountant.

The SEC alleges that Stanard, Merritt and Cash committed fraud in connection with a sham transaction that they allegedly concocted to smooth RenRe’s earnings.

The SEC said that the complaint concerns two seemingly separate, unrelated contracts “that were, in fact, intertwined.” Together, the contracts created a round trip of cash, it added.

“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, the complaint alleges, each of these individuals knew that this was not true,” the SEC stated in its announcement.

Merritt and Stanard were also accused of misrepresenting or omitting certain key facts about the transaction to RenRe’s auditors.

As a result of RenRe’s accounting treatment for this transaction, “RenRe materially understated income in 2001 and materially overstated income in 2002,” the SEC alleged.

The 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.