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Judge Sets Loss Amount Guidelines in Gen Re Case

Source: Business Insurance

Posted on 03 Nov 2008

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U.S. District Judge Christopher Droney ruled Friday that a fraudulent 2000 reinsurance deal between General Re Corp. and American International Group Inc. caused shareholder losses large enough to produce potential life terms for five convicted former executives under federal sentencing guidelines.

Judge Droney ruled that news reports about the reinsurance deal and the resignation of Maurice R. Greenberg as AIG's chief executive officer in 2005 drove down AIG's stock price on three dates, resulting in losses of between $544 million and $597 million to more than 250 AIG investors.

Under federal sentencing guidelines, the findings produce a guideline sentencing recommendation of life in prison. Judge Droney has not yet set a sentencing date for the five former Gen Re and AIG executives, and he has the discretion to depart from the guidelines and impose more lenient sentences.

Federal prosecutors have asked for "substantial" prison time for the defendants but are not seeking life terms, a spokesman for the U.S. Attorney's office in New Haven has said.

In his ruling, Judge Droney rejected an alternative prosecution theory that estimated the loss as high as $1.4 billion. He also rejected defendants' arguments that none of the AIG stock declines could reasonably be linked to the reinsurance transaction and that the loss therefore was zero.

Meanwhile, the judge also declined to order the defendants to pay restitution, finding that it would be too difficult to calculate payments to thousands of AIG shareholders.

Convicted in February on conspiracy and fraud charges were Ronald E. Ferguson, former General Re chief executive officer; Christopher P. Garand, former General Re senior vp in charge of U.S. finite underwriting; Robert Graham, former senior vp and legal counsel for the reinsurer; Elizabeth Monrad, former chief financial officer for General Re; and Christian M. Milton, former vp-reinsurance for AIG.

Prosecutors charged that the defendants engineered a sham loss portfolio reinsurance transaction that helped AIG inflate its loss reserves by $500 million in 2000 and 2001. The deal, aimed at countering stock analyst concerns about AIG's reserve levels, transferred no risk of loss to AIG and featured an unwritten side agreement that AIG would refund Gen Re’s $10 million premium and pay it a $5 million fee, the government alleged.