Posted on 02 Aug 2011
Earlier today a federal appeals court threw out the criminal convictions of four former General Re Corp. executives and an ex-American International Group Inc. (AIG) executive over a reinsurance transaction more than a decade ago that prosecutors said masked a drop in reserves at AIG.
The U.S. Second Circuit Court of Appeals ordered a new trial for former Gen Re Chief Executive Ronald Ferguson and four others. The court said the lower court shouldn't have allowed prosecutors to introduce evidence of a drop in AIG's stock price after it became public in 2005 that regulators were looking into a 2000 deal known as "Loss Portfolio Transfer" and other areas of AIG's financial disclosures. The stock-price data were introduced on charts shown to the jury during trial.
"The charts were prejudicial because the LPT was one of several problems besetting AIG at that time," U.S. Circuit Judge Dennis Jacobs said in a 77-page opinion. "The charts suggested that this transaction caused AIG's shares to plummet 12% during the relevant time period, which is without foundation, and (given the role of AIG in the financial panic) prejudicially cast the defendants as causing an economic downturn that has affected every family in America."
The criminal case grew out of investigations in 2005 by the Securities and Exchange Commission and the New York State attorney general's office into AIG's accounting. Maurice "Hank" Greenberg, AIG's former CEO, was named by prosecutors at trial as an "unindicted co-conspirator" in the case.
Mr. Ferguson, Christian Milton, a former AIG vice president, and three others were convicted of conspiracy, fraud and other charges in 2008. Mr. Ferguson was sentenced to two years in prison, while Christian Milton, a former AIG vice president, was sentenced to four years in prison. The others were sentenced to varying sentences. They have been free pending appeal.
"We're very gratified by the decision and look forward to the new trial," said Frederick P. Hafetz, a lawyer for Mr. Milton. A lawyer for Mr. Ferguson didn't immediately return a phone call seeking comment Monday.
During the trial, the district court tried to avoid prejudicing the defendants by allowing prosecutors to only show "isolated" ranges of the insurer's stock price.
"In any event, the court's solution, to allow only isolated ranges of stock-price data, did not mitigate the prejudice: Instead of a downward line, there were three dropping sets of dots; it is inevitable that jurors would connect them. So the risk that jurors would attribute the full 12% decline to the LPT was unabated by the court's precaution," Judge Jacobs said.
In 2005, AIG said it would restate more than four years of its earnings. In 2006, AIG agreed to pay more than $1.6 billion to settle accounting fraud allegations by the New York attorney general and the SEC.
An AIG spokesman declined to comment Monday.
In January 2009, Gen Re, a unit of Warren Buffett's Berkshire Hathaway Inc., agreed to pay $92 million as a part of a settlement with the federal government related to two alleged sham reinsurance transactions with AIG.
Last year, Mr. Greenberg, who has denied wrongdoing, agreed to give a deposition about the transaction, saying the statutes of limitations for any potential criminal charges had passed.
Mr. Greenberg and a group of former AIG executives agreed in August 2009 to pay $115 million to settle a separate shareholder suit over alleged false statements regarding the insurer's financial results. Mr. Greenberg, without admitting or denying wrongdoing, also agreed in August 2009 to pay $15 million to settle a separate action by the SEC.