The $72 million proposed class-action settlement between General Reinsurance and Ohio pension funds over a sham finite reinsurance transaction with American International Group Inc. has been remanded back to the district court level.
Gen Re and the Ohio pension funds had agreed to the settlement in 2009, but District Court Judge Deborah A. Batts denied their motion to certify a settlement class. She said they had failed to satisfy a "fraud-on-the-market" presumption, which would have created "intractable management problems" at trial.
In an unusual move, Gen Re and the Ohio pensions teamed up to appeal that decision.
Because the settlement would eliminate the need for a trial and the need to meet the "fraud-on-the-market" presumption, the U.S. District Court of Appeals for the Second Circuit vacated Batts' decision, and remanded the case back to the U.S. District Court for the Southern District of New York, according to its Aug. 13 decision.
At issue are the allegations that AIG and Gen Re violated securities laws by entering into a sham $500 million reinsurance transaction to mislead the market and artificially increase AIG's share price.
In late 2000 and early 2001, AIG and Gen Re agreed to a two-part transaction that allowed AIG to book a total of $500 million in premium reserves and $500 million in claims reserves. The terms of the agreement required AIG to make an additional $100 million in claims payments if additional losses developed, but "the risk was fiction, having been added by the parties to give the appearance that risk was being transferred," according to court documents.
The complaint alleged that no risk was transferred, and in exchange for participating in the deal, Gen Re received an undisclosed $5.2 million side payment.
After the sham transaction came to light in 2004 and 2005, under investigations from the U.S. Securities and Exchange Commission and the New York Attorney General, AIG admitted it had improperly accounted for the transaction, and the company's stock dropped substantially. In May 2005, AIG restated its earnings for the previous four years, dropping its net income by $3.9 billion.
Shareholders sued, seeking to recoup the lost value of the stock.
According to the original complaint in the class-action lawsuit, the Ohio Public Employees Retirement System; State Teachers Retirement System of Ohio, and Ohio Police and Fire Pension Fund accused the company of "employing devices, schemes and artifices to defraud." The three pension funds collectively represent 1.1 million members. The lawsuit sought damages for AIG investors who purchased shares between Oct. 28, 1999, and April 1, 2005.
Other related settlements in the case included: $725 million with AIG (Best's News Service, Oct. 6, 2011); a $115 million settlement with Maurice "Hank" Greenberg and three other former executives from AIG; and $97.5 million from PricewaterhouseCoopers LLC.
In June, a former AIG executive and four former Gen Re executives reached an agreement to pay their court-ordered fines, but face no jail time in a settlement agreement that would resolve criminal charges related to the sham finite reinsurance transaction that occurred 12 years ago.
The executives Christian Milton, former AIG vice president of reinsurance; Ronald Ferguson, former Gen Re chief executive; Elizabeth Monrad, former Gen Re chief financial officer; Christopher Garand, former Gen Re head of finite reinsurance operations in the United States; and Robert Graham, former assistant general counsel at Gen Re were convicted on charges including conspiracy and securities fraud in 2008, but three years later, an appellate court ordered a new trial in the case.
The executives were scheduled to face that new trial in January 2013. But under an agreement filed in the U.S. District Court of Connecticut on June 22, the trial will be delayed for 12 months. If the five executives follow the terms of the "deferred prosecution agreement" for that period, prosecutors said they would withdraw the charges.
This would mean the executives would not have a criminal record.
However, a separate 2009 SEC judgment that prohibits the five executives from ever serving as a director or officer of a public company would still stand.
Gen Re, a subsidiary of Berkshire Hathaway, currently has a Best's Financial Strength Rating of A++ (Superior). AIG has a Best's Financial Strength Rating of A (Excellent).