Posted on 22 Jan 2010
Giant Berkshire Hathaway reinsurer General Re has agreed to pay almost $100 million (rather than the $60 million reported earlier this week) to settle several charges and a lawsuit related to its involvement in accounting frauds by American International Group and Prudential Financial, according to the Securities and Exchange Commission, which charged Gen Re yesterday for its involvement in the schemes.
"Gen Re arranged to sell financial products to AIG and Prudential for the sole purpose of enabling those companies to manipulate their accounting results and mislead investors," said Andrew M. Calamari, Associate Director of the SEC's New York Regional Office.
Gen Re agreed to pay $12.2 million to settle SEC charges that it helped AIG and Prudential manipulate and falsify their financial statements, the regulator said.
Gen Re will also pay $19.5 million to the U.S. Postal Inspection Service Consumer Fraud Fund as part of a nonprosecution agreement unveiled by the Department of Justice, the SEC said. That was related to a criminal investigation into Gen Re's transactions with AIG.
Gen Re also agreed to pay $60.5 million to settle a class-action lawsuit on behalf of injured AIG shareholders. Gen Re also forfeited to the government roughly $5 million in fees it got from helping AIG falsify its financial statements, the SEC said.
Berkshire bought Gen Re in 1998. The acquisition has proved to be one of Chairman Warren Buffett's most troubled deals.
The settlements stem from an accounting scandal that erupted at AIG during the previous decade, before the insurance giant’s near collapse and subsequent government bailout. The controversy led to the departure of longtime AIG Chief Executive Maurice "Hank" Greenberg.
The SEC previously charged AIG with securities fraud and improper accounting, and the company settled the charges by paying more than $800 million among other remedies. The SEC also previously charged AIG former chairman Maurice R. 'Hank' Greenberg and former chief financial officer Howard I. Smith, as well as former senior executives of Gen Re for their roles in connection with the scheme with AIG. The Commission separately charged Prudential with securities laws violations in 2008.
According to the SEC's complaint against Gen Re, filed in U.S. District Court for the Southern District of New York, a foreign subsidiary of Gen Re entered into two sham 'reinsurance' transactions with AIG in 2000 to improperly allow AIG to reverse the declining reserve trend and falsely report additions to both loss reserves and premiums written. Senior officials at Gen Re helped AIG structure the two sham transactions. The contracts show reinsurance transactions that appeared to transfer risk to AIG, but the transactions did not transfer risk.
The SEC further alleges that Gen Re separately entered into a series of sham reinsurance contracts with Prudential's property and casualty division from 1997 to 2002. The contracts had no economic substance and purpose other than to allow Prudential to build up and then draw down on an off-balance sheet asset or 'finite bank' parked with Gen Re. As a result of the sham transactions, Prudential improperly recognized more than $200 million in revenues in 2000, 2001, and 2002. Gen Re received fees totaling $8.1 million for structuring and executing the scheme with Prudential.
In determining to accept Gen Re's settlement offer, the SEC took Gen Re's remediation efforts and cooperation into account. Among the efforts SEC considered: Gen Re's comprehensive, independent review of its operations conducted at the outset of the government's investigations the results of which were shared with investigators; Gen Re's substantial assistance in the government's successful civil and criminal actions against individuals involved in the scheme with AIG; and Gen Re's internal corporate reforms designed to strengthen oversight of its operations. Those reforms entail dissolving a subsidiary involved with the AIG transactions, appointing an independent director to its Board of Directors, forming a committee consisting of senior managers to review and approve complex transactions, requiring legal review of proposed finite or loss mitigation contracts, and fortifying its internal audit functions and underwriting rules. The settlement is subject to court approval.