Gen Re, AIG Sham Finite Reinsurance Transaction Case Heads to Appeals Court

The case of five former executives, four from General reinsurance Corp. and one from American International Group Inc., who were sentenced to jail for a sham finite reinsurance transaction heads to an appeals court today.

Source: Source: Bestwire | Published on November 17, 2010

Tom Carson, a spokesman in the Connecticut’s U.S. Attorney’s Office, said U.S. vs. Ronald Ferguson, et al, will be argued before the U.S. Court of Appeals for the Second Circuit in New York.

The executives were convicted after a six-week jury trial in 2008. They’ve all been free on bond while the appeal is pending, Carson said.

Ronald Ferguson, former Gen Re chief executive, was sentenced to two years in prison plus ordered to pay a $200,000 fine. Christian Milton, former AIG vice president of reinsurance, was sentenced to four years in jail and ordered to pay a $200,000 fine. Elizabeth Monrad, former Gen Re chief financial officer, was sentenced to 18 months in prison and ordered to pay a $250,000 fine. Christopher Garand, former Gen Re head of finite reinsurance operations in the United States, was sentenced to one year in prison and ordered to pay a $150,000 fine. Robert Graham, former assistant general counsel at Gen Re, was sentenced to one year in prison and ordered to pay a $100,000 fine.

The five executives were convicted on charges that included conspiracy, securities fraud, making false statements to the U.S. Securities and Exchange Commission and mail fraud. At issue was a loss portfolio transfer that prosecutors said allowed AIG to book $500 million of loss reserves in the fourth quarter of 2000 and first quarter of 2001 without assuming any real risk. Gen Re allegedly paid a $10 million premium that AIG secretly returned through a side deal, plus an additional $5 million fee, prosecutors said.

“The five defendants…knew the true deal behind closed doors, but documented a false deal on paper for AIG’s auditors and regulators to see,” prosecutors said in a 380-page appellate brief filed by Nora R. Dannehy, acting U.S. Attorney for Connecticut. “This case is not about a good faith violation of technical and complex accounting rules, as the absence of any debate at the time about those rules proved. It is about lies and deception,” she said in the brief.

Shareholders of AIG lost between $544 million and $597 million from the transaction, authorities said.

In January, Gen Re agreed to pay $92.2 million and dissolve a Dublin subsidiary to resolve federal charges relating to sham finite reinsurance contracts with AIG and Prudential financial Inc.’s former property/casualty division. The SEC said Gen Re would pay $12.2 million to settle its charges that it used sham finite reinsurance contracts to help AIG and Prudential manipulate and falsify their reported financial results. Also, the U.S. Department of Justice said Gen Re would pay $19.5 million to the U.S. Postal Inspection Service Consumer Fraud Fund to resolve related criminal charges (BestWire, Jan. 20, 2010).

Gen Re also agreed to pay $60.5 million through a civil class-action settlement to AIG’s shareholders, the SEC said in a statement. Gen Re previouslyforfeited to the government about $5 million in fees it earned for its participation in the scheme with AIG.

Under the settlement, Cologne Re Dublin, the Gen Re subsidiary that structured the AIG transactions, was dissolved. Cologne Re Dublin stopped writing new business in 2005, according to BestLink, which provides online access to A.M. Best’s Global Insurance & Banking Database.

AIG agreed to pay $800 million to settle related securities fraud and improper accounting charges. AIG’s former chairman, Maurice R. “Hank” Greenberg, and former CFO, Howard I. Smith, had previously agreed to pay $15 million and $1.5 million, respectively, to settle SEC charges.

Two other executives, who testified for the government, received probation in connection with the case. Richard Napier, a former Gen Re senior vice president, received two years probation and was fined $10,000. He pleaded guilty to one count of conspiracy to commit securities fraud and was ordered to perform 400 hours of community service, according to the Department of Justice.

John Houldsworth, the former CEO of Cologne Re Dublin, testified that the defendants structured the transaction to avoid detection by auditors and regulators. He was sentenced in federal court to serve two years of probation for his role, plus fined $5,000, and was ordered to perform 400 hours of community service.