Monday, May 16, 2005

General Re Executive Is Target of DOJ Investigation While AIG May Dismiss More Executives Involved in Accounting Problems

In typically cryptic fashion, Berkshire Hathaway disclosed that one of its executives it now the target of a grand jury investigation in connection with the investigation of the AIG-General Re reinsurance transaction (see earlier post here).  The executive will be placed on paid leave as of May 16, along with another executive who is also involved in a different investigation by the Department of Justice. A New York Times story (here) identifies the executive as John Houldsworth.  It is possible that two others involved in the General Re side of the transaction, Richard Napier and Elizabeth Monrad, will also be notified that they are targets of the criminal investigation. Houldsworth stepped down almost two weeks after receiving a Wells notices from the SEC, which informed him that the Commission's Enforcement Division staff had determined that he was likely to be sued for securities law violations.  No word yet on whether Napier will also take a paid leave.  Berkshire Hathaway's Form 8-K filing (here) on Friday, May 13, states:

An employee of a subsidiary of General Re Corporation (“General Re”) has been informed by the U.S. Department of Justice (“DOJ”) that the employee is a target of the DOJ’s ongoing investigation. This employee has also received a Wells notice from the Securities and Exchange Commission (“SEC”) in connection with the SEC’s ongoing investigation. General Re’s subsidiary has, effective May 16, 2005, placed this employee on administrative leave with pay, subject to the employee’s continuing cooperation with all governmental investigations. A former officer of General Re was previously informed by the U.S. Attorney for the Eastern District of Virginia (the “U.S. Attorney”) that this former officer is a target of the U.S. Attorney’s ongoing investigation.  In addition to the employee first mentioned above and the officer of General Re who, as previously disclosed, also received a Wells notice from the staff of the SEC in connection with its ongoing investigation, a former officer of General Re has received a Wells notice from the staff of the SEC in connection with its investigation.  The Chief Executive Officer of General Re’s subsidiary, Faraday Group, who previously served as the head of General Re’s international finite business unit, has also been placed on administrative leave with pay, effective May 16, 2005, subject to his continuing cooperation with all governmental investigations.

The other executive discussed in Berkshire's disclosure is Milan Vukelic, the head of the Faraday Group.

Berkshire Hathaway seems to make it a practice to disclose information about the investigation in Friday afternoon SEC filings, and its disclosure is not exactly a model of clarity.  The identification of targets of the criminal investigation means that the federal prosecutors believe they have sufficient information showing a likely involvement in criminal activity by the individuals, and the notification can be the functional equivalent of an SEC Wells notice, inviting the recipient to enter plea negotiations.

Meanwhile, over on the AIG side, the Wall  Street Journal reports (here) that the company will fire up to six eight* executives involved in the various accounting problems uncovered in its internal investigation.  No word yet on whether any of them have received Wells notices from the SEC, or target letters from the DOJ or N.Y. Attorney General Eliot Spitzer's office, but the issue is probably more a matter of when and not if the notifications will come, and who will receive them.  Federal prosecutors will likely bring a more narrow case than the SEC. (ph)

* Revised Wall Street Journal article here.

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