Saturday, June 11, 2005
Another General Re Executive Pleads Guilty -- Did TIAA-CREF Act Improperly When It Hired General Re's CFO?
A second senior General Re executive, Richard Napier, has entered a guilty plea in the Eastern District of Virginia to a single count of conspiracy to commit securities fraud related to the AIG-General Re finite insurance transaction. The statement of facts (here) is virtually identical to the recitation of those for John Houldsworth, and the statement again plays "What's My Line" (see earlier post here) by only identifying other executives by title.
One of the executives identified is General Re's (former) CFO, Elizabeth Monrad, who was until recently the CFO of TIAA-CREF, the large pension fund and insurance company (yes, I still have retirement money with the company). The Napier statement of facts includes one particular statement by Monrad as demonstrating the General Re executives knew AIG could not report an increase in its insurance reserves from the agreement: "We told AIG that there would not be symmetrical accounting . . . we told them that was one of the aspects of the deal they had to digest." Having identified Monrad's statement as evidence of the knowledge of the General Re executives that they were participating in a conspiracy with AIG executives to misreport the transaction, it appears that she will be charged with a crime, and may well enter into a plea agreement similar to that reached by Napier and Houldsworth.
As the government gets closer to Monrad, I wondered whether TIAA-CREF could have done anything to protect itself from having its name dragged into stories like this one, and I think the answer is no. TIAA-CREF hired her in June 2003, months before the transaction became the subject of the investigations by the SEC, DOJ, and NY Attorney General Spitzer's office. Moreover, the transaction involves aggressive accounting by AIG, not General Re, and while Monrad participated in the negotiations, it is unlikely she viewed them at the time as anything other than a normal business transaction. Indeed, that's what so many white collar crimes are when they involve questionable business decisions that are not obviously fraudulent: aggressive judgments that cross the line into illegality in the name of accomplishing a business objective. If TIAA-CREF asked Monrad if there were any questionable transactions during her tenure at General Re, I think she would have answered the question negatively, or at least not have considered the AIG finite insurance deal as the likely subject of a criminal investigation, much less a conspiracy that would be the subject of a plea bargain by two fellow executives. If TIAA-CREF checked her credentials with other General Re executives -- and I certainly hope it did -- the answer would have been similarly negative. Does that mean the transaction was not illegal? That's a different question from whether Monrad and other General Re executives viewed it that way at the time.
Can a large company protect itself from hiring a ticking timebomb? Companies can limit the pool of candidates to those in-house, but that breeds an insular culture, as witnessed by AIG under the near-dictatorial control of Maurice Greenberg. If an organization goes outside its ranks for some executives, it will be taking a risk that at some point in the past the person may have participated in transactions that will be the subject of investigation and even prosecution. All the background checks in the world cannot eliminate completely the possibility that a new hire will become a high-profile target of a state or federal investigation. Lie detector tests do no good when the process of making the decision that crosses the line includes convincing the participants that what they are doing is not only legal, but an acceptable exercise of business judgment. (ph)