Monday, August 8, 2005

The Investigation of Berkshire Hathaway's Insurance Subsidiaries Just Keeps Going

The wide-ranging investigation of the reinsurance industry for its "finite insurance" products that were used by purchasers to engage in earnings management shows no signs of abating, according to Berkshire Hathaway's most recent quarterly report (here).  The company's 10-Q -- filed as usual on a Friday after 5:00 p.m. -- has disclosures about the various government investigations and related civil litigation in the section entitled "Legal Proceedings" that is growing in size each quarter.  According to the company:

General Reinsurance Corporation (“General Reinsurance”), a wholly owned subsidiary of General Re Corporation (“General Re”) and an indirect wholly owned subsidiary of Berkshire, is continuing to cooperate fully with the U.S. Attorney for the Eastern District of Virginia, Richmond Division (the “U.S. Attorney”) and the Department of Justice in Washington (the “DOJ”) in their ongoing investigation of Reciprocal of America (“ROA”). The U.S. Attorney and the DOJ have continued to request additional information from General Reinsurance regarding ROA and its affiliate, First Virginia Reinsurance, Ltd. The U.S. Attorney and the DOJ have also interviewed a number of current and former officers and employees of General Re and General Reinsurance, and have indicated they plan to interview additional such individuals. General Reinsurance and four of its current and former employees, including a former president, originally received subpoenas for documents from the U.S. Attorney in connection with the U.S. Attorney’s investigation of ROA in October 2003. One of the individuals originally subpoenaed in October 2003 has been informed by the U.S. Attorney that this individual is a target of the U.S. Attorney’s investigation. General Reinsurance has also been sued in a number of civil actions as described below.

     General Re, Berkshire, and certain of its other insurance subsidiaries, including National Indemnity Company (“NICO”) have also been continuing to cooperate fully with the U.S. Securities and Exchange Commission (“SEC”) and the New York State Attorney General (“NYAG”) in their ongoing investigations of non-traditional products. The U.S. Attorney and the DOJ have also been working with the SEC and the NYAG in connection with these investigations. General Re, Berkshire and NICO have been responding to subpoenas from the SEC and the NYAG originally issued in January 2005 by providing information relating to transactions between General Reinsurance or NICO (or their subsidiaries) and other insurers. In particular, General Re and Berkshire have been responding to requests from all of the governmental authorities involved in these investigations for information relating to certain transactions that may have been accounted for incorrectly by counterparties of General Reinsurance (or its subsidiaries). Berkshire understands that the government is reviewing the role of General Re and its subsidiaries, as well as that of their counterparties, in these transactions. The SEC, NYAG, DOJ and the U.S. Attorney have jointly interviewed a number of current and former officers and employees of General Re and General Reinsurance as well as Berkshire’s Chairman and CEO, Warren E. Buffett, and have indicated they plan to interview additional such individuals.

The italicized parts above note that the various agencies plan to interview more employees, and those frequently lead to requests for additional documents to determine the accounting for transactions discussed, and perhaps can reveal new areas of inquiry.  Berkshire Hathaway's disclosure also notes that another senior officer of a General Re subsidiary, Milan Vukelic of the Faraday Group, was terminated in July in connection with an investigation by the Australian authorities related to finite insurance transactions. Don't look for a quick resolution of the various investigations, much to Warren Buffett's chagrin, no doubt. (ph)

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