Thursday, September 28, 2006
The SEC filed a civil action (here) in the U.S. District Court for the Southern District of New York alleging that James Stanard, the former CEO of RenaissanceRe Holdings, which is based in Bermuda, Martin Merritt, the company's former controller, and Michael Cash, a former executive at a RenRe subsidiary, alleging fraud in a pair of sham transactions designed to smooth the company's earnings in 2001-2003. According to the SEC Litigation Release (here):
In its complaint, the Commission alleges that Stanard, Merritt and Cash committed fraud in connection with a sham transaction that they concocted to smooth RenRe's earnings. The complaint concerns two seemingly separate, unrelated contracts that were, in fact, intertwined. Together, the contracts created a round trip of cash. In the first contract, RenRe purported to assign at a discount $50 million of recoverables due to RenRe under certain industry loss warranty contracts to Inter-Ocean Reinsurance Company, Ltd. in exchange for $30 million in cash, for a net transfer to Inter-Ocean of $20 million. RenRe recorded income of $30 million upon executing the assignment agreement. The remaining $20 million of its $50 million assignment became part of a "bank" or "cookie jar" that RenRe used in later periods to bolster income.
The second contract was a purported reinsurance agreement with Inter-Ocean that was, in fact, a vehicle to refund to RenRe the $20 million transferred under the assignment agreement plus the purported insurance premium paid under the reinsurance agreement. This reinsurance agreement was a complete sham. Not only was RenRe certain to meet the conditions for coverage; it also would receive back all of the money paid to Inter-Ocean under the agreements plus investment income earned on the money in the interim, less transactional fees and costs.
RenRe accounted for the sham transaction as if it involved a real reinsurance contract that transferred risk from RenRe to Inter-Ocean, when in fact, the complaint alleges, each of these individuals knew that this was not true.
Merritt entered into a partial settlement with the Commission in which he will be barred from serving as an officer or director of a public company and be enjoined from future violations of the securities laws; the issue of disgorgement and a civil penalty will be determined at a later time. All three defendants left RenaissanceRe in 2005, when the company restated its results related to the transactions. According to an AP story (here), attorneys for Stanard and Cash declared that their clients did not commit securities fraud in the transactions. (ph)