Wednesday, June 19, 2013

New SEC Policy On Admissions Of Wrongdoing: Tangibles And Intangibles

by: Solomon L. Wisenberg

SEC Chair Mary Jo White has announced an end to the SEC's blanket "does not admit or deny" settlement agreement policy. In a select number of cases involving "widespread harm to investors" or "egregious intentional misconduct" the Commission will now insist on admissions of wrongdoing on the part of civil defendants who want to settle. The blanket policy was previously eroded, in January 2012, in cases where settling defendants had already pled guilty to related criminal charges. Yesterday's Reuters story is here. Todays Thomson Reuters News & Insight analysis is here.

I strongly suspect that the tangible impact of the policy shift will be minimal. Since almost no SEC civil defendants can afford to admit wrongdoing as a condition of settlement (except in cases where a guilty plea occurred or is anticipated), we can expect the instances in which the SEC will insist on such admissions to be extremely rare. And those very rare cases will result in trials.

But the intangible impact of annually insisting on admissions of wrongdoing in three or four cases may be greater over time. First, the trials, though few in number, should be well-covered by the media. Second, the SEC will regain some much needed respect for its toughness. Third, going to trial and airing the dirty laundry accumulated by malefactors of great wealth should have salutary educational and public policy benefits. Fourth, we may actually see some deterrent effect from all this, so that companies don't automatically view SEC settlements as a cost of doing business.

We will revisit this issue as the new policy is implemented.


June 19, 2013 in AIG, SEC, Securities, Settlement | Permalink | Comments (0) | TrackBack (0)

Monday, August 1, 2011

Commentary on Second Circuit Opinion in AIG and General Re Execs Case

Reported here is the decision in the Ferguson, et. al. case, in which the Second Circuit vacated the convictions. Commentary:

  • It's a 77 page court decision and having several university degrees would assist in understanding the technical aspects of the business workings described here.  One can only imagine the difficulty faced in explaining this to a lay jury.
  • The court finds two errors by the district court, namely that it: "1) abused its discretion by admitting the stock-price data, and 2) issued a jury instruction that directed the verdict on causation."
  • Part of the problem with the admission of the stock-price data was that the "[a]lthough the evidence was admitted only to show materiality, the government exploited it to emphasize the losses caused by the transaction."
  • With respect to the jury instruction, the court noted that "[i]n seeking to accommodate the reasonable phrasings offered by the various parties, the court ended up with a charge that allowed the jury to convict without finding causation."
  • The defendants had not objected to the causation instruction, but the court found the error as plain error. 
  • The court did not find several other errors that were claimed by the defendants.
  • The Global Tech (see here) decision of the Supreme Court is referenced, but it offers no assistance to these defendants.
  • The court notes that the case depended heavily on the testimony of two cooperating witnesses and that their testimony was "bolstered by contemporaneous recordings of calls involving" one of them. But the court also later states with respect to one of these witnesses -  "Certain factual inconsistencies in Napier's testimony are sufficiently obvious to raise an eyebow, but most of the arguments are meritless."
  • The court states: " Since we are vacating the judgments on the grounds discussed above, we need not reconcile these cases or decide whether the prosecution's actions amounted to misconduct. . . . No doubt it is dangerous for prosecutors to ignore serious red flags that a witness is lying, and the government will doubtless approach Napier's revised recollections with a more skeptical eye on remand." The court does note that it would have been difficult for the government to verify the facts and that there was cross-examination and summation "which resolved the credibility issue against the defendants."
  • In light of this, would it really be the "right" action to retry this case?  Hasn't the cost (including emotional cost) to the clients been sufficient by this prosecution?  I can't help but recall the sentencing hearing of one of the accused individuals here, when the judge stated,  "Ms. Monrad was not motivated by personal gain."
  • To the government - please spend our money wisely.


August 1, 2011 in AIG, Fraud, Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Execs of Gen Re and AIG - Convictions Vacated

The Second Circuit vacated and remanded for a new trial the convictions of four executives of General Re and AIG. The decision is here.  Commentary to follow.


August 1, 2011 in AIG, Fraud, Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 17, 2009

Former General Re Exec Gets Probation

A former General Re executive received a sentence of community service, a fine, and probation. A factor here is likely the cooperation provided to the government.   See Matt Scroggins,Ex-Gen Re exec gets probation for finite fraud; Dave Collins, Houston Chronicle (AP), Former General Re executive given probation For background on other sentences coming from this investigation, see here



June 17, 2009 in AIG, Fraud, Sentencing | Permalink | Comments (0) | TrackBack (0)

Thursday, April 2, 2009

Former Finance Exec at General Re Gets 18 Months

The first sentence given to a former General Re executive was for two years (see here).  The second individual, AIGs former VP of reinsurance, was given four years (see here).  The third person was sentenced to one year and a day (see here).  And now a fourth person may be added to the prison system, this time with a sentence of 18 months.  Colleen McCarthy of  Business Insurance Magazine provides a detailed accounting of the sentencing hearing of a former finance exec at General Re. (see here).  Some comments:

  • Considering that the judge had previously looked at a significant loss figure, the sentence could have been extreme. (see here) One also had to be concerned about the effect of recent happenings at AIG and the public reaction -- which fortunately did not, as it should not, have come into play here. 
  • The judge in each of these cases appears to be sentencing the individual and not limiting the decision to arithmetic - and this is important. What is particularly noteworthy here is that the court credited the fact that "Ms. Monrad was not motivated by personal gain."
  • The government needs to stop arguing that a convicted defendant is refusing to take responsibility for his or her actions. If a person is appealing a case - claiming innocence, and arguing that the conviction should not stand - how can you ask that person to take responsibility?  To accept the government's argument would be to place the individual in a "Catch-22" position of maintaining innocence but also saying they are sorry for committing the act.  It would render moot innocence claims in appellate arguments. We have an appellate system for a reason, and it should be respected.  
  • Even though the defendant was fortunate that the sentence was lower than the guidelines, it is still a sentence to prison for someone who had no prior criminal record. This is yet another indication that the days of probation for those convicted of white collar crimes has passed. 
  • Every time someone is given a prison sentence it is important to recognize that the sentence not only affects them, but all the family and friends that will suffer the ramifications of that sentence.


Addendum - Jane Mills & David Voreacos,Gen Re's Monrad Gets 18 Months in AIG Investor Fraud

April 2, 2009 in AIG, Sentencing | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 27, 2009

Second Sentence in AIG- General Re

The first sentence given to a former General Re executive was for two years (see here).  The court now sentenced a second individual, AIG's former vp of reinsurance.  This time the sentence is four years. See Colleen McCarthy, Business Insurance, Milton Sentenced to 4 Years for General Re Fraud; Doug Berman, Sentencing Law & Policy Blog, Another former AIG executive gets serious prison time, but also a serious variance.  Commentary to follow.


January 27, 2009 in AIG, Sentencing | Permalink | Comments (0) | TrackBack (0)

Monday, February 25, 2008

Insurance Executives Convicted

Five former insurance company executives, four from General Re and one from American International Group, were convicted of conspiracy, securities fraud, false statements to the SEC, and mail fraud in connection with a "finite insurance" contract used to make AIG's reserves look stronger than they were.  The defendants include the former CEO of General Re, Robert Ferguson, the company's former CFO, senior vice president, and long-time assistant general counsel in addition to a vice president from AIG.  The case revolved around reinsurance transactions in 2000 and 2001 that helped AIG report an increase in its insurance loss reserves, something that analysts had been critical about, negatively affecting the stock price.  According to prosecutors, the contracts were a sham transaction because no real risk passed to General Re, so AIG's accounting for it as a reinsurance agreement was improper.

An interesting twist in the case was the government's identification of former AIG CEO Maurice Greenberg as an unindicted co-conspirator, although he has never been charged with any crime.  Naming such a well-known executive as a member of the conspiracy may have been a means to undermine the defendants' "empty chair" defense that sought to blame the problems with the transactioin on Greenberg.  He was forced out of his position as CEO by then-New York Attorney General (and now Governor) Eliot Spitzer, who demanded Greenberg's termination on the threat of criminal prosecution of the company, an almost sure death sentence for an insurer.  General Re is a wholly-owned subsidiary of Berkshire Hathaway, whose CEO is Warren Buffett, once named as a potential witness in the case but never called by either side.

While the case is primarily an accounting fraud prosecution, it is different from more typical cases of this type because the main defendants were not from the company whose accounting was improper.  Indeed, there was no claim that General Re's recording of the transaction was improper, only AIG's.  In that sense, General Re was an enabler of AIG, the type of enterprise liability rejected by the Supreme Court in the Stoneridge case for private securities fraud actions.  One rationale for rejecting that theory of liability in Stoneridge was the presence of the SEC and federal prosecutors to crack down on companies that aid others in violating the securities laws.  An AP story (here) discusses the verdict, which the defendants have vowed to appeal. (ph)

February 25, 2008 in AIG, Fraud, Securities, Verdict | Permalink | Comments (1) | TrackBack (0)

Thursday, February 9, 2006

AIG Resolves State and Federal Fraud Claims

As expected (see earlier post here), American International Group Inc. reached a global settlement with federal and state authorities, including the civil suit filed by New York Attorney General Eliot Spitzer, to resolve the various investigations of insurance and securities fraud at the company.  AIG's total payment will be $1.64 billion, comprised of the following: $700 million in disgorgement and a $100 million penalty to the SEC; $375 million to AIG policyholders; $344 million to states harmed by AIG's practices involving underreporting for workers' compensation funds; and, fines of $100 million to New York and $25 million to the U.S. Department of Justice.  The SEC's settled complaint (here) concerns the reinsurance transaction with General Re that led to the indictment of four defendants on Feb. 1 on conspiracy and securities fraud charges in the Eastern District of Virginia (indictment here), including three senior General Re executives.  According to the SEC's Litigation Release (here): "The Commission’s complaint, filed today in federal court in Manhattan, alleges that AIG’s reinsurance transactions with General Re Corporation (Gen Re) were designed to inflate falsely AIG’s loss reserves by $500 million in order to quell analyst criticism that AIG’s reserves had been declining. The complaint also identifies a number of other transactions in which AIG materially misstated its financial results through sham transactions and entities created for the purpose of misleading the investing public."  The settlement with New York covers a broader array of conduct, including the bid-rigging with Marsh & McLennan and other firms that first triggered the regulatory scrutiny (see NYAG settlement here).

With the company settlement, the remaining issue is whether federal prosecutors will pursue criminal charges against former AIG CEO Maurice Greenberg and former CFO Howard Smith.  Attorney General Spitzer has already stated that no criminal charges against them will be filed, only the civil case in which the company reached the settlement.  Whether prosecutors will be able to put together a case against Greenberg is very much an open question.  The prosecution in Virginia arising out of the AIG-General Re "finite insurance" transaction will probably be the key to any further criminal actions.  Unless former General Re CEO Ronald Ferguson or former AIG reinsurance executive Chris Milton, both defendants in the criminal case, agree to cooperate and provide solid evidence against Greenberg and Smith, it is unlikely the government will be able to file charges absent the discovery of a "smoking gun" document, which is unlikely to occur at this point in the investigation. An AP story (here) describes the settlement. (ph)

February 9, 2006 in AIG, Civil Enforcement, Fraud | Permalink | Comments (1) | TrackBack (0)

Monday, February 6, 2006

Will AIG Settle This Week

The New York Times is reporting here the possibility of a forthcoming settlement between regulators and AIG -- the number 1.6 billion. (The Wall Street Journal says here - "of at least $1.5 billion").  Whether it is -1.5 or 1.6 billion, it is a number that the Wall Street Journal is calling the "largest finance-industry regulatory settlement with a single company in U.S. history."

What would such a settlement indicate -

1. That wrongdoing in a company no longer should be considered a "cost of doing business," as the ramifications of the wrongdoing are far graver than can be anticipated.

2. That companies need to be attuned not only to federal criminal penalties and investigations, but also state and regulatory bodies.

3.That juggling all the entities that might be waiting to jump down the throat of a company can be difficult to manuever and a new type of corporate counsel needs to be cognizant of this.

4.  Having an "effective" corporate compliance program REALLY is necessary.

The story of AIG's troubles has been a long one.  And with individual prosecutions on the horizon, it is far from over.  But one is likely to find the federal/state approach as a key discussion in the business classes that use AIG as a case sudy.

People ask us how does one pull up all the prior posts on AIG.  It's really very simple.  Below this post is the date and next to it is the topic AIG.  Just click the AIG and all the prior posts can be seen.  They will be listed by date with the most recent ones first.


February 6, 2006 in AIG | Permalink | Comments (0) | TrackBack (0)

Thursday, February 2, 2006

General Re and AIG Executives Indicted for Fraud Related to Reinsurance Transaction

Three former General Re executives and one former American International Group Inc. executive have been indicted in the Eastern District of Virginia .  The fraud and conspiracy charges arise out of a transaction between the companies that permitted AIG to inflate its insurance reserves by treating it as a reinsurance agreement when in fact under accounting rules it should have been treated as a loan.  The transaction allowed AIG to overcome problems it had on Wall Street with estimates that its insurance reserves, a key financial figure, were insufficient, while General Re reaped the benefit of a lucrative transaction with a leading insurer.  The General Re defendants are its former CEO, Ronald Ferguson, CFO Elizabeth Monrad, and assistant general counsel Robert Graham, while Christian Milton was the head of AIG's reinsurance operations.  Ferguson retired from General Re in 2001, and in 2005 the company's parent, Berkshire Hathaway, terminated his consulting agreement because he refused to cooperate in the government's investigation by stating he would assert his Fifth Amendment right.  Monrad left General Re to become the CFO at TIAA-CREF, from which she resigned after the investigation became public.

Although reports of the indictment have appeared in the press (see Bloomberg story here), neither the U.S. Attorney's Office nor the SEC have made any public statement.  Most likely, the indictment was returned on Feb. 1 and then sealed to permit the defendants to arrange to surrender, rather than having an unseemly "perp walk" after being arrested.  Once the prosecutors and SEC release their filings, a link to them will be posted.

One interesting aspect of the prosecution is whether famed investor Warren Buffet, CEO of Berkshire Hathaway, will be called to testify for the government.  Prosecutors and SEC investigators interviewed Buffet about his discussions with Ferguson about the AIG transaction, and so Buffet may be in important witness regarding Ferguson's knowledge of the transaction and whether his statements were less than truthful regarding whether it was qualified as a reinsurance agreement.  Former AIG CEO Maurice Greenberg also had contact with the transaction, but at this point there's no indication that he is a potential defendant in either the civil or criminal suits. (ph)

UPDATE: The SEC's civil securities fraud complaint is available here, and in addition to the four defendants in the criminal case, it also names Christopher Garand, who was the head of General Re's finite insurance business through which the AIG transaction was underwritten.  The opening line of the SEC's description of the factual background to its suit states: "This case is not about the violation of technical accounting rules."  That assertion does not guarantee that it will be interesting, however. (ph)

February 2, 2006 in AIG, Fraud, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Friday, January 13, 2006

AIG Appears Ready to Pony Up to $1.5 Billion to Settle Fraud Investigations

The Wall Street Journal reports (here) that American International Group Inc. is close to a settlement of the federal and state investigations of its accounting for reinsurance and other transactions that it used to burnish its results, which were among the most consistent on Wall Street for years.  The Journal reports that the payment will be more than $1 billion , and perhaps as much as $1.5 billion, to resolve investigations that have ranged from its accounting for transactions with General Re that were disguised as reinsurance to its reserves for workers compensation policies.  New York Attorney General Eliot Spitzer filed a lawsuit against the company in May 2005, while the SEC and U.S. Attorney's Offices in New York and Virginia have been investigating AIG.  It is not clear how the final dollar figure will be divided between penalties, fines, and restitution, and how much New York will claim.  Expect a deferred prosecution agreement with the Department of Justice that will contain the usual terms (outside monitor, strengthened internal controls, cooperation in continuing investigations, etc.).

Importantly, the settlement will not cover former AIG CEO Maurice Greenberg and former CFO Howard Smith, both of whom were sued for fraud by Spitzer's office along with the company.  It will be interesting to see if the government pursues criminal charges against the two former executives, or will rely on the SEC to pursue civil securities fraud charges.  Greenberg has been aggressive in his attacks on the company's acknowledgment of accounting problems and assertions that the subject of the investigation concerns reasonable accounting judgments.  Greenberg (through his wife) owns approximately 1.7% of AIG, a stake that is worth billions, so he has a deep enough pocket (and powerful incentive) to fight any case the federal government decides to bring.  An AFP story (here) quotes a Greenberg spokesman: "Shareholders lose when companies choose to settle investigations motivated by political ambition, fueled by threats and settled out of fear."  (ph)

January 13, 2006 in AIG | Permalink | Comments (0) | TrackBack (0)

Friday, December 16, 2005

Spitzer Lobs a "Public Stink Bomb"

New York Attorney General Eliot Spitzer sent a letter to the Starr Foundation alleging the former American International Group CEO Maurice Greenberg and other AIG officers fraudulently caused the foundation to sell AIG shares at a depressed price to two other companies controlled by Greenberg back in 1970.  This is part of the ongoing battle between Spitzer's office and Greenberg regarding allegations that AIG did not properly account for certain insurance products and misled investors regarding its financial condition.  Spitzer effectively forced Greenberg from his position at AIG in March 2005 after nearly forty years in office.

Cornelius Vander Starr founded AIG, and after his death Greenberg and other company executives were the trustees of his foundation and sold AIG shares to C.V. Starr & Co. and Starr International Co., two private entities headed by Greenberg that control large blocks of AIG stock and were used as a means to compensate senior AIG executives.  Spitzer's letter alleges that the trustees, specifically Greenberg, sold the shares to benefit themselves through the private companies they controlled, at a cost to the Foundation of $6 billion based on the current value of the stock. 

Needless to say, Greenberg has fired back, disputing the allegations and accusing Spitzer of trying to "demonize" him.  Kenneth Langone, former chairman of the board of the New York Stock Exchange who is a defendant in another lawsuit filed by Spitzer's office regarding excessive pay to former NYSE CEO Richard Grasso, said that Spitzer "is trying to shore up his sorry case and his flagging political reputation by lobbing what amounts to a public stink bomb.''  Greenberg even allowed that he planned to support opponents of Spitzer in his campaign to be Governor of New York.  This case is starting to rival the Ronnie Earle-Tom DeLay case for its level of personal animosity.  An AP story (here) and Bloomberg story (here) discuss this latest turn in the Spitzer-Greenberg tussle. (ph)

December 16, 2005 in AIG | Permalink | Comments (0) | TrackBack (0)

Saturday, November 26, 2005

Greenberg Dodges a Criminal Bullet

Former American International Group, Inc. CEO Maurice Greenberg will not be facing criminal charges from the New York Attorney General's Office, which decided in June not to pursue a criminal case arising from the accounting problems at AIG.  While N.Y. Attorney General Eliot Spitzer has a civil fraud case pending against Greenberg and former CFO Howard Smith filed in May (complaint here), there was some talk by Spitzer that the office could pursue criminal charges against individuals at the company.  Continuing a pattern seen over the last few weeks (earlier post here), Spitzer's office decided not to pursue a criminal case based on questionable facts and, as with all accounting cases, significant gray areas.  The fact that Greenberg has very deep pockets and indicated he would fight any charges would have made a criminal case that much more difficult. 

Greenberg is not off the hook completely on potential criminal actions because the Southern District of New York and the Fraud Section at Main Justice are also looking at potential criminal charges, which could include securities and mail/wire fraud related to any accounting problems that led to serious misstatements.  Things have been quiet on the AIG front for a while, and the holiday season is usually slow but may produce further developments.  An AP story (here) discusses Spitzer's decision.

November 26, 2005 in AIG | Permalink | Comments (0) | TrackBack (0)

Thursday, November 10, 2005

AIG Restates Its Results . . . Again

Insurance giant American International Group, Inc. announced that, for the second time this year, it will restate its results from prior years and delay the filing of its 10-Q report, although this time only for five days.  AIG had to restate results for prior years due to improper accounting for certain reinsurance transactions, among other things, after an extensive internal investigation that led to the retirement of Maurice Greenberg as chairman and CEO in March 2005.  The latest restatement is related to continuing internal control weaknesses, as described in a company press release (here):

The most significant errors identified relate to the previously disclosed material weaknesses in internal controls surrounding accounting for derivatives and related assets and liabilities under FAS 133, reconciliation of certain balance sheet accounts and income tax accounting. AIG continues to believe its hedging activities have been and remain economically effective, but do not qualify for hedge accounting treatment.  AIG's remediation of the material weaknesses in internal controls disclosed in its 2004 Form 10-K is continuing and further remediation developments will be described in future filings with the Securities and Exchange Commission.  AIG estimates that the errors identified in the third quarter of 2005 resulted in an understatement of previously reported consolidated retained earnings at June 30, 2005 of approximately $500 million. The effect on net income in prior periods may be positive or negative in a particular period and will vary in amount from period to period.  Due to the significance of these corrections, AIG will restate its financial statements for the years ended December 31, 2004, 2003 and 2002, along with affected Selected Consolidated Financial Data for 2001 and 2000 and quarterly financial information for 2004 and the first two quarters of 2005. AIG's prior financial statements for those periods should therefore no longer be relied upon.

I suspect the securities fraud and shareholder derivative suits filed in the wake of AIG's revelation of significant financial reporting issues earlier in 2005 will be amended shortly to reflect this latest round of accounting woes at the company. (ph)

November 10, 2005 in AIG | Permalink | TrackBack (0)

Monday, October 10, 2005

Former General Re CEO Gets Notice of Possible SEC Securities Fraud Suit

Former General Re CEO Ronald Ferguson joined a slew of other executives at the firm, both current and former, who have received Wells Notices from the SEC that the Enforcement Division staff intends to recommend that the Commission file a securities fraud suit (earlier post here).  The notices are related to the American International Group-General Re "finite insurance" transaction that resulted in AIG improperly accounting for its insurance reserves.  Ferguson left General Re in 2001, and Berkshire Hathaway, which owns General Re, terminated his consulting contract in May when he refused to cooperate in the investigation by the SEC and U.S. Attorney for the Southern District of New York by stating that he would take the Fifth Amendment in response to questions.  A Berkshire Hathaway press release (here) states that Ferguson has received his Wells Notice, and the question now is whether the federal prosecutors will seek criminal charges in addition to any civil enforcement action.  (ph)

October 10, 2005 in AIG, Civil Enforcement, Securities | Permalink | TrackBack (0)

Friday, September 9, 2005

General Re CEO Receives Wells Notice From the SEC

Joseph Brandon, the current CEO of General Re, has received a Wells Notice from the SEC that the Enforcement Division staff intends to recommend a civil action against him for violations of the securities laws in connection with the AIG-General Re "finite insurance" transaction that has been the subject of an ongoing investigation.  Two former General Re executives (John Houldsworth and Richard Napier) have already entered guilty pleas related to their roles in the transaction, and former General Re CFO Elizabeth Monrad (who is on unpaid leave from TIAA-CREF, where she was the CFO) and CEO Ronald Ferguson have already been notified by the Commission that they may be named in a securities fraud complaint.  (See earlier post here). Ferguson's consulting contract with the company was terminated when he refused to cooperate in the SEC investigation by asserting his Fifth Amendment privilege.  Brandon replaced Ferguson as CEO of General Re in 2001, and other executives who received Wells Notices ultimately have been relieved of their duties, and it will be interesting to see if Brandon receives the same treatment.  A story on Bloomberg.Com discusses the SEC notice (here).

General Re is a wholly-owned subsidiary of Berkshire Hathaway, whose CEO Warren Buffett has already voluntarily appeared and given a statement to the SEC and U.S. Attorney's Office.  The SEC's case has reached as high as it can within General Re, and the interesting question is whether Buffett will receive a Wells Notice. I think it's unlikely, given Buffett's usual hands-off approach to the operations of subsidiaries, but it is certainly not impossible if he played a role in the accounting decisions related to the transaction. (ph)


UPDATE: Add two more General Re executives (one recently retired) to the list of those who received Wells Notices from the SEC related to their roles in the AIG finite insurance transaction.  Berkshire Hathaway issued a press release (here) disclosing that Christopher Garand, a former Senior V-P who retired on Aug. 31, and Robert Graham, a Senior V-P and Assistant General Counsel at the comapny, both received their Wells Notices on Sept. 8.  As with General Re CEO Joseph Brandon, the question regarding Graham is whether he will be allowed to continue in his job. (ph)

September 9, 2005 in AIG, Civil Enforcement, Securities | Permalink | TrackBack (0)

Saturday, July 16, 2005

Greenberg Challenges AIG's Restatement

Former American International Group CEO Maurice Greenberg told a group of current and former company executives that the accounting for at least one of the transactions that was the subject of a recent restatement was done properly, based on advice from the company's lawyers and auditors.  Greenberg spoke at a meeting of the shareholders of C.V. Starr & Co., the Bermuda company used as a vehicle to compensate AIG senior executives that controls (as of March 31) approximately 12% of AIG's shares.  As part of its restatement, the company said it needed to account for payments to AIG executives from C.V. Starr differently, a position that Greenberg disputes.  A Reuters story (here) also notes that Greenberg said at the meeting that he had put together "white papers" on the accounting for other transactions under scrutiny by the various state and federal agencies investigating AIG (and others), and will  meet with regulators to provide them with his side of the accounting story. 

Greenberg, no doubt working with his lawyers, appears to be taking the offensive to try to head off any criminal or SEC civil claims against him.  New York Attorney General Eliot  Spitzer's office (along with the Superintendent of Insurance Howard Mills's office) has already filed a civil suit (here) against Greenberg and former AIG CFO Howard Smith, but that is a comparatively mild threat compared to a criminal case brought by the Department of Justice, and probably less threatening than an SEC securities fraud case. (ph)

July 16, 2005 in AIG | Permalink | TrackBack (2)

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)

June 11, 2005 in AIG, Investigations, Prosecutions, Securities | Permalink | TrackBack (2)

Friday, June 10, 2005

Playing "What's My Line?" With the Houldsworth Plea Agreement

For those whose misspent youth included serious TV watching, you'll remember the television game show "What's My Line?" in which celebrities tried to guess the occupation (or with other celebrities their identity) of a contestant by asking a series of questions: "Can you do it at night?"  This was my first introduction to Bennett Cerf, Kitty Carlisle, etc. (see here).  The government is playing a little bit of that game with the statement of facts for former General Re executive John Houldsworth, who entered a guilty plea in the Eastern District of Virginia to one count of conspiracy to commit securities fraud related to structuring a reinsurance transaction to help American International Group dress-up its financial statements through a contract that did not in fact transfer any risk, as required by accounting rules (see earlier post here).  The statement of facts (here) refers to other General Re players by their title, such as its CEO, who we know was Ronald Ferguson, and its CFO, who was Betsy Monrad, now on unpaid leave from TIAA-CREF.  Others referred to obliquely are Richard Napier, another General RE executive, and, according to a Wall  Street Journal story (here), Chris Garand, an executive in General Re's international finite insurance division.  A fifth General Re executive has not been guessed yet -- "Is it a he or a she? Does this person have a title of vice president or higher?" -- but the mystery will no doubt be solved as the government gathers in more guilty pleas from the General Re side of the AIG deal.   

June 10, 2005 in AIG, Investigations, Prosecutions, Securities | Permalink | TrackBack (0)

Thursday, June 9, 2005

Guilty Plea Entered in General Re

Reported here was the upcoming plea of a "a former senior executive of reinsurer General Re."  That plea was entered today.  (see CNN here).  As we previously noted, this plea includes cooperation.


June 9, 2005 in AIG | Permalink | TrackBack (0)