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)

AIG, Fraud, Prosecutions | Permalink

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