The U.S. Securities and Exchange Commission last week broughtcivil securities fraud charges against three former top executiveswith Bermuda-based RenaissanceRe Holdings Ltd.

The three are: James N. Stanard, former RenRe chief executiveofficer; Martin J. Merritt, the former controller; and Michael W.Cash, a former senior executive of RenRe subsidiary, RenaissanceReinsurance Ltd.

In a complaint filed last week in Manhattan federal court, theSEC charged that Mr. Stanard, Mr. Merritt and Mr. Cash structuredand executed a sham transaction that had no economic substance, andno purpose other than to smooth over and defer more than $26million of RenRe's earnings from 2001 to 2002 and 2003.

The SEC also announced a partial settlement of its chargesagainst Mr. Merritt, who has consented to the entry of an antifraudinjunction and other relief.

Andrew M. Calamari, SEC Northeast Regional Office associatedirector, said the injunction in part barred Mr. Merritt fromacting as an officer or director of a public company. He said amonetary component would be settled at a later time.

Mr. Calamari could not say exactly what the defendants' exposureis, but conviction on the charges can result in a penalty of$100,000-to-$120,000 per violation, with the number of violationssubject to legal interpretation. He said that "hundreds ofthousands" is involved.

"This is another case arising from our ongoing investigation ofthe misuse of finite reinsurance to commit securities fraud," saidMark K. Schonfeld, SEC Northeast Regional Office director. "Thedefendants enabled RenRe to take excess revenue from one good yearand, in effect, 'park' it with a counterparty so it would beavailable to bring back in a future year when the company'sfinancial picture was not as bright."

Mr. Stanard, a resident of Maryland and Bermuda, resigned asRenRe's chairman and CEO last November. He joined the firm in1993.

According to the SEC, Mr. Merritt and Mr. Cash used twocontracts to create "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 industryloss warranty contracts to Inter-Ocean Reinsurance Company Ltd., inexchange for $30 million in cash, for a net transfer to Inter-Oceanof $20 million.

The SEC said RenRe recorded income of $30 million upon executingthe assignment agreement, while the remaining $20 million of its$50 million assignment became part of a "bank" or "cookie jar" thatRenRe used in later periods to bolster income.

The second contract, according to the SEC, was a purportedreinsurance agreement with Inter-Ocean that was, in fact, a vehicleto refund to RenRe the $20 million transferred under the assignmentagreement, plus the purported insurance premium paid under thereinsurance agreement.

According to the SEC, the reinsurance agreement was "a completesham." Not only was RenRe certain to meet the conditions forcoverage, it also would receive back all of the money paid toInter-Ocean under the agreements, plus investment income earned onthe money in the interim--less transactional fees and costs.

RenRe accounted for the sham transaction as if it involved areal reinsurance contract that transferred risk from RenRe toInter-Ocean when, in fact, the complaint alleges, each of theseindividuals knew that this was not true.

The two RenRe execs were also said to have misrepresented oromitted key facts about the transaction to RenRe's auditors.

As a result of RenRe's accounting treatment for thistransaction, RenRe materially understated income in 2001 andmaterially overstated income in 2002, at which time it made a"claim" under the "reinsurance" agreement.

It then received as apparent reinsurance proceeds the funds ithad paid to Inter-Ocean and that Inter-Ocean held in a trust forRenRe's benefit.

Mr. Stanard, the SEC charged, signed an annual 10K report to thecommission last year, containing misleading statements about thereason the firm was restating its results for 2001, 2002 and2003.

An attorney for Mr. Cash, Martin Pershetz, issued a statementthat his client denied the SEC charges, was not responsible forRenRe financial statements, and "should not have been named as adefendant in this case."

RenRe noted that the executives involved had left the company in2005, adding that "the company believes these developments willhave no impact on the company's business going forward."