A federal judge has ruled that prosecutors at the trial of fivereinsurance executives can play tapes of a witness discussing howfar American Insurance Group would go to present a phony financialpicture.

The complex decision, by U.S. District Court Judge ChristopherDroney in Hartford, let in some evidence and tapes and kept outother items–including mention of several allegedly fraudulent AIGoffshore reinsurance transactions.

Due for trial next January on securities fraud charges are:

o Ronald Ferguson, the former chief executive officer ofBerkshire Hathaway subsidiary General Re.

o Elizabeth Monrad, Gen Re's former chief financial officer.

o Robert Graham, former Gen Re assistant general counsel.

o Christopher P. Garand, former chief underwriter for Gen Re'sfinite reinsurance operations.

o Christian Milton, AIG's former vice president ofreinsurance.

The group is accused of putting together a sham reinsurancetransaction to inflate AIG's reported reserves for claims by $500million.

Their talks were taped by a Gen Re system that automaticallyrecorded calls in case there was a dispute over an insurancederivative trade.

Discussions the jury will hear involve conversations with JohnHouldsworth, Cologne Re Dublin's former CEO, who has pled guilty inthe case and agreed to testify to the conspiracy.

In a discussion with Mr. Garand, the taped excerpts show the twomen believe that AIG will “do whatever they need to make theirnumbers look right,” the judge noted.

Another taped segment has Mr. Houldsworth telling Ms. Monrad,“if there's enough pressure on at [AIG's] end, they'll find ways tocook the books, won't they?” and “we won't help them do thatmuch…We'll do nothing illegal,” to which Ms. Monrad replies,“right.”

The judge, in his Oct. 30 decision, said he would instruct thejury that the conversations related to the state of mind of thedefendants involved with them, and could not serve as proof ofcriminality at AIG or serve as evidence against Mr. Milton atAIG.

Lawyers for the defendants argued that the tapes were irrelevantand prejudicial or inadmissible hearsay, while the prosecution saidthey were inextricably linked to the fraud and needed to provetheir case.

As a result of the case, AIG admitted the transaction wasimproperly documented and issued a revised annual statement toaccount for a variety of financial moves, which reduced thecompany's book value by $2.7 million.

AIG, at the time of the deal that forms the basis for the case,was headed by then chairman and CEO Maurice Greenberg, who wasforced to leave the company.