A federal judge has ruled that prosecutors at the trial of five reinsurance executives can play tapes of a witness discussing how far American Insurance Group would go to present a phony financial picture.

The complex decision, by U.S. District Court Judge Christopher Droney in Hartford, let in some evidence and tapes and kept out other items–including mention of several allegedly fraudulent AIG offshore reinsurance transactions.

Due for trial next January on securities fraud charges are:

o Ronald Ferguson, the former chief executive officer of Berkshire 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's finite reinsurance operations.

o Christian Milton, AIG's former vice president of reinsurance.

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

Their talks were taped by a Gen Re system that automatically recorded calls in case there was a dispute over an insurance derivative trade.

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

In a discussion with Mr. Garand, the taped excerpts show the two men believe that AIG will “do whatever they need to make their numbers 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 to cook the books, won't they?” and “we won't help them do that much…We'll do nothing illegal,” to which Ms. Monrad replies, “right.”

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

Lawyers for the defendants argued that the tapes were irrelevant and prejudicial or inadmissible hearsay, while the prosecution said they were inextricably linked to the fraud and needed to prove their case.

As a result of the case, AIG admitted the transaction was improperly documented and issued a revised annual statement to account for a variety of financial moves, which reduced the company'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 was forced to leave the company.

Special Reports /

Jurors To Hear Dirty Picture Of AIG

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