HARTFORD, CONN.–A lawyer for one of the insurance executives on trial here for a scheme to artificially inflate American International Group loss reserves sought to bring out evidence today showing his client had no knowledge of illegality.
The effort by defense attorney Frederick P. Hafetz–who represents Christian Milton, former AIG vice president for reinsurance–came during cross-examination in U.S. District Court of government witness John Houldsworth, a former chief executive at Cologne Re Dublin, a subsidiary of the General Reinsurance unit of Berkshire Hathaway.
Mr. Milton is on trial with Ronald Ferguson (former Gen Reinsurance chief executive officer), Elizabeth Monrad (Gen Re's former chief financial officer), Robert Graham (former Gen Re senior vice president and counsel) and Christopher Garand (a former Gen Re senior vice president).
Mr. Houldsworth has admitted to conspiracy to commit securities fraud for his role in the transaction, which the government says allowed AIG to increase its loss reserves by $250 million in the fourth quarter of 2000, and by an additional $250 million in the first quarter of 2001. Without the deal, the company would have shown greater reductions in its loss reserves, prosecutors contend.
AIG restated its earnings in 2005 because of questions raised by the transaction.
According to prosecutors, the only economic benefit was an undisclosed side deal of $5 million paid to AIG by Gen Re. The sole purpose of the deal was to calm analyst's criticism, it is alleged.
Questioned by Mr. Hafetz, Mr. Houldsworth said that neither he nor anyone else connected to Gen Re, that he was aware of, ever told AIG about a side agreement guaranteeing that AIG would not lose money on the transaction.
Mr. Hafetz brought up a conversation discussing the reinsurance transaction that was taped between Mr. Houldsworth and Richard Napier, a former General Re senior vice president, who has also entered a guilty plea in the case and turned government witness.
“There's not one word spoken about an unwritten agreement, right, sir?” he asked Mr. Houldsworth. The attorney also brought up e-mail memos about the deal between AIG and Gen Re, asking him to confirm “there's not one word in any of those documents that Mr. Milton has agreed to a no-risk deal.”
“That's right,” the witness responded.
Mr. Hafetz also played a tape of another conversation, where Mr. Napier is heard telling Mr. Houldsworth that then AIG Chairman Maurice Greenberg and Gen Re CEO Ferguson “came to terms at $5 million.”
Mr. Napier was heard to say he had urged that a $10 million fee be charged, but “since it was already agreed to by Hank [Mr. Greenberg], there was no more negotiating.”
Mr. Greenberg has been named as an unindicted coconspirator in the case.
Mr. Garand's lawyer, Jonathan Rich, suggested that Mr. Houldsworth was a rising star with Gen Re and had attempted to make points at Mr. Garand's expense, leaving him off copies of e-mails about the AIG deal and excluding him from phone calls about the transaction.
The attorney asked Mr. Houldsworth if Mr. Garand had not suggested an alternative method for the transaction, which Mr. Houldsworth mentioned to his bosses without crediting Mr. Garand.
“You saw this as another way to marginalize Mr. Garand from the loss portfolio transaction?” he asked the witness. “No, I don't think that's right,” Mr. Houldsworth responded.
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