The defense rested on Feb. 7 in the federal securities fraud trial charging that four former executives from General Reinsurance and one from American International Group used a bogus finite reinsurance deal to artificially inflate AIG's reserves and financial results, and thus misled analysts and investors.

Defense attorney motions and discussion of what the judge should put in his charges are expected to delay the case going to the jury until later this week in U.S. District Court for the District of Connecticut.

The five defendants--none of whom took the stand during the five-week trial--were charged in a 16-count federal indictment with violation of federal securities law, securities fraud, mail fraud and making false statements to the U.S. Securities and Exchange Commission.

On trial are:

o Ronald Ferguson--Gen Re's former chief executive officer.

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

o Christopher Garand--a former Gen Re senior vice president.

o Robert Graham--Gen Re's former senior vice president and counsel.

o Christian Milton--AIG's former vice president for reinsurance.

During the trial, a pair of leading analysts said they had been bamboozled by the two carriers, stating that had they known then what they know now about the finite re transaction with General Re, their positive assessment of AIG at the time would have been very different.

The deal at issue was actually between AIG and General Re unit Cologne Re Dublin. The transaction allowed AIG to book 2000 fourth-quarter loss reserves of more than $100 million along with $260 million in premium, while lifting reserves in the first quarter of 2001 by $63 million.

Early in the trial, which began Jan. 7, Alice Schroeder, a Morgan Stanley analyst, said she never would have upgraded AIG's stock in March 2001 had she known the company's year-end reserves included $250 million related to what prosecutors allege was a bogus reinsurance deal with Gen Re.

She testified that she probably would not have upgraded the stock if she had known AIG's reserves were actually decreasing.

"Seriously, if I had known, it would almost certainly have affected my decision," Ms. Schroeder said under questioning by Assistant U.S. Attorney Eric Glover.

Ms. Schroeder testified that she upgraded AIG's rating to a "strong buy" after the year-end 2000 reserve increase, and after a conversation with Maurice R. Greenberg, AIG's former chairman and CEO, who reassured her about AIG's reserve levels.

Mr. Greenberg is an unindicted co-conspirator in this federal case, as well as a defendant in a state civil suit in New York involving the same transactions.

Ms. Schroeder is on leave from Morgan Stanley and is writing a book on Warren E. Buffett, chairman of Gen Re's parent company, Berkshire Hathaway Inc.

In her testimony, Ms. Schroeder also said she was friends or acquaintances with several of the defendants on trial. She said she sees Gen Re's ex-CEO, Ronald Ferguson, "from time to time," and described her relationship with him as "very friendly" and "cordial."

Later in the trial, a second analyst testified that the shift in reserves improved his opinion of AIG.

Jay Cohen, who has been a property-casualty insurance analyst with Merrill Lynch since 1995, said that as a result of seeing AIG's financials, he had written a note to investors that said in part, "given the renewed premium growth, we would expect reserves to continue rising..."

He also noted that Mr. Greenberg had failed to appear at a Merrill investors' conference on Feb. 14, 2005, after news reports that the New York State Attorney General's Office and the U.S. Securities and Exchange Commission had subpoenaed his company concerning the deal with Gen Re.

Mr. Cohen said the disclosure of the subpoenas was significant news to analysts. "One of the qualitative things we look at is management, and allegations like that raise questions," he said.

The government entered various articles written at the time reporting that management at AIG and Gen Re may have been involved in the transaction.

In other developments during the trial, Richard Napier, a former General Re senior vice president and key prosecution witness, testified about conversations he had with Mr. Ferguson, who detailed that the deal would not involve any real risk to AIG.

Mr. Napier, who has already pleaded guilty in the case, also said Mr. Ferguson had advised him to take steps to limit who knew about their activity. He read aloud an e-mail from Mr. Ferguson in early 2001 that said, in part, "Let's keep the circle of people involved as tight as possible."

Prosecutors played a recording at the trial involving discussions of the AIG deal by Mr. Napier with Ms. Monrad and John Houldsworth, Cologne Re Dublin's former CEO, who has also pleaded guilty in the case and agreed to testify to the conspiracy.

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

In previously released portions of transcripts, Mr. Houldsworth was recorded 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."

Mr. Houldsworth said Mr. Greenberg pressed for action on the reinsurance deal with a barrage of telephone calls to the head of General Reinsurance at the time.

Assistant U.S. Attorney Eric Glover played a tape on which Mr. Houldsworth, speaking with one of his superiors at Cologne Re's London headquarters, related that Ms. Monrad had told him that "Hank [Mr. Greenberg] is calling Ron [Ferguson] almost every day" to check on the deal.

Mr. Houldsworth testified that Cologne Re saw the deal as something that would make it look good to parent firm Gen Re, which stood to make the company $5 million. He testified he had personal doubts about whether the transaction could satisfy accepted accounting standards, but also worried AIG might approach a competing firm about a similar deal for a lesser fee.

Mr. Houldsworth said he could sense what AIG wanted was a boost in loss reserves, but he couldn't figure out how the accounting would be handled and, as he told one of his London managers, Ms. Monrad's message "was so incomplete, it's frightening."

Mr. Houldsworth has already pleaded guilty to one count of conspiracy to file false financial reports, falsify bank records and accounts, and mislead auditors. He said he pleaded guilty because, "I felt I'd done something wrong. I'd been involved in a transaction that allowed AIG to misrepresent its books."

Mr. Houldsworth has not yet been sentenced in the case. The charges against him carry a maximum up to five years in prison and a fine of up to $250,000. His plea arrangement carries no specific promise of leniency, beyond the fact that prosecutors will make known to the court the extent of his cooperation in giving testimony.

However, later in the trial, Mr. Houldsworth's credibility was attacked, and he admitted on the witness stand that he had a history of lying to investigators.

Under cross-examination by defense attorney Reid Weingarten, who represents Ms. Monrad, Mr. Houldsworth testified he had lied to Australian investigators examining Gen Re's Australian affiliate.

Mr. Weingarten asked Mr. Houldsworth if it was not true that, before he entered a plea and turned government witness in 2005, he had initially maintained to investigators that he did not know how AIG would enter the transaction on its books.

Mr. Houldsworth admitted that he had given false answers, specifically at a meeting in New York with a dozen lawyers present, including attorneys from the U.S. Justice Department, U.S Postal Service and Securities Exchange Commission.

"So," Mr. Weingarten said, "you have the ability to look 12 people in the eye and tell them falsehoods?"

"It would appear that way, yes," Mr. Houldsworth responded.

Meanwhile, a lawyer for one of the other defendants pressed Mr. Houldsworth to show his client had no knowledge of illegality. Questions by Frederick P. Hafetz--who represents Mr. Milton--prompted Mr. Houldsworth to testify 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.

Citing a conversation discussing the reinsurance transaction that was taped between Mr. Houldsworth and Mr. Napier, Mr. Hafetz asked: "There's not one word spoken about an unwritten agreement, right, sir?" He also brought up e-mail memos about the deal between AIG and Gen Re, asking Mr. Houldsworth 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.

Special Reports /

Defense Rests In Fraud Trial Charging Gen Re, AIG With Deception

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