Prudential Financial Inc. said it has settled a suit brought by the Securities and Exchange Commission alleging it had set up a sham reinsurance transaction with General Reinsurance Corp. for Prudential's property-casualty insurance subsidiaries.
The Newark, N.J.-based life insurer neither admitted nor denied the allegations and paid no monetary fine or penalty, according to Wednesday's filing with the SEC.
The company, in the settlement, agreed not to enter into future violations of securities laws and related rules and regulations of the SEC.
The SEC filing of the suit in U.S. District Court in Newark, N.J., came with Prudential's announcement of the settlement.
In the suit, the SEC accused Prudential of entering into reinsurance contracts with Gen Re from 1999 to 2002 that actually transferred no risk. Prudential sold off its p-c operations in 2003 to Liberty Mutual and Palisades Group.
The SEC complaint charged Prudential with reporting over $200 million in income as a result of the deal. The activity did not violate SEC regulations until the company went public in 2001 and continued improperly reporting the money as income.
In its complaint, the SEC said the arrangement turned out to be a bank for Prudential p-c operations where Gen Re would credit Prudential interest at the one-year Treasury bill rate and collect a fee of 4.5 percent, which was later reduced to 4 percent, on the money it held.
The SEC said that under a verbal side agreement the parties agreed that the deal was riskless. If Gen Re lost money Prudential would reimburse Gen Re in the form of future reinsurance contracts.
The true nature of the deal was hidden from independent auditors, the complaint said.
The result of Prudential's actions is that it understated pretax income in 1997, 1998 and 1999 and significantly overstated pretax income in 2000, 2001 and 2002.
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