NU Online News Service, Feb. 18, 3:09 p.m.EST

Liberty Mutual Insurance Co. has brought a federal court actionarguing that a sham transaction by General Re Corp. inflated thevalue of a company it sold to Liberty by millions of dollars.

The company as a result is seeking $12.1 million, according topapers Liberty filed with the U.S. District Court in Manhattan. Themonies involved were paid by Gen Re to settle Securities andExchange Commission charges concerning the alleged accounting fraudinvolved.

Both the SEC and General Re have filed papers disputing themerits of the claim.

Liberty argues that the money is owed from its purchase ofPrudential's property and casualty insurance subsidiaries in2003.

Around that same time, the SEC filed a complaint that Gen Rehelped Prudential improperly report more than $200 million inrevenues from 2000 through 2002 with sham reinsurance contractsthat began back in 1997.

The contracts, the SEC contended, were in fact off-balance sheetassets set aside for Prudential by Gen Re. The money would later bepaid to Prudential when requested.

As part of a settlement between the SEC and Gen Re reached inlate January over the sham contract, Gen Re agreed to pay $12.2million to the SEC to settle the case, $8.1 million in profitsgained and $4.1 million in interest, without admitting or denyingguilt.

Liberty argues that when it purchased Prudential's p&cbusiness for $522.7 million, part of the purchase price includedmore than $41 million in receivables from Gen Re. Those receivableswere allegedly the sham contracts. Eventually, the two partiesagreed on a payment of $29.2 million, with $12.1 in dispute.

A spokesman for Liberty said the company filed the complaintwith the court to protect the company's interests.

In its court papers, Liberty asked that the payment to the SECbe re-directed to Liberty, or at the least, the court preserveLiberty's right to seek the amount from Gen Re.

In a letter to the court, the SEC said that Liberty's claim hasno merit because the disgorgement was not set up for distributionto victims and that Liberty is not a victim in the affair. The SECalso argued that the money Gen Re is to pay has nothing to do withthe Prudential's contracts.

"In other words, even if Gen Re had already paid what Libertyclaims is due, Gen Re would remain liable for disgorgement of thefees," the SEC said.

The SEC added that Liberty retains its ability recover what itclaims from Gen Re "or another responsible party" using"negotiation, settlement, compromise, or, if necessary,litigation."

In a separate letter, Gen Re contends that whatever Liberty'sclaim is, the $12.1 million in dispute, by agreement, is to besubmitted to arbitration.

Gen Re was involved in sham insurance deals involving AmericanInternational Group and Prudential that allegedly helped bothcompanies to cover-up losses. The episode has resulted in theconviction of several executives over charges of fraud.