Fortress Re To Pay Sompo $1.12B

Mr. Hawkins explained that the arbitration was tried for 19 days in the Essex House Hotel in New York, where there were "a dozen or more" witnesses.

"All of the senior officers of Fortress Re testified, and several Sompo witnesses also testified," he said. Mr. Hawkins noted that after closing arguments were completed on Dec. 6, "we were hoping for a quick award, and the award did come down pretty quickly."

The arbitration award consists of $1.009 billion in compensatory damages and the return of $10.6 million of Sompo assets in escrow formerly held by Fortress Re, as well as $100 million in punitive damages and attorneys' fees.

Mr. Hawkins explained that Sompo had filed the suit in the United States in January 2002, alleging that Burlington, N.C.-based Fortress Re had defrauded the Japanese insurer of large sums through a misleading accounting scheme.

The lawsuit involves Fortress Re's history as a pool manager selling reinsurance on behalf of three major Japanese insurance firms: Aioi Insurance Co., Taisei Fire & Marine Insurance Co., and Nissan Fire & Marine Insurance, which merged to create Sompo. In 2001, Fortress Re was severely impacted by the 9/11 event and other disasters–including a passenger jet crash in Queens, N.Y., in November 2001.

But Mr. Hawkins emphasized that more than half of the losses actually came before 9/11, "and that was really the big shock, that there were billions of dollars in hidden losses."

In its complaint, Sompo alleged that Fortress Re principals Maurice Sabbah and Kenneth Kornfeld had concealed the reinsurance pool's liabilities and gave a false impression that the pool was profitable.

The Japanese insurer argued in the lawsuit that under these "false pretenses," Mr. Sabbah and Mr. Kornfeld paid themselves "hundreds of millions of dollars in contingent profit commissions, dividends and other compensation based upon fictitious profitability."

Furthermore, Sompo said the two men diverted significant funds to third parties, including trusts and foundations, and exposed its pool members to mounting liabilities through its deceptive accounting.

Mr. Hawkins commented that the arbitration award finally validates Sompo's position that it was "victimized" by an accounting fraud. "This indicates that Sompo is going to have a complete assistance of the court process in the United States to recover as much of those funds as possible," he said.

He added, "This is a great victory for Sompo because the amount of damages we obtained for the award is 100 percent of the losses." In fact, he said, "it's more than that, because the panel also awarded $100 million in punitive damages."

Mr. Hawkins noted that the decision will also have implications for other similar cases, including pending litigations by the pool members against Deloitte & Touche, former auditors of the pool accounts and of Carolina Re, a Bermuda-based reinsurer owned by Fortress Re principals that is now in liquidation proceedings.

Currently, Fortress is still in business, but "they don't have much money left," Mr. Hawkins acknowledged. "But we are suing principals and shareholders of Fortress and a number of other foundations and entities that funds have been transferred to. We expect to have significant recovery ultimately from those sources."

Mr. Hawkins explained that, "once you win against Fortress Re, then you have the right to go after the management. And in the case of Fortress Re, the management and shareholders were in control."

This week, his law firm announced that it has filed papers in the U.S. District Court for the Middle District of North Carolina to confirm the $1.119 billion arbitration award.

"This is to confirm the award, which is the step you must make to turn the award into a judgment. This is just a required procedure under the federal statutes." The panel's decision is now basically conclusive against owners and managers of Fortress Re, and "they will not be able to re-litigate this case," he said.