Ex-Cologne Re Boss To Plead In AIG Scandal

updated 10:42 p.m.

A former chief executive at Cologne Re Dublin will plead guilty to federal criminal conspiracy charges and testify against management at American International Group involved in a phony accounting scheme, his U.S. attorney said today.

The plea decision by John Houldsworth was revealed as the U.S. Securities and Exchange Commission filed documents in a separate action that revealed investigators probing the AIG transactions have tape recordings, mentioning "ways to cook the books," e-mails and handwritten notes.

Mr. Houldsworth is due to enter his plea on Thursday before U.S. District Court Judge Claude Hilton in Alexandria, Va., the U.S. Attorney's Office for the Eastern District of Virginia said.

Mr. Houldsworth's lawyer, Larry Byrne of the White & Case law firm New York office, said his client will return from Ireland to enter his plea to an action brought by the U.S. Justice Department's Criminal Fraud Division. He did not say what sentence agreement had been reached in return for cooperation.

The action by the SEC, which worked with the fraud division, also involves an agreement to cooperate with a continuing investigation and a judgment preventing Mr. Houldsworth from serving as a corporate officer or an accountant in the United States.

A final decision and agreement on payments or other possible civil penalties for Mr. Houldsworth has been deferred, the SEC said.

An SEC complaint, filed today in U.S. District Court in Manhattan, charged that on Oct. 26, 2000, AIG's since ousted CEO Maurice Greenberg asked Ronald E. Ferguson==then the CEO of Mr. Houldsworth's parent company, General Re==to assist in a securities fraud to brighten AIG's financial picture.

The complaint detailed how as a result, Mr. Houldsworth would go on to structure contracts to make it appear AIG had bolstered its loss reserves, "even though all parties understood" that $500 million in losses being reinsured by AIG/National Union "involved virtually no insurance risk and would not qualify as reinsurance for accounting purposes."

Mr. Greenberg, who has been questioned about the company's accounting activities by federal and state investigators, has refused to answer questions and invoked his Fifth Amendment right against self-incrimination, according to his attorneys.

The SEC compliant states that Mr. Greenberg made clear in discussions he wanted to increase reserves without actually reinsuring, and Mr. Ferguson knew it was only going to "look like reinsurance for AIG's accounting purposes."

AIG announced on March 30 that it had concluded that the General Re transaction documentation was improper and, in light of the lack of evidence of risk transfer, the transactions involved should not have been recorded as insurance. AIG said then that its financial statements would be adjusted to list the transactions properly.

According to an SEC transcript of a taped telephone conversation on Nov. 14, 2000, while the deal was still in the talking stage, Gen Re Chief Financial Officer Elizabeth Monrad said to Mr. Houldsworth: "Well, I think if we spend a lot of time trying to figure out how to transfer 500m of risk, we won't get this deal done in the time they want."

In response, Mr. Houldsworth said: "Yeah, I mean as you say, if there's enough pressure on their end, they'll find ways to cook the books, won't they?!"

The transcript reflects Ms. Monrad laughing as Mr. Houldsworth says: "It's no problem there, it's up to them! We won't help them do that too much. We'll do nothing illegal." In fact, according to the SEC, they did a lot of things illegal==including later preparation by Mr. Houldsworth of a false paper trail to make it seem that Gen Re had proposed the transaction, not AIG.

Mr. Houldsworth was also recorded telling other executives about AIG: "You know, we can charge the $500 million for a 500 limit and get them to book that as a reserve, but I would be staggered if they get away with that."

Gen Re Senior Vice President Richard Napier, according to an e-mail cited by the SEC, referred to the transaction as the MRG [Maurice R. Greenberg] reserve project.

Among others identified in the complaint with knowledge of the scheme are AIG's vice president of reinsurance, Chris Milton, and CFO Howard Smith. Both have been dismissed by AIG.

Mr. Byrne said Mr. Houldsworth==who lives and works in Dublin, Ireland==has agreed to settle the criminal action by pleading guilty to one count of conspiring to misstate AIG financial statements, including some filings with the SEC.

Mr. Houldsworth is cooperating fully with the U.S. Department of Justice and SEC, "and accepts full responsibility for his role in these matters. He deeply regrets his actions in working with others to assist in this scheme. John wants to put these regrettable matters behind him and looks forward to returning to the quiet life he shares with his wife and children in rural Ireland," said a statement from Mr. Byrne.

Gen Re did not return a request for comment.

Mark K. Schonfeld, director of the SEC Northeast Regional Office, said the complaint filing was a step "in an ongoing investigation of the abuse of insurance and reinsurance to falsify a company's financial results."

Gen Re is a unit of Omaha, Neb.-based Berkshire Hathaway, whose chairman, Warren Buffet, has given testimony to investigators. He is said not to be a target of the probe.

Reuters reported that Berkshire Hathaway said Mr. Houldsworth has been terminated from his post as CEO.