Two Reinsurance Execs Plead Guilty In AIG Accounting Scam

Cologne Re Dublin is a subsidiary of Gen Re, which is a unit of Omaha, Neb.-based Berkshire Hathaway.

Mr. Houldsworth entered his plea on June 9 in U.S. District Court in Alexandria, Va. He was scheduled for sentencing on Dec. 9 after Judge Claude Hilton advised him that he faces up to five years in prison and a fine of up to $250,000, or twice the gross gain or loss resulting from his actions.

Earlier in the week–on the day that his U.S. attorney, John Byrne, revealed he had reached a plea agreement with the Justice Department Criminal Fraud Division–the U.S. Securities and Exchange Commission filed documents in a separate action disclosing that investigators probing the AIG transactions have tape recorded telephone conversations, mentioning "ways to cook the books," e-mails and handwritten notes.

Judge Hilton initially had mentioned setting an earlier sentencing date, but Mr. Houldsworth's lawyers asked for a delay so the court and probation officials would have a full record of his cooperation.

Mr. Houldsworth did not make a public oral statement detailing the factual basis for his plea. Instead, a written statement of facts was given to the judge. "Is this all correct?" Judge Hilton asked. Mr. Houldsworth agreed that it was.

Later Mr. Byrne said his client had made four trips to the United States to meet with Justice Department lawyers as part of his cooperation. The judge released him on $75,000 bond. His lawyer said there has been no recommendation included with his plea agreement.

The deal with Mr. Houldsworth also involves a separate agreement to cooperate with a continuing SEC 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.

The SEC complaint, filed 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 complaint states that Mr. Greenberg made clear in discussions he wanted to increase reserves without actually reinsuring, and that 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 $500 million 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."

Mr. Napier, at Gen Re at the time, 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. Houldsworth–who lives and works in Dublin, Ireland–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 had no 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."

Meanwhile, the admission in U.S. District Court in Alexandria by Mr. Napier, the former senior vice president for Stamford, Conn.-based Gen Re, came as part of a plea agreement with the Eastern District of Virginia U.S. Attorney's Office and U.S. Justice Department's criminal division.

Both pleaded guilty to one count of conspiring to falsify SEC filings, and both as a consequence face up to five years in prison, a fine of $250,000 and twice any gain or loss. At a minimum they would face a year of probation. Judge James Cacheris set Dec. 9 for Mr. Napier's sentencing.

In 2000, when the scheme was allegedly hatched by Mr. Greenberg with Gen Re's chief executive officer at the time, Ronald E. Ferguson, Mr. Napier was responsible for managing relations with AIG, according to court filings with his plea.

According to the filing, the two CEOs agreed to a sham transaction enabling AIG to book $500 million in reinsurance reserves, even though AIG assumed no real risk in the transaction.

According to federal prosecutors, Mr. Napier was told that AIG wanted the transaction in response to stock market and insurance industry analysts' criticism of AIG's previous reduction of reserves.

The arrangements, according to prosecutors, were done through Gen Re's Dublin-based unit outside the United States so that it would not be apparent that Gen Re and AIG were booking the transaction in inconsistent ways.

The Justice Department said Mr. Napier, in a related civil case brought by the SEC, has agreed to a judgment barring him from serving as an officer or director of a public company.

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

In other news involving AIG, attorneys for Maurice Greenberg, the company's ousted chairman, last week released a letter announcing his decision to leave the board of the giant insurer. The letter said his resignation was effective immediately.

"I previously stated my intention not to stand for re-election to the Board. My decision to resign now results from my inability to receive information regarding the company and its operations necessary to fulfill my fiduciary duties. I wish the employees of AIG every future success," the 80-year-old executive wrote.

Mr. Greenberg was forced to resign as chairman and CEO after the company came under scrutiny last year for improper accounting transactions designed to improve its financial position. The company, in its recent restatement of annual earnings, made adjustments that reduced the firm's book value by $2.7 billion.

(Additional reporting by Matt Brady.)

Callouts, no mugs:

"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."

John Houldsworth, speaking of finite re deal struck with AIG while he was chief executive of Cologne Re.