Four former top executives of Berkshire Hathaway's General Re Corp. and one former senior American International Group official were indicted last week by the U.S. Attorney's Office in Connecticut for allegedly manipulating AIG's financial statements.
This indictment supersedes a previous indictment of four of the defendants in Virginia earlier this year after a district judge there transferred the case to Connecticut.
The executives were charged in a multicount indictment with conspiracy to violate federal securities laws and commit mail fraud, as well as with securities fraud and making false statements to the Securities and Exchange Commission.
The U.S. Attorney's Office said the five were charged with engaging in a fraudulent scheme to make it appear as though New York-based insurer AIG increased its loss reserves. A date for an arraignment hearing has not been set.
The prosecutors allege that what is at issue are "two sham reinsurance transactions between subsidiaries of AIG and Gen Re that were initiated by an AIG senior executive to quell criticism by analysts of an approximate $59 million reduction in AIG's loss reserves in the third quarter of 2000."
The deal, the prosecutors alleged in the 49-page indictment, allowed AIG to increase its loss reserves by $250 million in the fourth quarter of 2000, and by an additional $250 million in the first quarter of 2001. Without the deal, the company would have shown greater reductions in its loss reserves.
AIG restated its earnings in 2005 because of questions raised by the transaction.
The prosecutors also charged that the only economic benefit was an undisclosed side deal of $5 million paid to AIG by Gen Re, a subsidiary of Omaha, Neb.-based Berkshire Hathaway Inc. The sole purpose of the deal was to calm analyst's criticism, prosecutors allege.
If convicted, Christopher P. Garand, former senior vice president of Gen Re, faces a maximum of 160 years in prison and up to $29.5 million in fines. The remaining four (see infographic) could receive a maximum of 230 years in prison and $46 million in fines.
Meanwhile, former top Citigroup official Robert Willumstad last week was elected chairman of AIG at a board meeting in London. He will assume the post on Nov. 1.
AIG's new chairman retired from Citigroup as president in 2005, following Charles Prince's appointment to the top job in that company, and was named to the AIG board last January.
Mr. Willumstad will succeed Frank Zarb, who took over as chairman following founding chairman Maurice Greenberg's ouster from the board in the aftermath of state and federal investigations.
In February, AIG agreed to pay $1.64 billion to resolve allegations that it used deceptive accounting practices to mislead investors and regulatory agencies. The settlement did not cover Mr. Greenberg, who still faces civil action from New York Attorney General Eliot Spitzer.
Today, Mr. Greenberg heads up Starr International, AIG's largest shareholder. Starr has been engaged in litigation for the past year over separation issues–the two entities were once closely intertwined. Starr issued a statement last week welcoming Mr. Willumstad's selection as chairman.
In other action, AIG named IBM executive Virginia Rometty to the board and declared a quarterly cash dividend on the company's common stock of 16.5 cents, per share payable on Dec. 15.
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