The federal trial of four former insurance executives from Gen Re and one from American International Group accused of using a false transaction to puff up AIG financial results began yesterday in Hartford, Conn.
Prosecutors told the jury that Gen Re leant AIG $500 million to increase its loss reserve and improve its standing with investors. The loan, they contend, was disguised as a sham reinsurance transaction to hide it from both investors and the government.
The executives are charged in a 16-count federal indictment with violation of federal securities law, securities fraud, mail fraud, and making false statements to the Securities and Exchange Commission.
Those charged are:
o Ronald E. Ferguson, 63, of Fairfield, Conn., the chief executive officer of Gen Re from 1987 to 2001.
o Elizabeth Monrad, 51, of New Canaan, Conn., Gen Re's chief financial officer from 2000 to 2003.
o Christian Milton, 58, of Winnewood, Pa., AIG's vice president of reinsurance from 1982 to 2005.
o Robert Graham, 58, of Westport, Conn., Gen Re senior vice president and assistant general counsel. He was with the company from 1986 to 2005.
o Christopher P. Garand, 59, of Upper Saddle River, N.J., Gen Re's senior vice president and the head and chief underwriter of Gen Re's finite reinsurance operations in the U.S. from 1994 to 2005. He was also a member of the board of directors of Cologne Re Dublin, a Gen Re subsidiary.
In opening arguments yesterday, Prosecutor Raymond Patricco said the executives engaged in a phony deal to cover up the company's falling loss reserves.
The scheme was initiated by former AIG CEO Maurice Greenberg, prosecutors alleged, who approached Gen Re after AIG saw its stock drop 6 percent in 2000 and analysts were critical in their assessments of the firm. The negative reaction came after the company reduced its loss reserves by $59 million in the third quarter of that year.
According to the indictment, AIG reinsured Gen Re for $600 million in exchange for $500 million in premium. That premium was used to shore-up AIG's sagging loss reserve. Without it, prosecutors said, AIG would have had to report a reduction of $331 million in loss reserves over two quarters of 2000 and 2001.
Problems began in 2005 when AIG reported that there was a lack of evidence of risk transfer from the deal and the contracts were canceled. The revelations led to the ouster of Mr. Greenberg, as well as the firing of AIG chief financial officer Howard Smith and Mr. Milton.
In opening arguments, defense attorneys said the reinsurance transaction was in fact totally transparent and that there was no attempt to hide anything.
Executives at the highest levels of both AIG and Gen Re–including Warren Buffet, the chief executive of Berkshire Hathaway, the parent company of Gen Re–were apprised of the deal, underscoring its legitimacy, defense attorneys said.
The defense is also arguing that Gen Re executives did inform AIG that the deal was being counted as a monetary exchange and not a payment of premium, adding that how AIG accounted for it was not Gen Re's responsibility.
An attorney with Mr. Ferguson's defense team, Clifford H. Schoenberg, of Cadwalader, Wickersham & Taft LLP in New York, said the executive received no personal gain from the transaction, bringing into question why someone on the verge of retirement after a long career would want to risk going to jail for such a scheme.
He said the defense will question the reliability of two prosecution witnesses, John B. Houldsworth, a former CEO of Gen Re's subsidiary Cologne Re Dublin, and Richard Napier, a former AIG executive.
Both have pleaded guilty to deceiving the SEC. He said questions will be raised concerning their motives for testifying in exchange for a lighter sentence and their truthfulness as witnesses.
According to court documents, close to 100 prosecution and defense witnesses could be called in a trial that is expected to last for two months.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.