Tape Reveals Auditors Were Told Of AIG-Gen Re Deal

HARTFORD, CONN.–Information about an American International Group reinsurance deal that allegedly was a sham transaction to inflate the insurer's financial picture was provided to Cologne Re auditors, evidence in federal court revealed today.

The contact with auditors was disclosed during the cross examination in U.S. District Court here of John Houldsworth, a former chief executive at Cologne Re Dublin, a subsidiary of the General Reinsurance unit of Berkshire Hathaway.

Mr. Houldsworth, who confessed to a role in the AIG deal and is now a government witness, is testifying against a group of executives who are on trial for securities fraud.

The defendants are, Ronald Ferguson, former Gen Re chief executive officer; Elizabeth Monrad, Gen Re's former chief financial officer; Robert Graham, former Gen Re senior vice president and counsel; Christopher Garand, a former Gen Re senior vice president and Christian Milton, former AIG vice president for reinsurance.

They are accused of putting together a finite reinsurance transaction in 2000-2001 Gen Re and AIG, which inflated AIG loss reserves by $500 million.

Defense attorney Reid Weingarten representing Ms. Monrad during his cross examination played a tape of a conversation between Mr. Houldsworth and Deloitte Touche auditor Mary Fulton in which he explained that the AIG deal involved “absolutely no risk transfer and no risk of a loss to AIG.”

He also informed her that Cologne Re would collect $ 5 million over two years for its role in the transaction.

In another conversation that was played for the jury, Mr. Houldsworth learned from a subordinate that Gen Re's U.S. auditors were aware of the AIG deal. The tape did not disclose exactly what particulars the audit firm had been given.

On an earlier tape, Mr. Houldsworth was heard chatting with his boss in London, Milan Vukelic, belittling his counterparts at Gen Re as being dense in their understanding of a part of the AIG deal he was being asked to structure.

“You found it incredible that Betsy [Monrad] wasn't getting what it was you were trying to accomplish, correct? asked Mr. Weingarten. “On that little point,” responded Mr. Houldsworth.

He was also confronted with an e-mail memo from Mr. Napier to senior Gen Re executives telling them that AIG would go forward with the loss portfolio transaction.

Mr. Houldsworth testified, “At this point I was coming to the realization that this transaction was going to be inappropriately accounted for by AIG.”