NU Online News Service, June 17, 12:20 p.m. EDT
John Houldsworth, who turned government witness in the securities fraud case involving American International Group and General Reinsurance Group, was sentenced to probation yesterday.
The two-year term was imposed by U.S. District Judge Christopher F. Droney in Hartford, who presided over the trial of an AIG executive and four Gen Re executives who were convicted of creating a sham reinsurance transaction to pump up AIG's financial picture.
Mr. Houldsworth, 50, an Irish citizen from Dublin, the former head of Cologne Re, a Gen Re subsidiary, was praised in a statement released by Acting Connecticut U.S. Attorney Nora R. Dannehy, and Dana Boente, Acting United States Attorney for the Eastern District of Virginia.
They said he had "provided extraordinary assistance to the government throughout the investigation and prosecution of his co-conspirators, and testified for eight days during the trial, explaining in great detail the fraudulent nature of the transaction."
Mr. Houldsworth, who pleaded guilty to one count of conspiring to commit securities fraud on June 9, 2005, was also ordered by Judge Droney to pay a $5,000 fine perform 400 hours of community service.
The five executives Mr. Houldsworth gave evidence against were:
Gen Re Chief Executive Ronald Ferguson, Christopher Garand (a former Gen Re senior vice president), Robert Graham, (Gen Re's former senior vice president and counsel), Elizabeth Monrad (Gen Re's former chief financial officer) and Christian Milton (former AIG vice president for reinsurance).
The group was convicted last year of conspiracy, securities fraud, false statements to the U.S. Securities and Exchange Commission and mail fraud charges
Mr. Ferguson was sentenced to two years in prison, Mr. Milton to four years, Mr. Garand and Mr. Graham both to one year and Ms. Monrad to 18 months. All were fined as well.
According to trial evidence, after financial analysts' criticism of a $59 million decrease in AIG's loss reserves for the third quarter of 2000, and at the direction of Gen Re executives, Mr. Houldsworth assisted Gen Re in structuring a sham reinsurance transaction that allowed AIG, Gen Re's most significant client, to manipulate its financial statements.
Gen Re is a Berkshire Hathaway company.
The sham reinsurance transaction, made it appear that AIG was reinsuring Gen Re, and that AIG was taking on $100 million in risk, but under a secret side agreement no risk was transferred to AIG, and AIG returned the $10 million premium that Gen Re paid to AIG, and paid Gen Re a fee of $5 million to undertake the sham transaction.
Prosecutors said the sham transaction increased AIG's loss reserves by $250 million in the fourth quarter of 2000 and $250 million in the first quarter of 2001, masking a declining trend in loss reserves in the face of premium growth.
When the scheme became public, AIG restated the transactions at issue in filings with the SEC in May 2005. Evidence at trial established that when the investigation was disclosed to investors by AIG and through various media outlets between Feb. 14 and March 14, 2005, shares of AIG stock dropped from $73.12 to $61.92.
Judge Droney has ruled that AIG's shareholders lost between $544 million and $597 million in the case as a result of the scheme.
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