Liberty Seeks $12M From Gen Re In Tilt Over Sham Reinsurance

NU Online News Service, Feb. 18, 3:09 p.m. EST

Liberty Mutual Insurance Co. has brought a federal court action arguing that a sham transaction by General Re Corp. inflated the value of a company it sold to Liberty by millions of dollars.

The company as a result is seeking $12.1 million, according to papers Liberty filed with the U.S. District Court in Manhattan. The monies involved were paid by Gen Re to settle Securities and Exchange Commission charges concerning the alleged accounting fraud involved.

Both the SEC and General Re have filed papers disputing the merits of the claim.

Liberty argues that the money is owed from its purchase of Prudential's property and casualty insurance subsidiaries in 2003.

Around that same time, the SEC filed a complaint that Gen Re helped Prudential improperly report more than $200 million in revenues from 2000 through 2002 with sham reinsurance contracts that began back in 1997.

The contracts, the SEC contended, were in fact off-balance sheet assets set aside for Prudential by Gen Re. The money would later be paid to Prudential when requested.

As part of a settlement between the SEC and Gen Re reached in late January over the sham contract, Gen Re agreed to pay $12.2 million to the SEC to settle the case, $8.1 million in profits gained and $4.1 million in interest, without admitting or denying guilt.

Liberty argues that when it purchased Prudential's p&c business for $522.7 million, part of the purchase price included more than $41 million in receivables from Gen Re. Those receivables were allegedly the sham contracts. Eventually, the two parties agreed on a payment of $29.2 million, with $12.1 in dispute.

A spokesman for Liberty said the company filed the complaint with the court to protect the company's interests.

In its court papers, Liberty asked that the payment to the SEC be re-directed to Liberty, or at the least, the court preserve Liberty's right to seek the amount from Gen Re.

In a letter to the court, the SEC said that Liberty's claim has no merit because the disgorgement was not set up for distribution to victims and that Liberty is not a victim in the affair. The SEC also argued that the money Gen Re is to pay has nothing to do with the Prudential's contracts.

"In other words, even if Gen Re had already paid what Liberty claims is due, Gen Re would remain liable for disgorgement of the fees," the SEC said.

The SEC added that Liberty retains its ability recover what it claims from Gen Re "or another responsible party" using "negotiation, settlement, compromise, or, if necessary, litigation."

In a separate letter, Gen Re contends that whatever Liberty's claim is, the $12.1 million in dispute, by agreement, is to be submitted to arbitration.

Gen Re was involved in sham insurance deals involving American International Group and Prudential that allegedly helped both companies to cover-up losses. The episode has resulted in the conviction of several executives over charges of fraud.