Former General Re, AIG Executives Convicted of Fraud (Update5)
http://www.bloomberg.com/apps/news?pid=20601087&sid=aAA9l_WKpq2I&refer=homeBy David Voreacos and Jane Mills
Feb. 25 (Bloomberg) -- Four former executives of General Reinsurance Corp. and a former American International Group Inc. executive were convicted of fraud charges for helping to deceive AIG investors through a sham transaction in 2000.
Ronald Ferguson, former General Re chief executive officer, and Elizabeth Monrad, a former chief financial officer, were among those found guilty today in federal court in Hartford, Connecticut. Prosecutors said they helped AIG fraudulently add $500 million in loss reserves, a key indicator of an insurer's health.
``This case is about truth, a choice to lie and deception to cover it up,'' Assistant U.S. Attorney Raymond Patricco told jurors in closing arguments. ``These five defendants made the choice to lie to AIG's investors and to deprive them of the opportunity to make informed decisions about their stock.''
Jurors, who began hearing evidence Jan. 7, deliberated six days and convicted each defendant of all charges, including conspiracy, securities fraud, mail fraud and making false statements to the Securities and Exchange Commission.
The defendants face maximum terms of 20 years on the most serious charges. Advisory guidelines typically call for lesser terms. Sentencing is set for May 15. Each defendant is free on $1 million bond.
Prosecutors said Ferguson and his subordinates set up a phony reinsurance deal after the former CEO of New York-based AIG, Maurice ``Hank'' Greenberg, sought to assuage investors about the reserves.
Testimony on Buffett
The trial featured testimony about Greenberg and billionaire Warren Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., which owns General Re. Neither was charged with a crime, and both denied wrongdoing.
Ferguson, 66, and Monrad, 53, were convicted with Christopher Garand, 60, a former senior vice president; former General Re assistant general counsel Robert Graham, 59; and Christian Milton, 60, AIG's former head of reinsurance. U.S. District Judge Christopher Droney presided over the trial.
``I think we did a good job,'' said juror Kenneth Quarti, a pharmacist. ``We considered all the evidence and we thought about it a lot and we worked on it a lot.''
Defense lawyers for Ferguson, Garand and Milton said they would appeal. Monrad's lawyer Reid Weingarten had no immediate comment after the verdict.
``This is a very sad day, not only for Ronald Ferguson, but for our criminal justice system,'' Ferguson's lawyer, Cliff Schoenberg, said in a statement. He said he hopes Droney or an appeals court ``will reverse this grave miscarriage of justice.''
`Too Complicated'
Schoenberg said the reinsurance industry may have been too complicated for jurors to understand. Milton attorney Frederick Hafetz said, ``There is a substantial basis for appeal dealing with the fairness of a multidefendant trial.''
Graham's attorney Alan Vinegrad said the case is a ``terrible tragedy'' for his client, who ``obviously is disappointed. We will continue to fight vigorously on his behalf.''
Prosecutors have secured hundreds of convictions of executives since a crackdown on corporate fraud began after the collapse of Enron Corp. in 2001.
``What the prosecution tried to do was simplify the issues,'' said Paul Pelletier, principal deputy chief of the Justice Department's fraud section. ``We didn't want to take them down a complicated accounting path.''
Loss Reserves
The deal arose after AIG said on Oct. 26, 2000, that premiums increased in the third quarter of 2000 as reserves for claims fell by $59 million. AIG, the world's largest insurer by assets, dropped 6 percent that day. Five days later, Greenberg asked Ferguson for help with AIG's loss reserves.
General Re agreed in writing to transfer $600 million in policies and pay $500 million in premiums, making it appear AIG could lose $100 million.
Prosecutors said secret oral side agreements corrupted the companies' contract. Under unwritten terms, AIG faced no losses, rebated the $10 million in premiums advanced by General Re and paid a $5 million fee to General Re, prosecutors said.
Defense attorneys attacked the credibility of the government's two main witnesses, former General Re executives John Houldsworth and Richard Napier. Both pleaded guilty to conspiring to abet false accounting at AIG.
Probes of Sales
Prosecutors said AIG fraudulently booked $500 million in loss reserves, implying a risk of loss, when it should have booked a no-risk deposit, as General Re did. AIG later reversed the transaction and agreed in 2006 to pay $1.64 billion to settle probes of sales and accounting practices.
Buffett, 77, approved the deal's reputational risk, or threat of bad publicity, Napier testified. Prosecutors said he wasn't aware of the secret side agreements. Buffett, who was on the government's witness list, didn't testify.
Greenberg, 82, who prosecutors said was an unindicted coconspirator, believed the deal was ``perfectly legitimate,'' one of his attorneys, Robert Morvillo, said before the verdict.
Jurors reviewed dozens of e-mails and heard taped conversations of Houldsworth, former CEO of General Re's unit in Dublin, whose office calls were recorded. On one call, Monrad told Houldsworth the deal was ``highly confidential'' and ``our name would be mud with AIG'' if it surfaced. She said on another call that the $10 million refund would go ``round trip.''
Recorded Conversations
Prosecutors played snippets of conversations out of context, said defense lawyers, who argued that the deal was a legitimate use of finite reinsurance, a type of low-risk coverage used to achieve certain financial goals.
After the verdict, Assistant U.S. Attorney Eric Glover said it was a challenge to convict executives of ``helping manipulate the financial statements of another company.''
Pelletier, the prosecutor, said aiding and abetting fraud cases are typically not prosecuted.
``The reality is the defense always is, `We didn't know how they were going to book it.' But in this case we had tapes that proved it,'' Pelletier said in an interview.
The Justice Department's Patricco said AIG would never have returned the $10 million premium paid by General Re or paid a $5 million fee to take on $100 million of risk.
The defendants ``knew without a doubt that this deal was in reality a no-risk deal,'' he said in closing arguments. ``Not a low-risk finite deal where AIG could only lose a little bit of money, but a no-risk deal where AIG would not lose one penny.''
Buffett spokeswoman Jackie Wilson said no one at Berkshire was available to comment. Chris Winans, a spokesman for AIG, declined to comment. Morvillo didn't immediately return a call seeking comment.
The case is U.S. v. Ferguson, 06-cr-137, U.S. District Court, District of Connecticut (Hartford).
