To talk or not to talk

Warren Buffett testifies before SEC, while attorney says Maurice Greenberg will not answer questions

Houston Chronicle News Services
April 12, 2005

On a day when Warren Buffett talked to investigators, Maurice Greenberg decided not to.

The lawyer for Greenberg, former chairman and chief executive of insurance company American International Group, said Monday that his client would invoke his Fifth Amendment privilege and decline to answer questions from the Securities and Exchange Commission and the New York attorney general's office in an appearance today.

Lawyer David Boies said the large number of transactions being examined and the fact that some occurred years ago "have precluded Mr. Greenberg from adequately preparing this testimony at this time."

Among the transactions under investigation is one between AIG, the world's largest insurer, and General Re Corp., a unit of Buffett's holding company, Berkshire Hathaway. The four-year-old investment boosted AIG's reserves and may have hidden the company's true financial condition from investors.

"I told them everything I know," Buffett said Monday as he left the Woolworth Building in Manhattan, where the SEC has an office.

Billionaire investor Buffett, 74, was called as a witness, not a target, partly to help decipher industry practices, New York Attorney General Eliot Spitzer told ABC News over the weekend.

"Reinsurance is a sector for cowboys, and they roam freely," says Kevin Hennosy, founder of Spread the Risk, a nonprofit insurance public-policy group in Kansas City, Mo. "You don't have the formality or the documentation."

Greenberg forced out

Greenberg, 79, was forced out in mid-March as allegations of improprieties mounted. When asked by reporters about Greenberg, Buffett replied, "I don't really know anything about that."

In a written statement Monday, Greenberg noted AIG is involved in millions of transactions each year, making it unfair to demand his testimony unless investigators narrow the scope of their questions.

"I am willing to accept responsibility and to account for the performance of my duties, but I believe that good order and fairness require that I have an adequate opportunity to be advised of the issues to be investigated and to my alleged involvement therein," Greenberg said.

Spreading the risk

The investigators are looking into a number of reinsurance transactions, which involve insurance purchased by insurance companies like AIG. Reinsurance traditionally has been used to spread out risk among insurers but, in some cases, it has been used for the questionable purpose of polishing a company's financial statements.

New York-based AIG said March 30 that improper accounting may have inflated its net worth by as much as $1.7 billion over 14 years. Spitzer told ABC News that he has "powerful evidence" and that he may be moving toward a civil or criminal case against Greenberg.

The inquiry poses risks for Buffett and for shareholders of Berkshire Hathaway, the Omaha, Neb.-based investment company where Buffett is chairman and chief executive, said Robert Heim, a former SEC attorney.

"Buffett is known as the ethical conscience of American business, and if that reputation gets tarnished, it's going to have a major impact not only on his reputation but also for the value of Berkshire Hathaway," Heim said.

A $134 billion business

Buffett built Berkshire into a $134 billion company by investing in businesses, often out of favor, that range from paint manufacturers to furniture sellers. Berkshire last year earned $7.3 billion.

"He stands for smart long-term investing, transparency, accountability all those things we value and support," Spitzer told ABC News.

Buffett spent about five hours at the SEC's offices before emerging in the afternoon. Buffett, 74, crossed the street amid a crowd of reporters, told them he'd told investigators everything he knew and then drove off in a black car.

AIG spokesman Chris Winans said the company continues to cooperate with investigators and declined to comment on Greenberg's decision.

"Statements that seem innocuous and harmless at this juncture may later serve as lethal weapons," said Christopher Bebel, a former federal prosecutor who now practices law in Houston.

Darren Dopp, Spitzer's spokesman, didn't return calls. Robert Morvillo, Greenberg's criminal attorney, and SEC spokesman John Nester declined to comment. The Wall Street Journal reported Greenberg's plans earlier today.

Spitzer is focusing his AIG investigation on Greenberg, who stepped down as chairman and CEO last month after an almost four-decade reign. AIG "was a black box run with an iron fist by a CEO who did not tell the public the truth," Spitzer told ABC.

Shares of AIG rose 19 cents to $52.10 in New York Stock Exchange composite trading.

Safest option

Greenberg may have been tempted to ignore his safest option against the advice of his lawyers, said Rusty Hardin, a Houston attorney who represented Arthur Andersen in its failed attempt to avoid obstruction of justice charges tied to Enron Corp.'s collapse.

Accounting rules debatable

The relevant accounting rules are debatable and Greenberg would never have done the General Re transaction had he thought it was wrong, Boies said in an April 7 interview.

"For people like Greenberg who don't believe they have done anything wrong, your first inclination is to tell everyone anything they might what to know," Hardin said. "That isn't always the wisest thing until you know what the other side is contending."

Spitzer and the SEC last year began probing nontraditional or finite risk reinsurance, a type of reinsurance that became more popular in the 1990s and plays on the boundary between financing and insurance.

The accounting on finite risk can be abused if the insurer classifies what is essentially a low-cost loan from the reinsurer as reinsurance, thereby artificially reducing its liabilities.

In the General Re transaction, AIG said March 30 that it shouldn't have been accounted for as reinsurance because there was no risk involved.

Investigators are also probing transactions with offshore reinsurers. Deals with Barbados-based reinsurer Union Excess Reinsurance Co. alone may have inflated AIG's net worth by $1.1 billion, the company said last month.

Boies said in the prepared statement that Greenberg's requests to delay the testimony to review documents were refused.

Copyright 2005 Chronicle News Services

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