An Executive At Berkshire Faces Charge From SEC
By TIMOTHY L. O'BRIEN
The New York Times
May 7, 2005
Berkshire Hathaway, the company controlled by Warren E. Buffett, disclosed late yesterday that the Securities and Exchange Commission plans to file a civil securities fraud complaint against a senior vice president of the General Re Corporation, a Berkshire insurance unit mired in a number of investigations for possible financial manipulation.
The move by the S.E.C. heightens an international investigation that has drawn General Re into wide-ranging examinations of improprieties in the insurance industry. The identity of the General Re executive could not be determined, although it is a person still working for the company, according to someone briefed on the S.E.C.'s action. The person briefed on the S.E.C. action said the move involved the continuing investigation of the insurance giant American International Group.
Investigators have been focusing on a 2000 reinsurance transaction between A.I.G. and General Re that allowed A.I.G. to increase its reserves artificially by $500 million over two quarters. In March, A.I.G. acknowledged that the deal was improper.
The person briefed on the S.E.C. action said that other General Re executives were likely to receive similar notices and that former General Re employees may already have been notified. General Re knows when executives receive the S.E.C. notifications only if its employees and executives disclose them to the company.
The S.E.C. action, known as a Wells notice, occurs when the agency completes an investigation and has found securities violations. Recipients of Wells notices have the opportunity to prepare a response if they can persuade the agency that an enforcement action is unwarranted. Berkshire said that the S.E.C. notified the General Re senior vice president of its intention to file a securities fraud complaint on May 2, just two days after Berkshire's annual meeting.
A number of law enforcement agencies in the United States and overseas are examining General Re's involvement selling nontraditional reinsurance products that may have been used by clients to dress up their financial position.
Reinsurance is a product insurers themselves use to limit their exposure to large, risky policies. But a number of cases have already surfaced in which insurers provided loans to other insurers that were merely masked as reinsurance products. In a number of cases, the loans were used to prop up weak financial statements or mask more severe financial problems.
Australian regulators, as well as the S.E.C., the Justice Department, and the New York State attorney general's office are examining the past practices of General Re.
Berkshire also disclosed that Britain's top insurance regulator, the Financial Services Authority, told General Re on April 15 that it was investigating an officer of a General Re affiliate, the Faraday Group, as well as a former officer of another affiliate, Cologne Reinsurance, which is based in Dublin, about nontraditional reinsurance transactions.
Berkshire also said that the Irish Financial Services Regulatory Authority had requested that Cologne Reinsurance provide information relating to its use of nontraditional insurance products.
While none of the identities of the individuals involved in these actions have been disclosed, Australian regulators barred several current and former General Re executives based in Dublin late last year. One of them, John Houldsworth, continues to work for Cologne Re, and, according to insurance industry executives and others briefed on the matter, oversaw the doctoring of paperwork relating to the questionable transaction between General Re and A.I.G.
Another General Re executive barred from Australia, Tore Ellingsen, recently resigned from Cologne Re. In December, Australian regulators barred another General Re executive, Milan Vukelic, who is now chief executive of Faraday.
As a number of the insurance scandals were beginning to surface in 2001, General Re's former chief executive, Ronald E. Ferguson, handed the corporate reins to the new chief executive, Joseph P. Brandon, who has instituted tighter controls. Neither executive has been charged with wrongdoing.
A.I.G. forced Maurice R. Greenberg to step down as chief executive and chairman of the company after nearly four decades at the helm.
Mr. Buffett is a cooperating witness in the investigation and individuals with direct knowledge of the inquiry said no evidence had emerged indicating that he knew about the structuring of any questionable transactions before they occurred.