By Karen Richardson
The Wall Street Journal
May 7, 2005
NEW YORK -- The Securities and Exchange Commission is considering filing a
civil securities-fraud complaint against Rick Napier, an executive at Berkshire
Hathaway Inc.'s (BRKA) General Re unit, for helping American International Group
Inc. (AIG) improperly account for a reinsurance transaction, according to a
person familiar with the SEC action.
Berkshire disclosed Friday the SEC served its so-called Wells notice to a
senior vice-president of General Re on Monday and that the regulator could "
bring a civil injunctive action and seek penalties against the individual,
alleging that the individual violated or aided and abetted" securities laws.
Berkshire, which didn't name the executive, couldn't be reached over the
The SEC action is the latest salvo by regulators in an ongoing investigation
into finite-reinsurance products that spans several continents and brings into
the spotlight the potential legal liability carried by parties that haven't
engaged in improper accounting themselves but enter contracts with parties that
have. Finite, or nontraditional, reinsurance blends elements of financing and
Investigators' focus on a reinsurance transaction between General Re and AIG
that took place four years ago helped lead to the March departure of insurance
titan Maurice R. "Hank" Greenberg as chairman and chief executive of AIG.
Investigators and regulators have also interviewed Warren Buffett, Berkshire's
chairman, as a witness in its investigation into the AIG-General Re deal, and
the Federal Bureau of Investigation has said it is conducting a wide-ranging
inquiry into the insurance industry in the wake of the accounting scandal at
Mr. Napier, who works in General Re's Stamford, Conn. office, was one of
several executives who knew the reinsurance deal with AIG didn't have enough
risk to qualify for favorable accounting treatment that burnished AIG's books,
people familiar with the investigation have said.
The Wall Street Journal reported last month that Mr. Napier and colleague
Elizabeth Monrad told two senior AIG executives in a November 2000 conference
call that the portfolio of contracts General Re had put together for AIG
wouldn't transfer enough risk to qualify as reinsurance under U.S. accounting
rules, according to a person with knowledge of the matter. Mr. Napier and Ms.
Monrad asked the AIG executives if that still was acceptable to the firm, and
they responded the lack of risk didn't cause accounting problems for them,
according to this person.
Mr. Napier and Ms. Monrad, who is now chief financial officer at the TIAA-CREF
pension fund, couldn't be reached for comment.
The SEC alleges Mr. Napier, through his actions, helped AIG falsify its books,
according to the person familiar with the SEC complaint. Mr. Napier can prepare
a response to the Wells notice in an effort to persuade the regulator that
enforcement action isn't warranted.
AIG has said it improperly accounted for the transaction. That accounting
impropriety, together with others that helped AIG burnish its books since 2000,
would cut its net worth by $2.7 billion, or 3.3%, AIG said Sunday in a
Berkshire also said Friday the Financial Services Authority, the British
securities regulator, is investigating an officer of General Re's Faraday Group,
an insurance broker based in the United Kingdom, as well as a former executive
of Cologne Re's Dublin unit, another General Re subsidiary. Berkshire didn't
disclose the names of the executives.
Berkshire added General Re and a former CEO, Ronald Ferguson, were defendants
in a class-action complaint filed April 29 in federal court in New York. The
complaint "alleges that AIG and certain other defendants violated federal
securities laws, but doesn't assert any causes of action against General
Reinsurance or Mr. Ferguson," Berkshire said in notes to its first-quarter
earnings results, released late Friday.
Mr. Ferguson led General Re when Berkshire purchased the reinsurer in 1998.
After several years of poor results, he stepped down as CEO in 2001 and has been
a consultant to Berkshire's reinsurance businesses ever since. Mr. Greenberg
contacted Mr. Ferguson in 2000 to strike up the deal now under scrutiny.
Berkshire said it is cooperating fully with various subpoenas and requests for
information from insurance regulators, including those in Virginia and
Tennessee, as well as from the Office of the Connecticut attorney general.