SEC Complaint Details General Re Exec Role in AIG Reinsurance Scheme
The Insurance Journal
June 7, 2005
The former chief executive officer of Cologne Reinsurance Company in Dublin, a General Reinsurance subsidiary, has agreed to plead guilty to federal criminal charge of conspiring with others to misstate certain financial statements. John Houldsworth has entered into a settlement agreement with the Securities and Exchange Commission over the AIG affair.
The former CEO, who had been placed on leave last month after receiving a notice from the SEC that he was a target of the AIG investigation, has been fired by Berkshire Hathaway, parent company of General Re and Cologne Re.
The SEC filed an enforcement action against Houldsworth for his role in aiding and abetting AIG in committing securities fraud. In its complaint in federal court in Manhattan, the Commission alleged that Houldsworth and others helped AIG structure two sham reinsurance transactions that had as their only purpose to allow AIG to add a total of $500 million in phony loss reserves to its balance sheet in the fourth quarter of 2000 and the first quarter of 2001. The transactions were initiated by AIG to quell criticism by analysts concerning a reduction in the company's loss reserves in the third quarter of 2000, according to the SEC.
In partial settlement of the SEC's claims, without admitting or denying the SEC's allegations, Houldsworth consented to the entry of a partial final judgment which resolves all issues of liability against him but defers the determination of disgorgement and penalties until a later date. As part of his settlement, Houldsworth has agreed to cooperate fully with the continuing investigation of this matter.
"AIG's fraud did not occur in isolation. With this case, we are holding accountable an individual who, even though outside AIG, knowingly assisted the company to manipulate its financial results," said Linda Chatman Thomsen, director of the SEC's division of enforcement.
"This is another step in our ongoing investigation of the abuse of insurance and reinsurance to falsify a company's financial results. Here the defendant helped to structure a sham transaction designed solely to enable AIG to achieve a specific, and false, accounting result," commented Mark K. Schonfeld, director of the SEC's Northeast regional office.
The SEC action comes following the filing of a complaint against AIG and two if its former senior executives last week by New York officials, including Attorney General Eliot Spitzer.
The SEC complaint against Houldsworth alleges that Houldsworth and others at Gen Re worked with their counterparts at AIG to fashion two sham reinsurance contracts between Cologne Re Dublin, a Gen Re subsidiary in Dublin, Ireland, of which Houldsworth was the chief executive officer, and an AIG subsidiary.
The complaint details the conversations of participants in the planning meeting and other conversations that led to AIG's filing of fraudulent financial statements. On the basis of these conversations and other facts alleged, the complaint charges that all parties understood from the beginning that they were engaged in an undertaking to create sham transaction documents for the sole purpose of allowing AIG to make false accounting entries on its books.
The SEC maintains that Houldsworth and others at Gen Re knew that AIG accounted for the sham transactions as if they were real reinsurance contracts that transferred risk from Gen Re to AIG, when all parties involved knew that was not true. As a result of AIG's accounting treatment for these transactions, the company's financial results showed false increases in reserves that AIG touted in the company's quarterly earnings releases for the fourth quarter of 2000 and the first quarter of 2001. Without the phony loss reserves, AIG's financial results in both quarters would have shown further declines in its loss reserves. In a press release dated March 30, 2005, AIG admitted that the accounting for these transactions was improper and would be corrected. In its 2004 Form 10-K filed with the Commission on May 31, 2005, AIG restated its financial statements to recharacterize the transactions as deposits rather than as reinsurance.
The SEC said its investigation is continuing.