Berkshire Executives Knew AIG Would 'Cook the Books,' SEC Says

David Plumb
Bloomberg.com
June 8, 2005


June 8 (Bloomberg) -- Executives at Berkshire Hathaway Inc.'s General Re unit knew four years ago that American International Group Inc. would use a reinsurance transaction to "cook the books," according to phone transcripts cited in a suit from regulators.

John Houldsworth, a former General Re executive who this week agreed to plead guilty to a criminal charge of conspiring to misstate AIG's finances, discussed the planned transaction in a November 2000 phone call with the insurer's chief financial officer at the time, Elizabeth Monrad.

"They'll find ways to cook the books won't they?!," Houldsworth told Monrad, according to a civil complaint the U.S. Securities and Exchange Commission filed on June 6 in conjunction with the plea agreement. The comment prompted Monrad to laugh, and then Houldsworth continued, "It's up to them! We won't help them to do that too much. We'll do nothing illegal!"

The SEC said in court papers that Monrad and Houldsworth, as well as General Re Senior Vice President Richard Napier and former Chief Executive Officer Ronald Ferguson, knew what was intended by New York-based AIG, which last month corrected its accounting on that deal and an array of other transactions. Warren Buffett, the billionaire chairman of Berkshire Hathaway, in April said the company will be judged by whether it has "knowing participation" in the misdeeds of clients.

The transaction, which improperly boosted AIG's reserves for claims, sparked an accounting investigation in October that last month led AIG to restate five years of financial reports and lower net income by $3.9 billion, or 10 percent. The deal also triggered AIG, the world's largest insurer, to oust Maurice "Hank" Greenberg as chairman and CEO in March.

Handshake

"The government now has a cooperating witness within the executive suites of General Re," said James Cox, a securities law professor at Duke University in Durham, North Carolina, about Houldsworth's agreement with the Department of Justice. "The natural thing is to look at the other participants. It has a profound likelihood of radiating out from him."

Houldsworth, who worked in General Re's Dublin office and was fired after agreeing to the plea, will also settle the SEC suit, said his attorney, Larry Byrne. His sentence, which will be determined by a judge, may include jail time, said former federal prosecutor Robert Mintz. Houldsworth, 46, is the only person who has been sued by the SEC in the matter.

Attorneys for Greenberg, 80, and Ferguson, 62, declined to comment. Napier's attorney, Charles Carberry, didn't return phone calls and an e-mail, and Napier didn't return a call to his office at Stamford, Connecticut-based General Re.

Monrad's lawyer, Paul Shechtman, said that "when all the facts are known, it will be clear that Ms. Monrad acted properly." AIG spokesman Chris Winans declined to comment.

Greenberg's Call

Greenberg initiated the General Re transaction with a phone call to Ferguson in late 2000, according to the SEC's complaint and a civil suit that New York Attorney General Eliot Spitzer filed against AIG and Greenberg last month. Greenberg wanted to appease analysts worried about its reserve levels, without taking on additional risks, the regulators said.

The accounting rules don't permit favorable insurance accounting unless risk is transferred from one insurer to another. Companies also can't enter into a transaction that has no purpose besides an accounting gain.

In a conversation between Napier, Houldsworth and Monrad about two weeks later, Napier said the deal created accounting concerns requiring Greenberg and Ferguson "to have a handshake" about it, according to the suit. Napier was responsible for General Re's relationship with AIG, the SEC said.

'Paper Trail'

As Houldsworth prepared policy documents in December 2000, he asked General Re colleagues in an e-mail whether his office needed "to produce a paper trail" that disguised the transaction by creating the false impression that General Re approached AIG about it, the SEC said.

Houldsworth ended up writing such a document and General Re received a $5.2 million fee from AIG through side agreements that weren't disclosed to regulators, according to the suit.

The complaint was preceded by a warning notice to Houldsworth, and the SEC has sent similar notices to at least two other executives from General Re, including Monrad, 50.

Shares of Berkshire have fallen 4.2 percent since AIG admitted to improper accounting on March 30, compared with a 1.8 percent gain in the New York Stock Exchange Composite Index. General Re spokesman James Heslin Jr. declined to comment.

The federal plea agreement "demonstrates this investigation will continue to spread and will continue to reach other individuals," Spitzer said in an interview yesterday, praising the Justice Department.

Buffett didn't know details of the General Re policy or how AIG intended to use it, Omaha, Nebraska-based Berkshire said in a March statement. He was called a "cooperative witness" by Spitzer in April after being interviewed by investigators for the attorney general, the SEC and the Justice Department.

'Knowing Participation'

Later that month, Buffett said General Re's liability will depend on whether the company was aware that it might be aiding fraud. AIG is one of three General Re clients under scrutiny by investigators.

"It really gets down to whether there is knowing participation," Buffett, 74, told 20,000 Berkshire shareholders and admirers at the company's annual meeting on April 30. Clients "could be doing anything with their accounting."

Copyright © 2005 Bloomberg L.P.




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