Four Ex-General Re, AIG Executives Indicted in Probe
By Otis Bilodeau and Jesse Westbrook
February 2, 2006
Feb. 2 (Bloomberg) -- Three former executives of Berkshire Hathaway Inc.'s General Re unit and a former American International Group Inc. official were indicted on charges of conspiring to distort AIG's finances.
A federal grand jury in Virginia said Ronald Ferguson, General Re's former chief executive officer, Elizabeth Monrad, its former chief financial officer, and Robert Graham, former assistant general counsel, designed a sham reinsurance transaction to inflate AIG's reserves for claims. Christian Milton, who had overseen reinsurance at New York-based AIG, was also part of the 13-count indictment, prosecutors said today.
"The four executives arranged a complex scheme to cook the books at AIG,'' said Alice Fisher, assistant attorney general for the criminal division of the Department of Justice, at a press conference in Washington. "The scheme was designed to mislead analysts and the investing public.''
Prosecutors may use the indictments to wrest guilty pleas and build cases against others involved in the five-year-old contract between AIG and Stamford, Connecticut-based General Re, said Jacob Frenkel, a former federal prosecutor. Regulators probing the deal questioned Berkshire Chairman Warren Buffett and led AIG to remove Maurice "Hank'' Greenberg as CEO of the world's largest insurer.
"Sometimes it takes the filing of an indictment to induce a plea and cooperation,'' said Frenkel, who now practices law at Shulman, Rogers, Gandal, Pordy & Ecker in Rockville, Maryland. Investigators will probably "continue to climb up the ladder.''
The four were charged with one count of conspiracy, four counts of securities fraud, two counts of false statements to the SEC, four counts of wire fraud, and two counts of mail fraud. The charges carry a maximum possible sentence of 95 years in prison and more than $7 million in fines for each former executive. They will be arraigned Feb. 16 in federal district court in Alexandria, Virginia, court spokesman Edward Adams said.
The U.S. Securities and Exchange Commission simultaneously filed civil suits against the four for aiding and abetting securities fraud. Christopher Garand, the 58-year-old former head of General Re's finite reinsurance operations, was also sued.
Frederick Hafetz, Milton's attorney, said "he will vigorously contest the charges and is confident that he will be exonerated at trial.''
Alan Vinegrad, Graham's attorney, called his client "an attorney of the highest integrity who always acted in good faith and within the bounds of the law.'' Graham "looks forward to having his day in court and expects to be vindicated,'' Vinegrad said.
Garand's lawyer, Robert Cleary, said his client had cooperated fully with the SEC and "voluntarily'' met with the agency's investigators.
"I was surprised that they filed a complaint and quite frankly dismayed,'' Cleary said. "He has done nothing wrong, and we're confident that at the end of this, he's going to be vindicated.''
Monrad and her lawyer, Paul Shechtman, didn't return phone calls, nor did Ferguson's attorneys, Douglas Koff or Clifford Schoenberg. Berkshire Chief Financial Officer Marc Hamburg didn't return a phone call. Stanley Twardy, a General Re lawyer, declined to comment, as did Greenberg's spokesman, Howard Opinsky.
Joseph Brandon, General Re's current CEO, is also under investigation and was notified by the SEC in September that he may be sued by the agency. Brandon, 46, could face civil penalties or be barred from serving as an officer of a public company, Omaha, Nebraska-based Berkshire said at the time.
"I wouldn't want to talk about additional charges but the investigation is absolutely continuing,'' Fisher said.
Shares of Berkshire fell $300 to $88,690 in New York Stock Exchange composite trading. AIG fell 80 cents, or 1.2 percent, to $65.47. The stock is down 10 percent since the company received accounting subpoenas Feb. 14.
State and federal prosecutors discovered the transaction during an industrywide investigation of instances when insurers disguise what are essentially low-cost loans as insurance to get favorable accounting treatment.
A probe of the deal led to a broad accounting inquiry at AIG last year, ultimately prompting the company to restate past earnings by $3.9 billion, or 10 percent.
AIG said labeling the contract as reinsurance allowed it to inflate its reported reserves for claims by $500 million. General Re, the largest U.S. reinsurer, accounted for it as a series of deposits and loans because there wasn't enough risk to justify the reinsurance accounting.
According to Richard Napier and John Houldsworth, two former General Re executives who pleaded guilty in the case in June, Greenberg initiated the deal with a phone call to Ferguson in late 2000 because he wanted to appease analysts who were concerned about AIG's reserve levels.
Ferguson, 63, and Monrad, 51, knew that AIG meant to misuse the contract to distort its finances, the guilty pleas said. Milton, 58, was at a meeting in late 2000 in which AIG's intention was discussed, the SEC said in a related complaint.
"There was a secret oral side agreement that the deal was risk free to AIG,'' Fisher said today. "Graham further stated in another context, quote: Our group will book the transaction as a deposit. How AIG books its transaction is between them, their accountants and God."
The SEC, Justice Department and New York Attorney General Eliot Spitzer interviewed Buffett, the 75-year-old billionaire investor, in April and Spitzer later called him a "cooperative witness.''
Click here to return to our homepage