Four Insurance Industry Executives To Plead Not Guilty To Fraud Charges

By MARCY GORDON, AP Business Writer
Associated Press
February 16, 2006


WASHINGTON - As a federal probe into the insurance industry widens, four former top executives of giants General Re and American International Group are pleading not guilty to fraud and conspiracy charges.

The Justice Department has accused the four of orchestrating an audacious fraud, putting together a sham reinsurance transaction that allowed AIG to falsely report some $500 million (euro420 million) in reserves against losses and thereby mislead shareholders, Wall Street and regulators.

The alleged conspiracy, using phony contracts and a secret side deal, was designed to make it appear that AIG's loss reserves were growing so as to inflate the company's stock price, prosecutors say.

New York-based AIG, one of the world's largest insurance companies, last week agreed to pay a record $1.64 billion (euro1.38 billion) in a settlement with federal and New York state authorities. It also apologized for having deceived investors and regulators with misleading accounting practices.

AIG was alleged to have taken part in bid-rigging schemes, paid secret commissions to insurance brokers to steer business to it, used phony insurance deals to burnish its earnings and misstated the amounts of workers' compensation premiums it had collected.

The company's ousted chief executive, Maurice "Hank" Greenberg, remains under investigation by the Justice Department and the Securities and Exchange Commission, and has been named in a civil lawsuit by New York Attorney General Eliot Spitzer.

Greenberg, though not named, is referred to as "AIG unindicted coconspirator 1" and portrayed as playing a role in the sham transaction in the indictment handed up this month by a federal grand jury in Norfolk, Virginia.

Greenberg has denied any wrongdoing. He has said that transactions made during his 38 years at the helm of AIG were proper and correctly accounted for, and his spokesman says he will be vindicated in the courts.

Charged in the indictment and summoned Thursday to federal court in Alexandria, Virginia, are the four former executives: Ronald Ferguson, who was chief executive of Berkshire Hathaway Inc.'s General Re; Elizabeth Monrad, its former chief financial officer; Robert Graham, the company's former assistant general counsel; and Christian Milton, who ran the reinsurance division of AIG.

All four were entering pleas of not guilty and planned to contest the charges at trial, their attorneys say. Each defendant, if convicted on all 13 criminal counts of conspiracy, fraud and making false statements to the SEC, could face a maximum 95 years in prison and $7.75 million (euro6.51 million) in fines.

They also are named in a related civil lawsuit by the SEC alleging that they aided AIG's alleged securities fraud.

The indictment stemmed from the Justice and SEC investigations of a 5-year-old deal between AIG and General Re, both major players in the reinsurance industry, which sells insurance to primary insurers to help spread risk. Wide-ranging investigations of the reinsurance business are being conducted by authorities in the United States and elsewhere.

General Re parent Berkshire Hathaway, an investment company based in Omaha, Nebraska, is led by influential billionaire Warren Buffett.

Prosecutors say AIG had been concerned about Wall Street analysts' suggestions that it had insufficient reserves to cover potential losses and approached General Re to facilitate a deal that would increase its loss reserves on paper. But the deal had no substantive value, did not transfer risk, and was designed to cosmetically alter AIG's books, according to the indictment.

"While the $500 million (euro420 million) boost to AIG's reserves may have been good reading, it was pure fiction," Assistant U.S. Attorney General Alice Fisher said at a news conference announcing the indictment.

"... The investigation absolutely is continuing," she said.

Two other former executives of Stamford, Connecticut-based General Re John Houldsworth and Richard Napier pleaded guilty in June to roles in the sham deal. As part of their plea bargains, they have been aiding the investigation.

Copyright © 2006 Associated Press



Click here to return to our homepage