Ex-Chief of General Re British Unit Is Banned by FSA (Update2)

By Caroline Binham
Bloomberg News
April 6, 2009

April 6 (Bloomberg) -- A former General Reinsurance Corp. unit's chief executive officer was banned from ever holding a position of trust in the financial-services industry after he was found to have helped companies conceal losses.

Britain's Financial Services Authority won a case against former Alternative Solutions CEO Milan Vukelic when a London tribunal agreed with the regulator that he had acted without "integrity," the FSA said today. Vukelic knowingly aided companies in using reinsurance products to hide "very significant losses" on three separate occasions, the FSA said.

So-called finite reinsurance products have been at the center of investigations by regulators worldwide. Gen Re is a subsidiary of Warren Buffett's Berkshire Hathaway Inc., several units of which have been subject to a U.S. investigation since 2005 for abuse of the products. Gen Re CEO Joseph Brandon stepped down last April after a series of convictions of his executives who misused finite reinsurance.

"Those carrying out senior functions in regulated firms need to be clear that the FSA will hold them to the highest standards of behavior and will take action against those who fall short," said Margaret Cole, the FSA's enforcement director, in an e-mailed statement.

Vukelic declined to comment when reached on him mobile phone. James Bagge, a lawyer for Vukelic at London-based Norton Rose LLP, declined to comment. Charlie Agin, a Stamford, Connecticut-based spokesman for Gen Re, also declined to comment. Berkshire Hathaway didn't immediately respond to a request for comment.

Vukelic Contested

Vukelic was fired by Gen Re in July 2005 after being put on administrative leave in May of that year.

Vukelic had contested the FSA's case against him, arguing that the contracts with three companies were legitimate, according to the decision published today by the Financial Services and Markets Tribunal.

The case against Vukelic centered on three transactions with FAI Insurances Ltd., Zurich Australian Insurance Ltd. and New Cap Reinsurance Corp., the judgment said. FAI became part of HIH Insurance Ltd., which collapsed in 2001 as Australia's biggest corporate failure, while New Cap was liquidated in 1999.

Australia's financial regulator banned Vukelic in 2007. The FSA had to wait until he had exhausted his appeal of the authority's case at the tribunal.

While finite reinsurance products can be used properly when there is a genuine transfer of risk, Vukelic sold the products knowing they would be used to hide losses.

'Obviously Suspicious Signs'

Vukelic "turned a blind eye to what was obvious and failed to follow up obviously suspicious signs," the tribunal said. "Anyone who promotes financial products on the basis that a clear potential for abuse is not their problem because primary responsibility for disclosure to auditors, regulators or others rests with the client, is, as we see it, acting unethically."

Vukelic was CEO of AltSol from 1997 to 2002, the FSA said. He then went on to be CEO of Gen Re's Faraday Underwriting unit, with his FSA approval lapsing in July 2005, according to the FSA register.

He is the second senior employee from a Gen Re unit to be banned by the FSA for misuse of financial reinsurance. A Cologne Reinsurance (Dublin) Ltd. executive was banned for five years in 2006.

Tougher FSA

The FSA has repeatedly warned that it will take tougher action against high-ranking officials in financial companies. FSA CEO Hector Sants warned last month that some executives "should be frightened of the FSA."

"The general message from the FSA is that people in his role must supervise properly," said Tony Woodcock, a regulatory lawyer at London-based Stephenson Harwood. "The more sophisticated the deals and the products, the more probing they have to be. It's not enough to rely on third parties like auditors or compliance."

The case is the second victory for the FSA at the tribunal in a week. It won a hearing against a Close Brothers Group unit last week, which, had the tribunal found against the FSA, would have forced the regulator to have a higher burden of proof when it files civil cases of market abuse.

Separately, the former chief financial officer of Gen Re was sentenced to 18 months in prison and fined $250,000 on April 2 in the U.S. for helping to defraud American International Group Inc. investors in 2000 by using finite reinsurance products. At the center of the fraud was what prosecutors called a sham transaction to inflate AIG loss reserves by $500 million.

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