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Jury Convicts Five of Fraud
In Gen Re, AIG Case

February 26, 2008; Page A1

Five former insurance executives were convicted on charges stemming from fraudulent transactions between American International Group Inc. and General Re Corp., and prosecutors said they plan to "work up the ladder" seeking more indictments.

Four of the five executives worked for General Re, a unit of billionaire Warren Buffett's Berkshire Hathaway Inc., while the fifth was formerly employed by AIG. A federal jury found them guilty on all 16 counts in their indictment, including conspiracy, securities fraud, mail fraud and making false statements.

Prosecutors had accused the executives of inflating AIG's reserves by $500 million in 2000 and 2001 through fraudulent reinsurance deals that made AIG -- the world's biggest insurer and Gen Re's largest client -- look stronger than it was, artificially boosting its stock price. Reinsurance allows insurance companies to completely or partly insure the risk they have assumed for their customers.

The verdict came in one of the highest-profile fraud cases to emerge from the accounting investigations that rocked Wall Street following the collapses of Enron Corp. and WorldCom Inc. While the case dealt a black eye to General Re, Mr. Buffett was never drawn into the trial despite defense lawyers' pretrial assertions that they would present evidence tying the legendary Omaha, Neb., investor to the fraud.

After winning a complicated trial involving arcane accounting rules and tens of thousands of pages of documents, prosecutors hinted they might be looking to gather evidence against others in the fraud.

"We're not done. The investigation continues," said Paul Pelletier, one of three federal prosecutors who tried the case in U.S. District Court in Hartford, Conn. "We've got a lot of work to do to work up the ladder."

During the trial, former AIG Chief Executive Maurice R. "Hank" Greenberg, who led the company for nearly four decades, presiding over much of its growth, and General Re's current chief executive, Joseph Brandon, were identified as unindicted co-conspirators. Mr. Brandon was chief financial officer at General Re when some of the bogus reinsurance deals were concocted, and he worked with several of the defendants.

Neither Mr. Greenberg nor Mr. Brandon has been charged with any wrongdoing, and neither appeared in taped phone conversations that were among the most compelling pieces of evidence presented in the trial.

Convicted yesterday were General Re's former chief executive, Ronald Ferguson, 65 years old; former Senior Vice President Christopher Garand, 60; former Chief Financial Officer Elizabeth Monrad, 53; Robert Graham, 69, a former General Re assistant general counsel; and Christian Milton, AIG's former vice president of reinsurance.

Messrs. Ferguson, Graham, Milton and Ms. Monrad each face prison sentences as long as 230 years and a fine of as much as $46 million. Mr. Garand faces a prison sentence of as long as 160 years and a fine of as much as $29.5 million.

While prosecutors might have lacked evidence to secure additional indictments last year, yesterday's convictions could strengthen their hand if the defendants provide information implicating others in the fraudulent reinsurance deals. "When you have a conviction of this sort, it certainly can shake information loose from defendants who are convicted in post-conviction cooperation," said Daniel Richman, a law professor at Columbia University.

Concern at AIG

A lawyer for Mr. Greenberg said in an email yesterday that his client wasn't "a defendant in this action, and he neither initiated nor participated in an improper transaction." The lawyer added that Mr. Greenberg had "acted responsibly, ethically and legally during his career at AIG, which he built into the largest and most successful insurance company in the world."

For AIG, the verdict comes at a time when the influence of its 82-year-old former leader has loomed large. In a securities filing in November, Mr. Greenberg and a group of affiliated shareholders expressed "concern over the direction" of AIG, from which he resigned in 2005 amid an investigation into its accounting. Mr. Greenberg and other shareholders in the group together owned almost 12% of the company's voting shares as of Oct. 31, according to the New York State Insurance Department.

Mr. Greenberg, who has also been actively pursuing other business ventures since he left the insurer, followed up with another filing in which he said he wouldn't launch a proxy fight or serve again as an officer or director of AIG. Still, his role cast a spotlight on the insurer's performance under Mr. Greenberg's onetime deputy and successor, Martin Sullivan.

This month, AIG disclosed that its auditor had found a "material weakness" in the company's accounting, and its stock fell to a five-year low, though it has since rebounded somewhat.

Yesterday's verdict could have broader repercussions. Jerry Bernstein, a white-collar criminal-defense lawyer at Blank Rome LLP in New York, said that "manipulation of financial reserves and reinsurance are not concepts that typical jurors know about, so these convictions can only further embolden the Justice Department to bring to trial cases dealing with complex financial transactions." That could include any cases stemming from the current probes into Wall Street firms' role in the recent turmoil in mortgage markets.

"These convictions continue the string of successes in our crackdown on corporate fraud and our effort to restore integrity to our financial markets," said Acting Deputy Attorney General Craig Morford, chairman of the President's Corporate Fraud Task Force, in a written statement.

Getting Information

Federal prosecutors in Manhattan have expressed interest in getting information on a probe by the Securities and Exchange Commission into whether Merrill Lynch & Co. booked inflated prices of mortgage bonds it held despite knowledge that the valuations had dropped, according to people familiar with the matter. Prosecutors in Brooklyn, N.Y., have launched a preliminary criminal investigation into whether UBS AG also improperly valued its mortgage-securities holdings, as well as the circumstances surrounding the failure of two hedge funds at Bear Stearns Cos., which collapsed last summer because of losses tied to mortgage-backed securities, according to people familiar with the matter.

Lawyers for the five defendants convicted yesterday said they intend to appeal. Fred Hafetz, a lawyer for Mr. Milton, the only defendant who worked for AIG, said he believes his client was denied a fair trial when he was prosecuted with the four former General Re executives. Contrary to pretrial indications by defense attorneys, none of the defendants testified.

The defendants, who remain free on $1 million bond, are scheduled to be sentenced May 15. They could try to reduce their sentences by cooperating with prosecutors in building cases against other, more senior conspirators, legal experts say.

Prosecutors had said they would call Mr. Buffett to testify should the defense produce evidence showing his alleged involvement in the reinsurance deals at issue in the trial. Instead, defense attorneys merely invoked his name to support their arguments that their clients believed the widely respected investor knew of the deals, and therefore that they didn't have any criminal intent in putting them together. Prosecutors, as well as Mr. Buffett and his lawyer, have said he wasn't involved in the deals. Mr. Buffett wasn't charged with any wrongdoing.

The federal case started coming together in late 2004 and early 2005 as state and federal investigators were probing companies' use of reinsurance to improperly burnish their financial statements. It alleged that the defendants engaged in sham deals in which General Re, for a $5 million fee, improperly helped AIG boost its loss reserves by about $500 million, misleading investors about the amount of losses AIG could absorb and supporting its stock price.

Taped Conversations

The case hinged largely on emails and taped phone conversations in which some defendants could be heard clearly discussing details of the deals, laughing about financial-reporting rules and even poking fun at AIG's accounting practices. Jurors heard testimony from witnesses describing how Mr. Greenberg, concerned about AIG's stock price, asked General Re's Mr. Ferguson to put together a reinsurance deal.

Mr. Ferguson and his team at General Re's headquarters in Stamford, Conn., worked with a General Re unit in Dublin to create several transactions with AIG that ultimately didn't transfer enough risk to qualify as reinsurance under U.S. accounting rules, according to prosecutors.

Write to Amir Efrati at

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