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SEC Charges General Re Corporation for Role in AIG and Prudential Accounting Frauds
FOR IMMEDIATE RELEASE Wednesday, January 20, 2010
General Reinsurance Corporation Enters into
Agreement Resolving Its Role in Fraudelent
Reinsurance Transaction with AIG
WASHINGTON – General Reinsurance Corporation (General Re), a Connecticut–based corporation, has entered into an agreement with the Department of Justice related to its role in a fraudulent scheme from 2000 through 2004 to manipulate AIG’s financial statements, the Justice Department announced. General Re is a subsidiary of Berkshire Hathaway Inc., a company incorporated in Delaware with its principal place of business in Omaha, Neb.
Also as part of the agreement announced today, General Re has agreed to pay $19.5 million to the U.S. Postal Inspection Service Consumer Fraud Fund. General Re previously contributed $5 million to the fund as forfeiture of the illicit $5 million accommodation fee it received from AIG. General Re has agreed to pay $60.5 million through a civil class action settlement to AIG’s injured shareholders. In addition, the U.S. Securities and Exchange Commission (SEC) announced today that General Re has agreed to pay $12.2 million to settle the SEC’s charges related in part to this scheme[.]
As part of its resolution with the Justice Department, General Re has admitted that its most senior management engaged in a scheme to falsely inflate AIG’s reported loss reserves, a key indicator of financial health to insurance industry analysts and investors. According to the statement of facts, the fraud was carried out through the use of two sham reinsurance transactions between subsidiaries of AIG and General Re in response to analysts’ criticism of a $59 million decrease in AIG’s loss reserves for the third quarter of 2000.
According to the statement of facts, the two sham transactions increased AIG’s loss reserves by $250 million in the fourth quarter of 2000 and $250 million in the first quarter of 2001, masking a declining trend in loss reserves in the face of premium growth. AIG restated the transactions in filings with the SEC in May 2005. Evidence presented at the related federal criminal trial of four former General Re officers and one former AIG officer established that when the investigation was disclosed to investors by AIG and through various media outlets between Feb. 14 and March 14, 2005, shares of AIG stock dropped from $73.12 to $61.92. Subsequently, on Oct. 31, 2008, the U.S. District Court presiding over the trial found that AIG’s shareholders lost between $544 million and $597 million as a consequence of the fraudulent scheme.
General Re has admitted that its senior management who were involved in the scheme knew that the true purpose of the transactions was to permit AIG to falsely report increasing loss reserves in its statements to analysts, investors and in its SEC filings. As part of the agreement, General Re admitted its senior management participated in structuring a sham reinsurance transaction and creating a phony paper trail to make it appear as though General Re’s subsidiary, Cologne Re Dublin, had solicited reinsurance from AIG when the evidence demonstrated that the parties knew AIG wanted the transaction to manipulate its financial statements. Additionally, General Re entered into a secret side deal whereby AIG would never have to pay any losses under the contracts; AIG would return to General Re’s subsidiary the $10 million in premiums General Re’s subsidiary paid to AIG and AIG paid General Re an illicit accommodation $5 million fee for entering into the transaction.
The agreement announced today requires General Re, for a term of three years, to maintain significant internal corporate remediation provisions it has already implemented, including: (1) appointment of an independent member to General Re’s Board of Directors, who will also be a member of the Audit Committee; (2) the attendance of General Re’s Audit Committee meetings by representatives of Berkshire Hathaway Inc.; (3) the creation of a Complex Transaction Committee, consisting of senior managers that, among other responsibilities, will review relevant actuarial protocols for reinsurance contracts and will review on a quarterly basis certain reinsurance transactions to ensure that they are not designed to assist other parties in falsifying, manipulating and/or window-dressing its financial statements; (4) to enhance the review and reporting roles of its Internal Audit Group; (5) to establish a Risk Committee charged with examining risk exposure in underwriting transactions; (6) to implement enhanced underwriting rules for reinsurance and deposit transactions; (7) to ensure proper training and ethical compliance in risk-transfer protocols applicable to reinsurance contracts; and (8) to dissolve its subsidiary, Cologne Re Dublin, that had helped to structure the sham transaction.
In addition, the agreement requires General Re to acknowledge its obligation toward restitution to AIG’s shareholders who were injured as a consequence of General Re’s and AIG’s conduct. As part of the agreement, the Justice Department acknowledged that General Re has agreed to contribute $60.5 million, exclusive of attorneys’ fees and expenses, toward a civil settlement with AIG’s injured shareholders, which, when combined with payments contributed or agreed to be contributed by other third-parties involved in the fraudulent scheme, will satisfy the loss amount determined by the U.S. District Court in the related criminal proceedings.
The agreement recognizes General Re’s willingness to conduct an internal investigation; its ongoing cooperation with the Justice Department and the SEC; its disclosure to the Justice Department and the SEC of other unrelated finite reinsurance transactions of concern; its willingness to accept responsibility for the conduct of its senior officers; its agreement to undertake remedial measures; and its demonstration of future compliance with the federal securities laws and Generally Accepted Accounting Principles. These factors contributed to the Department’s agreement not to prosecute General Re for this conduct, provided that General Re satisfies its ongoing obligations under the agreement.
The prosecution of General Re was conducted by Principal Deputy Chief Paul E. Pelletier and Assistant Chief Adam Safwat of the Criminal Division’s Fraud Section. The U.S. Postal Inspection Service participated in the investigation with the Justice Department. The prosecution of the individuals from General Re and AIG was conducted jointly by the Fraud Section, the U.S. Attorney’s Office for the Eastern District of Virginia and the U.S. Attorney’s Office for the District of Connecticut. The Justice Department also acknowledges and expresses its appreciation for the significant assistance provided by the SEC’s Enforcement Division.
10-053
Criminal Division (1)
SEC Charges General Re Corporation for Role in AIG and Prudential Accounting Frauds
FOR IMMEDIATE RELEASE
2010-10
Washington, D.C., Jan. 20, 2010 — The Securities and Exchange Commission today charged General Re Corporation for its involvement in separate schemes by American International Group (AIG) and Prudential Financial, Inc. to manipulate and falsify their reported financial results.
Gen Re agreed to pay $12.2 million to settle the SEC’s charges. In addition, in a non-prosecution agreement announced today by the Department of Justice in connection with a related criminal investigation of Gen Re’s transactions with AIG, Gen Re agreed to pay $19.5 million to the U.S. Postal Inspection Service Consumer Fraud Fund. Gen Re also agreed to pay $60.5 million through a civil class action settlement to AIG’s injured shareholders. Gen Re previously forfeited to the government approximately $5 million in fees it earned for its participation in the scheme with AIG.
“Gen Re arranged to sell financial products to AIG and Prudential for the sole purpose of enabling those companies to manipulate their accounting results and mislead investors,” said Andrew M. Calamari, Associate Director of the SEC’s New York Regional Office.
The SEC previously charged AIG with securities fraud and improper accounting, and the company settled the charges by paying more than $800 million among other remedies. The SEC also previously charged AIG former chairman Maurice R. “Hank” Greenberg and former chief financial officer Howard I. Smith, as well as former senior executives of Gen Re for their roles in connection with the scheme with AIG. The Commission separately charged Prudential with securities laws violations in 2008.
According to the SEC’s complaint against Gen Re, filed in U.S. District Court for the Southern District of New York, a foreign subsidiary of Gen Re entered into two sham “reinsurance” transactions with AIG in 2000 to improperly allow AIG to reverse the declining reserve trend and falsely report additions to both loss reserves and premiums written. Senior officials at Gen Re helped AIG structure the two sham transactions. The contracts show reinsurance transactions that appeared to transfer risk to AIG, but the transactions did not transfer risk.
The SEC further alleges that Gen Re separately entered into a series of sham reinsurance contracts with Prudential’s property and casualty division from 1997 to 2002. The contracts had no economic substance and purpose other than to allow Prudential to build up and then draw down on an off-balance sheet asset or “finite bank” parked with Gen Re. As a result of the sham transactions, Prudential improperly recognized more than $200 million in revenues in 2000, 2001, and 2002. Gen Re received fees totaling $8.1 million for structuring and executing the scheme with Prudential.
In determining to accept Gen Re’s settlement offer, the SEC took Gen Re’s remediation efforts and cooperation into account. Among the efforts SEC considered: Gen Re’s comprehensive, independent review of its operations conducted at the outset of the government’s investigations the results of which were shared with investigators; Gen Re’s substantial assistance in the government’s successful civil and criminal actions against individuals involved in the scheme with AIG; and Gen Re’s internal corporate reforms designed to strengthen oversight of its operations. Those reforms entail dissolving a subsidiary involved with the AIG transactions, appointing an independent director to its Board of Directors, forming a committee consisting of senior managers to review and approve complex transactions, requiring legal review of proposed finite or loss mitigation contracts, and fortifying its internal audit functions and underwriting rules. The settlement is subject to court approval.
The Commission appreciates the assistance of the U.S. Department of Justice, Fraud Section, Criminal Division, the U.S. Attorney’s Office for the Eastern District of Virginia, and the U.S. Postal Inspection Service in this matter. (2)
* * *
For more information about this enforcement action, contact:
Andrew M. Calamari
Associate Director, SEC’s New York Regional Office
(212) 336-0042
Ken C. Joseph
Assistant Director, SEC’s New York Regional Office
(212) 336-0097
(1) http://www.justice.gov/opa/pr/2010/January/10-crm-053.html
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Chopshop - Thanks for shining the light on this outrageous miscarriage of justice. The DOJ sellout, er, settlement agreement of massive, multi-year (2000-2004) fraud by Buffett's General Re was eye-opening and mind-boggling. It exposed the DOJ allowing big shots like Buffett to buy their way out of prosecution and jail.
The DOJ fines Buffett's General Re for helping AIG fraud. On Jan 20, 2010 Obama's DOJ delivers a slap on the wrist to Buffett. On May 28, 2008 Buffett endorsed Obama for President, a very important endorsement giving Obama major league support from the business community, even more than that, an endorsement from the most famous, most idolized business tycoon in America.
I'm so sick of Buffett. When are the majority of people going to realize that greedy SOB is raping the American public!
at least there isn't anything fishy going on ... like BRK splitting its stock to pay for warren's self-described "all-in". interesting huh.
well, at least there weren't any SEC rule changes in the middle of the night right ? right ?
film at 11.
If one cannot trust Buffet, who the hell can you trust!?
What a crock of shit this Fraud Street business really is.
Like the McCain/Palin campaign only "Sell, sell sell!"
Time to stop donating 401k ammunition for these crooks!
If you are just now learning of Mr. Buffet's lax ethics, you have been willfully ignorant. This is not an anomaly. Thanks, Chop Shop, for the reporting.
my pleasure, Cursive; just regurgitating what is already out there and willfully ignored by a hollow IV'th Estate.
armstrong has a few interesting things to say about Mr. Buffett and something like $2 B worth of silver from way back when.
why is it that the gov't doesn't allow Marty visitors et cet ??
No news...
Buffett is a crook.
His authorized biography details his start as a trader on inside info.
Great article.