The former chairman and CEO of the world’s largest insurer initiated a deal that led to five ex-executives being charged in a scheme to manipulate the company’s financial statements, a federal prosecutor said Monday during opening arguments at their trial in Hartford, Conn.
Four former executives of Berkshire Hathaway’s General Re Corp. and a former executive of American International Group Inc. are charged in the scheme involving AIG’s financial statements.
Prosecutor Raymond Patricco said former AIG CEO Maurice “Hank” Greenberg, who has not been charged in the case, started the deal in 2000, after AIG’s stock price dropped 6 percent, representing a loss of $12 billion to shareholders. The price dropped because loss reserves had declined.
“Greenberg and AIG came to Gen Re for this deal,” Patricco said.
Greenberg, who headed New York-based AIG for nearly 40 years, has denied any wrongdoing.
Allegations of accounting irregularities, including the Gen Re transactions, led to his resignation in 2005.
“There is no evidence that Mr. Greenberg initiated, participated in, or knew of a conspiracy or fraudulent scheme involving the Gen Re loss portfolio transaction,” Greenberg spokeswoman Amy Foote said in a statement Monday. “Mr. Greenberg inquired as to whether Gen Re had a loss portfolio which could be ceded to AIG.”
Greenberg delegated the task of negotiating and implementing the potential transaction to his subordinates and did not get involved in the details, Foote said.
One of those charged, Elizabeth Monrad, Gen Re’s former chief financial officer, had no reason to believe the deal “could ever be shady” because she believed Greenberg initiated it and billionaire investor Warren Buffett supported it, said her attorney, Reid Weingarten. Buffett leads Berkshire Hathaway.
“Warren Buffett is an icon,” Weingarten said. “Well it turns out he knew about this transaction.”
Buffett, a potential witness in the case, was heavily interested in dealings involving AIG and the transaction would not have proceeded if Buffett was opposed, Weingarten said.
But federal prosecutors say Buffett did not approve the deal. They said they only named him as a potential witness to rebut suggestions he was involved in or approved the deal.
Attorneys for the defendants denied their clients did anything wrong and said the case involved complex, subjective accounting. They attacked government witnesses – two senior Gen Re executives who pleaded guilty to conspiracy to falsify SEC filings – as out to save themselves.
They also said their clients did not benefit financially from the scheme.
“This is not Enron or WorldCom,” said Anthony Pacheco, attorney for former General Re Senior Vice President Christopher P. Garand, referring to two of the biggest recent business scandals.
At issue in the trial of the former executives are two reinsurance transactions between AIG and Stamford-based General Re. Reinsurance policies are backups purchased by insurance companies to completely or partly insure the risk they have assumed for their customers.
Prosecutors said the transactions were designed to quell criticism by analysts of a reduction in AIG’s loss reserves in the third quarter of 2000. The indictment alleges that the aim was to make it appear that AIG increased its loss reserves by about $500 million in 2000 and 2001, pacifying the analysts and investors and artificially boosting the company’s stock price.
“But the evidence in this case will show that deal was nothing more than a sham transaction,” Patricco said. “The defendants in this case knew what appeared in the contracts was a lie.”
Prosecutors said Greenberg called his friend, former General Re CEO Ronald Ferguson, who is one of the defendants, and told him that AIG wanted to increase its loss reserves by $500 million, but did not want to bear the risk.
Ferguson agreed to the deal Greenberg proposed, Patricco said.
For a reinsurance transaction to be legitimate, there must be a transfer of risk of losses, which was lacking in the deal in question, prosecutors said.
“The evidence in this case will show the defendants knew this would be a no-risk deal for AIG,” Patricco said.
Greenberg and the company later reported that the loss reserves had gone up.
“Plain and simple, ladies and gentlemen, the statements about AIG’s loss reserves were lies,” Patricco said.
In opening arguments, Patricco never mentioned Buffett.
Michael Horowitz, Ferguson’s attorney, said his client told Buffett and others about the requested transaction.
“Not a single red cent went into his pocket,” Horowitz said.
The former General Re executives charged were Ferguson, chief executive officer from about 1987 through September 2001; Monrad, chief financial officer from June 2000 through July 2003; Robert Graham, a senior vice president and assistant general counsel from about 1986 through October 2005; and Garand, a senior vice president from 1994 until 2005.
Also charged was Christian Milton, AIG’s vice president of reinsurance from about April 1982 until March 2005. Patricco said Monday that he lost $360,000 when the stock price dropped.
AIG filed a restatement in 2005 related to the transactions and agreed to pay a record $1.64 billion in a settlement with federal and New York authorities.
In 2005, two senior Gen Re executives, John Houldsworth and Richard Napier, pleaded guilty to conspiracy to falsify SEC filings in connection with the investigation and are awaiting sentencing.
If convicted of all the charges, Ferguson, Monrad, Milton and Graham each face up to 230 years in prison and a fine of up to $46 million. Garand faces up to 160 years in prison and a fine of up to $29.5 million.
The trial is expected to last about two months