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SEC attorney Andrew Calamari, who headed the SEC’s investigations in both cases, declined to comment on whether criminal charges were under consideration in the RenRe matter. He stressed that the Commission brings only civil cases and is not involved in decisions about whether to bring criminal charges in any case.
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The Securities and Exchange Commission, which has been investigating a number of finite reinsurance transactions for the past two years, lowered the boom on three former officers of the Bermuda-based reinsurance group Renaissance Re.
The government agency charged with regulating the securities industry brought civil suits against RenRe Holdings Ltd. former Chairman and CEO James N. Stanard and former controller Martin J. Merritt. It also named Michael W. Cash, a former senior executive of RenRe’s wholly-owned subsidiary, Renaissance Reinsurance Ltd.
The action against RenRe’s former officers differs from the criminal complaints filed by the Department of Justice against former officers of American International Group and General Re. The SEC brings only civil actions. If criminal wrongdoing is a suspected incident to a SEC investigation, the matter is made known to prosecutors.
The complaint, filed in federal court in Manhattan, “alleges that Stanard, Merritt, and Cash structured and executed a sham transaction that had no economic substance and no purpose other than to smooth and defer over $26 million of RenRe’s earnings from 2001 to 2002 and 2003,” said the SEC bulletin.
In addition to the overall allegations of securities fraud, the complaint specifically charges the three men with violations concerning reporting, books-and-records and internal control provisions; and with aiding and abetting RenRe’s violations of a number of sections of the Exchange Act. Those rules aim to assure transparency in the buying and selling of shares through public markets, such as the New York Stock Exchange. When a company says it has made more money than it has, that’s a lie, i.e., fraud. Companies, however, aren’t people; they can only act through their officers, directors and employees. Therefore when misstatements are made, they are the people held responsible.
Basically the SEC described two interrelated contracts that “created a round trip of cash” between RenRe and Inter-Ocean Reinsurance Company Ltd. that “purported to assign at a discount $50 million of recoverables due to RenRe under certain industry loss warranty contracts.” The SEC charges that instead of “a real reinsurance contract that transferred risk from RenRe to Inter-Ocean,” the transaction “was a complete sham,” and that each of the three men “knew that this was not true.” The full details can be found in the SEC’s press release at: http://www.sec.gov/
news/ press/2006/2006-164.htm.
GenRe/AIG
The case does resemble the one filed against four former senior executives of General Re and one former senior AIG executive. The SEC also filed a civil case in that matter. In criminal cases, however, different rules of evidence apply; the prosecution must prove guilt “beyond a reasonable doubt,” and the penalties can include prison terms as well as fines. In addition directors and officers insurance coverage is not applicable to criminal actions, while it usually covers defense costs in civil matters.
GenRe/AIG involves charges of criminal conspiracy to make it appear that AIG had increased its loss reserves by $500 million through a series of contracts and side deals involving finite reinsurance. The amounts involved, the extended scope of the transactions, and the charge that they constituted a “conspiracy” are the key differences.
SEC attorney Andrew Calamari, who headed the SEC’s investigations in both cases, declined to comment on whether criminal charges were under consideration in the RenRe matter. He stressed that the Commission brings only civil cases and is not involved in decisions about whether to bring criminal charges in any case. Speaking in general terms, he noted that the SEC considers many factors in deciding whether to refer a matter to criminal authorities for investigation, including the evidence of “intent” and the “magnitude” of harm caused by the offense. He indicated that the SEC has a good working relationship with the U.S. Attorney’s Offices in New York and the Justice Department in Washington, D.C. It is therefore part of a natural process to share relevant information from investigations with colleagues in the criminal justice system, who then decide whether to proceed further.
While the SEC cannot put people in jail, it can still come down hard on those who try to abuse the system. It can ask for “civil money penalties,” which are frequently substantial. Calamari explained that the payments are either made available to recompense people injured by the fraud, or, if the monetary damages are slight, they go to the government.
In addition the SEC can bar individuals found in breach of its laws and rules from practicing before it. As a result CPAs, lawyers and other practitioners also run the risk of losing their state licenses, if the SEC bars them.
This has already happened in the RenRe case. The SEC announced a partial settlement of its charges against Merritt, who has consented to the entry of an antifraud injunction and other relief. When the judgment is entered it “will permanently enjoin him from violating or aiding or abetting future violations of the securities laws, bar him from serving as an officer or director of a public company, and defer the determination of civil penalties and disgorgement to a later date.”
In addition, Merritt has agreed to a Commission administrative order, based on the injunction, barring him from appearing or practicing before the Commission as an accountant, under Rule 102(e) of the Commission’s Rules of Practice. Merritt was a certified public accountant licensed to practice in Massachusetts.
Like throwing a stone in a pond, SEC actions also form ripples that branch outward. The most common are shareholders’ derivatives suits, usually class actions, typically filed under section 10b-5 of the Exchange Act. If the suit concerned misrepresentations in a registration statement there might also be suits under Sections 11 and 12 of the Securities Act. Law firms like William Lerach’s San Diego-based firm Millberg, Weiss and William have specialized in these types of lawsuits over the years – making a great deal of money in the process.