General Re, AIG Executives’ Convictions Tossed; New Trial Ordered

By and | August 2, 2011

Four former executives at Berkshire Hathaway Inc.’s General Re Corp. unit and one at American International Group Inc. won the reversal of their convictions over a reinsurance transaction that prosecutors said fraudulently boosted AIG’s loss reserves.

The 2nd U.S. Circuit Court of Appeals in New York ordered on Monday a new trial for all five defendants, including former General Re Chief Executive Ronald Ferguson, citing errors by the presiding judge at their closely-watched 2008 trial.

Prosecutors had accused the defendants of engineering a sham transaction in 2000 that let AIG inflate its loss reserves by $500 million without transferring risk.

The transaction helped lead to the 2005 ouster of AIG’s longtime Chief Executive Maurice “Hank” Greenberg.

Warren Buffett, Berkshire’s chief executive, was questioned by investigators about the transaction but was not implicated or accused of wrongdoing.

The other defendants whose convictions were thrown out are former General Re Chief Financial Officer Elizabeth Monrad, former Senior Vice President Christopher Garand and former Assistant General Counsel Robert Graham, as well as former AIG Vice President Christian Milton. They have been free on bail pending their appeals.

It is unclear whether prosecutors will retry the case. The office of U.S. Attorney David Fein in Connecticut did not immediately return calls seeking a comment.

The reinsurance arrangement took place well before AIG in 2008 and 2009 accepted $182.3 billion of taxpayer-funded bailouts amid the global financial crisis. The government still owns a majority of AIG.

“SUBSTANTIAL RIGHTS AFFECTED”

In its decision, the 2nd Circuit said the trial judge, U.S. District Judge Christopher Droney in Hartford, Connecticut, erred in admitting data suggesting that the transaction caused a 12 percent decline in AIG’s stock price in early 2005, when details about it became known.

The court said the data were prejudicial because there were other problems, including bid-rigging and earnings manipulation allegations, that could have also hurt the insurer’s stock price.

“The defendants’ substantial rights were affected,” Chief Judge Dennis Jacobs wrote for the appeals court.

Jacobs also said Droney did not properly instruct jurors on how to decide whether the defendants had committed fraud.

Droney sentenced Milton to four years in prison, Ferguson to two years, Monrad to 1-1/2 years, and Garand and Graham to one year each, following a six-week trial.

Two other former General Re executives, John Houldsworth and Richard Napier, pleaded guilty in the case and were sentenced to probation.

In May, President Barack Obama nominated Droney to serve on the 2nd Circuit.

Frederick Hafetz, a lawyer for Milton, said: “We are very gratified by the decision, and look forward to a new trial.”

Lawyers for the remaining defendants did not immediately return calls seeking comment.

PROBES

Greenberg is still dealing with fallout from General Re, including a 2005 civil fraud lawsuit in which then-New York Attorney General Eliot Spitzer accused him of structuring transactions to hide AIG losses.

That case has yet to go to trial, and Greenberg in March lost a bid to remove the presiding judge on bias grounds after that judge called the government’s case “devastating.”

In 2006, AIG agreed to pay $1.64 billion to settle state and federal probes into its business practices.

General Re, meanwhile, agreed in January 2010 to pay $92.2 million to end a U.S. Securities and Exchange Commission probe over alleged sham transactions with AIG and Prudential Financial Inc.

The case is U.S. v. Ferguson et al, 2nd U.S. Circuit Court of Appeals, No. 08-6211.

(Editing by Gerald E. McCormick and Robert MacMillan)

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