Securities Fraud—Gen Re and AIG

With the Enron trial in recess until Monday, and now that we have discussed some of the mechanics of trial, we can focus our attention on other interesting stories. Such as the indictment of 3 former Gen Re, and 1 former AIG, senior executives on conspiracy, securities fraud, wire fraud, mail fraud, and false statements charges.^[1]

The individuals are Ronald E. Ferguson, Gen Re’s CEO, Elizabeth Monrad, Gen Re’s CFO, Christian Milton, AIG’s Vice-President of reinsurance, and Robert Graham, Gen Re’s Senior Vice-President and Assistant General Counsel.^[2]

According to the indictment, the defendants allegedly engaged in a fraudulent scheme “to make it appear as though AIG increased its loss reserves,” which is a “key financial indicator” to analysts and investors.^[3] The government is focusing on two “sham” reinsurance transactions between AIG and Gen Re subsidiaries that were allegedly initiated by an AIG senior executive “to quell criticism by analysts of an approximate $59 million reduction in AIG’s loss reserves in the third quarter of 2000.”^[4]

The defendants are also accused of “creating a phony paper trial for the … transactions to make it appear as though Gen Re had solicited the reinsurance when all parties [allegedly] knew AIG sought the deal to manipulate its financial statements.”^[5]

Civil fraud charges have also been brought against the four individuals by the SEC.^[6]

This is a fascinating case because Gen Re is not alleged to have actually “booked the deal improperly.”^[7] Instead, the government is taking an extremely aggressive approach to going “beyond companies that engage in accounting fraud to also punish people and firms that facilitate it.”^[8] As Assistant Attorney General Alice S. Fisher said “Executives should be wary of those who espouse the view that what happens on the accounting books of a counterparty is not your problem. … When you aid and abet someone else in securities fraud, that is criminal conduct.”^[9] This could foreshadow a new direction for the Justice Department, and it could have serious implications for every publicly traded company in America.

Because the target of the investigation seems to actually be Maurice “Hank” Greenberg, AIG’s former CEO, expect some guilty pleas in the future. Mr. Greenberg is listed only as “AIG unindicted co-conspirator #1,” but there is a minimal paper- or video-trail linking Mr. Greenberg to the alleged misconduct.^[10] Therefore witness testimony will have to be secured against him, and like we have seen time and again, the government tends to work on the people further down the ladder, offering reduced prison sentences in exchange for damning testimony.

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[1] US DOJ, Three Former Gen Re And One Former AIG Senior Executives Charged in Connection with Fraud Scheme, Feb. 2, 2006.
[2] Id.
[3] Id.
[4] Id.
[5] Id.
[6] Brooke A. Masters, 3 Anticipated AIG Fraud, Charges Say, Wash. Post, Feb. 3, 2006.
[7] Id.
[8] Id.
[9] Id.
[10] Id.