updated 11/3/2008 4:48:48 PM ET 2008-11-03T21:48:48

A federal judge has ruled that shareholders of American International Group Inc. lost more than $500 million as a result of a scheme to manipulate the financial statements of the world's largest insurance company.

The ruling Friday by Judge Christopher Droney means five former insurance executives convicted of the scheme could face up to life in prison under advisory sentencing guidelines.

Four former executives of General Re Corp. and a former executive of AIG were convicted in February of conspiracy, securities fraud, mail fraud and making false statements to the Securities and Exchange Commission.

Prosecutors filed court papers citing a study by its expert, concluding the fraud-related losses to AIG shareholders totaled $1.2 billion to $1.4 billion.

They cited another methodology by the expert that put the losses at $544 million to $597 million, but said either method is reasonable.

Droney rejected the higher estimate, but said the lower range was reasonable. That finding and a determination that the fraud affected more than 250 victims will increase the advisory guideline sentence range.

The guideline range and a sentencing date have not been set yet.

The defendants challenged the estimate, saying there was no loss to investors. The defendants are Christopher Garand, Ronald Ferguson, Elizabeth Monrad, Robert Graham and Christian Milton.

Ferguson has said in court papers that he anticipated the government will advocate a loss amount that leads to a recommendation for life in prison. But prosecutors made no such recommendation, simply concluding that the defendants should receive a "substantial" prison sentence.

A report by the probation department recommended sentences of 14 years to more than 17 years for each defendant.

Prosecutors said the defendants participated in a scheme in which AIG paid Gen Re as part of a secret side agreement to take out reinsurance policies with AIG in 2000 and 2001, propping up its stock price and inflating reserves by $500 million.

Reinsurance policies are backups purchased by insurance companies to completely or partly insure the risk they have assumed for their customers.

General Re is part of Berkshire Hathaway Inc., which is led by billionaire investor Warren Buffett of Omaha, Nebraska.

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