Three former executives at Berkshire Hathaway’s General Re insurance unit and a former American International Group executive have been indicted by a federal grand jury on charges of fraud and conspiracy, the Justice Department announced Thursday.
The indictment was returned Wednesday by a grand jury in Norfolk, Va., charging the former executives with conspiring to make AIG’s finances appear better than they were.
Those charged are: Ronald Ferguson, who was General Re’s chief executive; Elizabeth Monrad, the former chief financial officer; Robert Graham, the company’s former assistant general counsel; and Christian Milton, who ran AIG’s reinsurance division.
The defendants put together a sham reinsurance transaction that allowed AIG to fraudulently report about $500 million in loss reserves “to mislead AIG’s shareholders, stock market analysts and the investing public,” the indictment said. The conspiracy was designed to make it appear AIG’s loss reserves were growing in order to pump up the price of AIG stock, according to the indictment.
“The message is straightforward: Cooking the books is a recipe for disaster,” said Linda Thomsen, enforcement director at the Securities and Exchange Commission, which filed a related civil lawsuit Thursday alleging that the defendants aided AIG’s securities fraud.
The indictment stemmed from the Justice and SEC investigations of a 5-year-old deal between the two companies, major players in the reinsurance industry, which sells insurance to primary insurers to help spread risk. Wide-ranging investigations of the reinsurance business are being conducted by authorities in the United States and elsewhere.
General Re parent Berkshire Hathaway Inc., an investment company based in Omaha, is led by the influential billionaire Warren Buffett.
Prosecutors have said that AIG had been concerned about Wall Street analysts’ suggestions that there were insufficient reserves to cover potential losses and approached Gen Re to facilitate a deal that would increase its loss reserves on paper.
But the deal had no substantive value and was designed to cosmetically alter AIG’s books, according to court documents. Gen Re received a $5.2 million fee to arrange the sham transactions.
AIG in March 2005 acknowledged that the transactions were improper. In May, while restating earnings for five years, AIG said it was correcting its account of the transactions, saying that “there was insufficient risk transfer to qualify for insurance accounting.”
Maurice “Hank” Greenberg, who had led AIG for 37 years, was forced out last March amid growing regulatory probes into the insurance giant’s business. He has said repeatedly that transactions made during his watch were proper and correctly accounted for.
Greenberg spokesman Howard Opinsky said Thursday he had no comment on the latest Justice Department action.
In morning trading, shares of New York-based AIG dropped 28 cents to $65.99 on the New York Stock Exchange. Shares in Berkshire Hathaway were off $90 at $88,900, also on the NYSE.
Two former Gen Re executives — John Houldsworth and Richard Napier — pleaded guilty in June to roles in the sham transaction. As part of their plea bargains, they are aiding the investigation.
The SEC’s civil suit, filed in federal court in Manhattan, names the four defendants in the indictment as well as another former Gen Re executive, Christopher Garand, in connection with the sham transactions.