The insurer General Re Corp. has agreed to pay $92.2 million to settle charges by federal authorities and shareholder claims over its alleged role in accounting misconduct schemes by American International Group and Prudential Financial.
The Securities and Exchange Commission and the Justice Department announced the settlements Wednesday with Gen Re, which is part of Berkshire Hathaway Inc., the company led by billionaire investor Warren Buffett.
Gen Re, based in Stamford, Conn., is paying $19.5 million in a non-prosecution agreement with the Justice Department regarding its criminal probe of Gen Re's transactions with AIG.
Under that accord, Gen Re acknowledged that its senior managers engaged in a scheme from 2000-2004 to falsely inflate AIG's reported loss reserves, a key indicator of financial health, the department said. It said the fraud was conducted through the use of two sham insurance transactions between subsidiaries of AIG and General Re in response to analysts' criticism of a $59 million decline in AIG's loss reserves for the third quarter of 2000.
The SEC said Gen Re is paying $12.2 million to settle the agency's civil charges over AIG and Prudential. The SEC had said that Gen Re engaged in sham transactions with AIG and Prudential that enabled those companies to "manipulate and falsify" their financial results about 10 years ago.
In addition, Gen Re will pay $60.5 million to resolve a class-action lawsuit by AIG shareholders, the SEC and the Justice Department said.
The sham transactions orchestrated by Gen Re enabled AIG to falsely inflate its loss reserves by $500 million and enabled Prudential to improperly book more than $200 million in revenue, the authorities said. Gen Re received fees totaling $8.1 million for structuring and executing the scheme with Prudential, according to the SEC.
Gen Re previously forfeited to the government about $5 million in fees it earned for its role in the AIG accounting scheme, the SEC said.
"Gen Re arranged to sell financial products to AIG and Prudential for the sole purpose of enabling those companies to manipulate their accounting results and mislead investors," Andrew Calamari, associate director of the SEC's New York regional office, said in a statement.
Officials of Berkshire Hathaway at its headquarters in Omaha, Neb., didn't immediately respond to a request for comment on the settlements.
Gen Re is one of the largest providers of reinsurance, which is purchased by primary insurance companies to spread risk.
Under the terms of its non-prosecution accord, Gen Re also agreed to maintain for three years a series of internal controls it has already put in place.
New York-based AIG, one of the world's largest insurance companies, nearly collapsed in the fall of 2008 at the height of the financial crisis and received about $180 billion in bailout aid from the government. The company paid a record $1.64 billion in February 2006 in a settlement with federal and New York state authorities, and it apologized for having deceived investors and regulators with misleading accounting practices.
The accounting scandal at AIG also brought the ouster in 2005 of then-chairman Maurice "Hank" Greenberg.
In early 2008, four former executives of Gen Re and AIG's vice president of reinsurance stood trial on charges of conspiracy, securities fraud, making false statements to the SEC and mail fraud. Federal prosecutors said they orchestrated an audacious fraud, putting together the sham reinsurance transaction that allowed AIG to falsely report $500 million in loss reserves and thereby mislead shareholders. They were later found guilty of all charges and sentenced to prison.