January 20, 2010
– General Reinsurance Corporation (General Re), a Connecticut–based corporation, has entered into an agreement with the Department of Justice related to its role in a fraudulent scheme from 2000 through 2004 to manipulate AIG’s financial statements, the Justice Department announced. General Re is a subsidiary of Berkshire Hathaway Inc., a company incorporated in Delaware with its principal place of business in Omaha, Neb.
Also as part of the agreement announced today, General Re has agreed to pay $19.5 million to the U.S. Postal Inspection Service Consumer Fraud Fund. General Re previously contributed $5 million to the fund as forfeiture of the illicit $5 million accommodation fee it received from AIG. General Re has agreed to pay $60.5 million through a civil class action settlement to AIG’s injured shareholders. In addition, the U.S. Securities and Exchange Commission (SEC) announced today that General Re has agreed to pay $12.2 million to settle the SEC’s charges related in part to this scheme
As part of its resolution with the Justice Department, General Re has admitted that its most senior management engaged in a scheme to falsely inflate AIG’s reported loss reserves, a key indicator of financial health to insurance industry analysts and investors. According to the statement of facts, the fraud was carried out through the use of two sham reinsurance transactions between subsidiaries of AIG and General Re in response to analysts’ criticism of a $59 million decrease in AIG’s loss reserves for the third quarter of 2000.
According to the statement of facts, the two sham transactions increased AIG’s loss reserves by $250 million in the fourth quarter of 2000 and $250 million in the first quarter of 2001, masking a declining trend in loss reserves in the face of premium growth. AIG restated the transactions in filings with the SEC in May 2005. Evidence presented at the related federal criminal trial of four former General Re officers and one former AIG officer established that when the investigation was disclosed to investors by AIG and through various media outlets between Feb. 14 and March 14, 2005, shares of AIG stock dropped from $73.12 to $61.92. Subsequently, on Oct. 31, 2008, the U.S. District Court presiding over the trial found that AIG’s shareholders lost between $544 million and $597 million as a consequence of the fraudulent scheme.
General Re has admitted that its senior management who were involved in the scheme knew that the true purpose of the transactions was to permit AIG to falsely report increasing loss reserves in its statements to analysts, investors and in its SEC filings. As part of the agreement, General Re admitted its senior management participated in structuring a sham reinsurance transaction and creating a phony paper trail to make it appear as though General Re’s subsidiary, Cologne Re Dublin, had solicited reinsurance from AIG when the evidence demonstrated that the parties knew AIG wanted the transaction to manipulate its financial statements. Additionally, General Re entered into a secret side deal whereby AIG would never have to pay any losses under the contracts; AIG would return to General Re’s subsidiary the $10 million in premiums General Re’s subsidiary paid to AIG and AIG paid General Re an illicit accommodation $5 million fee for entering into the transaction.
The agreement announced today requires General Re, for a term of three years, to maintain significant internal corporate remediation provisions it has already implemented, including: (1) appointment of an independent member to General Re’s Board of Directors, who will also be a member of the Audit Committee; (2) the attendance of General Re’s Audit Committee meetings by representatives of Berkshire Hathaway Inc.; (3) the creation of a Complex Transaction Committee, consisting of senior managers that, among other responsibilities, will review relevant actuarial protocols for reinsurance contracts and will review on a quarterly basis certain reinsurance transactions to ensure that they are not designed to assist other parties in falsifying, manipulating and/or window-dressing its financial statements; (4) to enhance the review and reporting roles of its Internal Audit Group; (5) to establish a Risk Committee charged with examining risk exposure in underwriting transactions; (6) to implement enhanced underwriting rules for reinsurance and deposit transactions; (7) to ensure proper training and ethical compliance in risk-transfer protocols applicable to reinsurance contracts; and (8) to dissolve its subsidiary, Cologne Re Dublin, that had helped to structure the sham transaction.
In addition, the agreement requires General Re to acknowledge its obligation toward restitution to AIG’s shareholders who were injured as a consequence of General Re’s and AIG’s conduct. As part of the agreement, the Justice Department acknowledged that General Re has agreed to contribute $60.5 million, exclusive of attorneys’ fees and expenses, toward a civil settlement with AIG’s injured shareholders, which, when combined with payments contributed or agreed to be contributed by other third-parties involved in the fraudulent scheme, will satisfy the loss amount determined by the U.S. District Court in the related criminal proceedings.
The agreement recognizes General Re’s willingness to conduct an internal investigation; its ongoing cooperation with the Justice Department and the SEC; its disclosure to the Justice Department and the SEC of other unrelated finite reinsurance transactions of concern; its willingness to accept responsibility for the conduct of its senior officers; its agreement to undertake remedial measures; and its demonstration of future compliance with the federal securities laws and Generally Accepted Accounting Principles. These factors contributed to the Department’s agreement not to prosecute General Re for this conduct, provided that General Re satisfies its ongoing obligations under the agreement.
The prosecution of General Re was conducted by Principal Deputy Chief Paul E. Pelletier and Assistant Chief Adam Safwat of the Criminal Division’s Fraud Section. The U.S. Postal Inspection Service participated in the investigation with the Justice Department. The prosecution of the individuals from General Re and AIG was conducted jointly by the Fraud Section, the U.S. Attorney’s Office for the Eastern District of Virginia and the U.S. Attorney’s Office for the District of Connecticut. The Justice Department also acknowledges and expresses its appreciation for the significant assistance provided by the SEC’s Enforcement Division.
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