Ending one of the most shameful
stories in the US insurance industry’s history, reinsurer General
Reinsurance Corporation (Gen Re) has entered into an agreement with
the Department of Justice in which it acknowledged its role in a
fraudulent scheme to manipulate American International Group’s
(AIG) financial statements.
For the subsidiary of investment company
Berkshire Hathaway, the settlement comes at a cost of $92.2
million, of which the lion’s share, $60.5 million, will go to
settle a class action by AIG shareholders who suffered financial
loss as a result of the scheme.
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Of the remaining amount, $19.5 million goes to
the US Postal Inspection Service Consumer Fraud Fund and $12.2
million to the Securities and Exchange Commission (SEC). The latter
amount will be used to settle charges related to the AIG scheme and
another fraudulent scheme involving US insurer Prudential
Financial.
The settlement ends a saga that, in the case
of AIG, began in 2000. At the time, as Gen Re admitted, most of its
senior management engaged in a scheme to falsely inflate AIG’s
reported loss reserves. This was done through use of two sham
reinsurance transactions between subsidiaries of AIG and Gen 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 and in 2006 paid $800 million to the SEC to
settle related charges the regulator had laid against it.
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By GlobalDataThe Gen Re-AIG fraud led to the conviction of
six former Gen Re executives and one AIG former executive. Two
received two-year suspended sentences and the other for prison
sentences ranging from one to four years.
Sentences as harsh as 230 years in jail could
have been imposed on some of the accused.
In the separate Gen Re-Prudential case, the
SEC alleged Gen Re entered into a series of sham reinsurance
contracts with Prudential’s property and casualty division from
1997 to 2002. These contracts, according to the SEC, enabled
Prudential to build an off-balance sheet with Gen Re which enabled
it to improperly recognise more than $200 million in revenues in
2000, 2001, and 2002. Gen Re received $8.1 million for structuring
and executing the scheme with Prudential.
