By Brooke A. Masters and Kathleen Day
Washington Post Staff Writers
Friday, February 3, 2006; D01
Three former top executives of General Re Corp. were indicted yesterday on charges they helped insurance giant American International Group Inc. cook its books by engineering a phony reinsurance deal.
Former General Re chief executive Ronald Ferguson, former finance chief Elizabeth Monrad and former general counsel Robert D. Graham each face a total of 12 criminal charges, including conspiracy, securities fraud, wire fraud, mail fraud and making false statements to the Securities and Exchange Commission.
The indictment quotes from e-mails and audiotapes in which Gen Re officials allegedly stressed the need for secrecy and made clear that they knew AIG was going to account for the deal improperly. "How AIG books it is between them, their accountants and God," Graham wrote in an e-mail quoted in the indictment, adding that Ferguson and other top executives "have been advised of and accepted the potential reputational risk that US regulators (insurance and securities) may attack the transaction and our part in it."
The federal grand jury in Norfolk also charged AIG former vice president of reinsurance Christian Milton with the same offenses. They each face a maximum of 95 years in prison and several millions of dollars in penalties if convicted. All four plan to plead not guilty to the charges and will be arraigned Feb. 16 in Alexandria.
The case stems from a deal allegedly struck in the fall of 2000 by Ferguson and former AIG chief executive Maurice R. "Hank" Greenberg, who was not charged yesterday but appears in the indictment as "AIG unindicted co-conspirator #1." He has denied wrongdoing.
Prosecutors allege that AIG, facing criticism from Wall Street analysts for reducing its loss reserves and fearing its stock price would fall, improperly used the transaction to boost its reported reserves by $500 million. There is no allegation that General Re, a Connecticut-based insurance company, booked the deal improperly.
But government officials said the case is emblematic of their efforts to go beyond companies that engage in accounting fraud to also punish people and firms that facilitate it.
Graham, 57, was also captured on audiotape saying, "our own skirts are clean, but they [AIG] have issues." His attorney, Alan Vinegrad, said that his client "has committed no crime."
"Executives should be wary of those who espouse the view that what happens on the accounting books of a counterparty is not your problem," said Assistant Attorney General Alice S. Fisher at the news conference announcing the indictments. "When you aid and abet someone else in securities fraud, that is criminal conduct."
The SEC and the Justice Department have already brought cases against accountants, investment bankers and outside vendors who were implicated in their clients' accounting problems. Yesterday, the SEC also brought civil fraud charges against the four indicted executives plus Christopher Garand, 58, Gen Re's former chief underwriter for U.S. reinsurance. General Re is a subsidiary of Berkshire Hathaway Inc., whose chief executive, Warren E. Buffett, is a major investor in The Washington Post Co. and also sits on its board of directors.
The transaction at the center of the investigation was designed to look like reinsurance, according to the indictment. Reinsurance deals, in which one insurance company pays another to assume a specific amount of risk, are not illegal, as long as risk is genuinely transferred from one company to another. That, the grand jury alleged, was the problem with the AIG-General Re deal.
The indictment alleges that General Re and AIG officials created a series of fake documents that made it appear that Gen Re was paying $10 million for AIG to take on the extra risk, when in fact AIG assumed no risk and paid the money back plus an additional $5 million.
"The defendants did not simply turn a blind eye to AIG's fraud," said SEC Regional Director Mark K. Schonfeld, whose office brought the civil case. "They went into this deal with their eyes wide open, understanding that they were helping AIG deceive the investing public."
Monrad, 51, allegedly referred to the reinsurance deals as "a little bit like morphine, it's hard to come off of them." Her attorney did not return phone calls yesterday.
Outside legal analysts said the indictments suggest that prosecutors are homing in on Greenberg, who was ousted as chief executive of AIG after his board learned of the transaction. Milton, 58, is the first AIG employee to face criminal charges. Two lower-level Gen Re employees pleaded guilty to fraud charges last year.
"There's no question that the prosecutors' sights are beyond these four. Whether they will be able to climb further is the open question," said Jacob Frenkel, a former SEC enforcement attorney now working as a defense lawyer. New York Attorney General Eliot L. Spitzer brought a civil fraud case against Greenberg last year but has ruled out criminal charges.
Unlike the executives named in the indictment, Greenberg did not use e-mail extensively, and he was not captured on audiotape discussing the deal. If there is evidence to be found that would implicate Greenberg, it is most likely to be found in the hands of Milton, who worked at AIG, or Ferguson, 63, who spoke directly with the former AIG chief about the deal on Oct. 31, 2000.
Ferguson's lawyer did not return phone calls, and Milton's lawyer, Frederick Hafetz, said his client "will vigorously contest the charges and is confident he will be exonerated at trial."
Greenberg's lawyers have pointed out that the $500 million deal amounted to less than 2 percent of AIG's $25 billion in reserves in 2000. They have also argued that the deal may have legitimately transferred risk. "We are confident, because Mr. Greenberg has done nothing to warrant an accusation of criminal conduct, that no charges will ever be filed," said attorney Robert G. Morvillo.