An insurance executive who arranged a transaction that helped American International Group Inc. make its finances look better agreed Monday to plead guilty to conspiracy.
In a parallel settlement of civil charges against John Houldsworth, former chief executive of an Ireland subsidiary of General Re Corp., securities regulators cited e-mails and transcripts of taped phone conversations in which, as in other high-profile corporate investigations, executives appear to be winking at the rules.
"They'll find a way to cook the books won't they?!" Houldsworth, who arranged the transaction that prosecutors say falsely boosted AIG's reserves by $500 million, is quoted as saying in a transcript of a phone call to another General Re executive.
Houldsworth will admit to arranging the deal at the request of former AIG chief executive Maurice R. "Hank" Greenberg and a "then senior executive" at General Re, identified in other papers as former General Re chief executive Ronald E. Ferguson, according to his lawyers, citing a criminal information expected to be filed Thursday.
Houldsworth has agreed to cooperate with investigators from the Justice Department and the Securities and Exchange Commission, according to his lawyer, Larry Byrne of the New York firm White & Case LLP. "John wants to put these regrettable matters behind him," Byrne said.
The SEC's complaint filed in U.S. District Court in Manhattan cites tape-recorded conversations and e-mail exchanges in which Houldsworth and several named senior executives at General Re's Stamford, Conn., headquarters appear to be aware that AIG intended to improperly account for the transaction.
General Re is a unit of Warren E. Buffett's Berkshire Hathaway Inc. Buffett, who gave testimony earlier this year on the General Re-AIG deal to New York Attorney General Eliot L. Spitzer and other investigators, is an investor in and board member of The Washington Post Co. Prosecutors have said Buffett is not a target of the investigation.
Houldsworth is expected to appear in federal court in Alexandria to answer the criminal charge later this week. The plea agreement is part of a wide-ranging set of regulatory and criminal probes now shaking the U.S. insurance industry that involves the Justice Department's fraud unit, the office of U.S. Attorney Paul J. McNulty from the Eastern District of Virginia, the SEC and Spitzer. So far, 10 insurance executives, including four former AIG employees, have pleaded guilty in New York state court to criminal charges stemming from Spitzer's investigation into bid-rigging among insurance brokers and carriers.
Spitzer and McNulty also are probing sales of a product called finite reinsurance, typically sold to insurance and other companies that want to spread large losses over time, investigating whether it has been misused to make corporate balance sheets look better.
The Justice Department's probe arose from the 2003 collapse of a Richmond-based medical malpractice insurer, Reciprocal of America, which bought income-smoothing finite reinsurance from General Re. Two former Reciprocal executives have pleaded guilty to federal criminal charges. Insurance regulators in England, Ireland and Australia are also investigating General Re and other companies.
The 24-page SEC complaint filed Monday offers an intimate look at how senior executives at General Re and New York-based AIG put together the $500 million finite reinsurance deal in 2000 and 2001 that is at the heart of the current probes. According to the complaint, the deal purported to show that AIG had taken on some of General Re's risk, allowing it to book new premiums and additional reserves. But, in fact, the complaint says, the transaction involved no risk and the accounting was fraudulent.
The SEC complaint includes lengthy excerpts of taped phone conversations between Houldsworth and former General Re chief financial officer Elizabeth Monrad and a senior vice president, Richard Napier, who was in charge of General Re's relationship with AIG. The complaint includes repeated references to AIG's former vice president of reinsurance, Joseph Umansky, who has given Spitzer's office testimony compelled under state civil and criminal law, according to court documents.
The complaint includes direct references to "the AIG chairman," Greenberg, who "made clear" to "the Gen Re CEO," Ferguson, in a telephone conversations in 2000, that "the transaction he was contemplating was one that would not require AIG to take on any actual insurance risk." Ferguson, in turn, "understood" that what "the AIG chairman was describing was not a bona fide reinsurance transaction," the complaint says.
Lawyers for Ferguson, Napier and Monrad did not return a telephone call; nor did a General Re spokesman. Lawyers for Greenberg declined to comment. A lawyer for Umansky could not be located.
The complaint says the deal was called "the MRG Reserve Project," a reference to Greenberg's initials, and was begun in response to Wall Street analysts' worries over a drop in AIG's reserve levels in the fall of 2000. In taped conversations in November of that year, Monrad and Houldsworth discuss the problem of how AIG would account for a transaction that carried no risk, according to the complaint.
Houldsworth: "There is clearly no risk transfer. You know, there is no money changing hands."
Monrad: "(AIG) may have a tough time getting the accounting they want out of the deal that they want to do . . . They are not looking for real risk."
In a conference call the next day Houldsworth says, "I would be staggered if they get away with that."
Napier mentions that Greenberg was "calling daily on this. He's pretty excited about this," the complaint says.
According to people familiar with matter, Houldsworth had authority to trade derivatives for the General Re unit, subjecting him to the company's telephone taping system. Houldsworth was aware of the tapes but did not focus on them, one of the people said. Houldsworth, a licensed chartered accountant in England, agreed to SEC civil penalties, including a permanent bar on serving as director or officer of a U.S. public company or practicing as an accountant.