New York Attorney General Eliot L. Spitzer and federal officials have stopped cooperating with each other in parallel probes of the U.S. insurance industry, and each has made separate deals with witnesses that render the witnesses less useful to the other side, according to people familiar with the case and legal experts.
State and federal officials jointly interviewed insurance executive witnesses until late April or early May, but since then cooperation has stopped, and they now conduct interviews separately, said sources familiar with the case. The sources spoke only on the condition of anonymity because of the continuing investigation.
At one point, a scheduled joint interview was canceled after federal officials learned that Spitzer staffers already had met separately with the witness's lawyer and discussed a deal, one of the people familiar with the matter said.
"Everyone is all smiles when it comes to cooperation between the agencies," says Jacob S. Frenkel, a former Securities and Exchange Commission enforcement lawyer and partner at Shulman, Rogers, Gandal, Pordy and Ecker PA, in Rockville. "But in truth, the competition for convictions and civil settlements is so intense that each regulator is putting its interest ahead of the public good."
Interagency tensions were exacerbated by news leaks from a high-profile interview April 11 with legendary investor Warren E. Buffett, head of Berkshire Hathaway Inc. Buffett's General Re Corp. unit is part of a wide-ranging probe into a product known as a finite reinsurance, which has been used by some buyers to make their earnings look better. Buffett is a longtime director of, and investor in, The Washington Post Co. Investigators have said he is not a target of the investigation.
Accounts of the closed-door session were published by news organizations the same day. Federal officials suspected Spitzer staffers of relaying information about the meeting that ultimately reached news reporters, according to two sources on the federal side.
The three-hour session, held at the Securities and Exchange Commission's offices in New York, included federal prosecutors from the Justice Department and the Eastern District of Virginia, SEC lawyers, and Spitzer's staff.
Michele Hirshman, Spitzer's top deputy, said any suggestion that state officials leaked information from the Buffett meeting is "inaccurate and ridiculous." She described the insurance investigations as separate but complementary and said prosecutors on both sides are experienced in dealing with parallel probes by other agencies. "At the end of the day, the investigations are producing good results in terms of finding the wrongdoing that was hidden from regulators for many years," she said.
Representatives of federal officials leading the probe declined to comment. They are Paul J. McNulty, the U.S. attorney for the Eastern District of Virginia; David N. Kelley, the U.S. attorney for the Southern District of New York; the Justice Department; and the Securities and Exchange Commission.
Evidence of the breach surfaced soon after the Buffett interview. On May 2, in a speech to business writers and editors in Seattle, Spitzer blasted the Bush administration for failing to investigate illegal practices in the insurance industry after Spitzer-led investigations resulted in 10 guilty pleas from insurance executives and industry fines and restitution of more than $1 billion. Spitzer is running for the Democratic nomination for governor of New York.
"Not a word has come out of the White House about maybe there being a structural problem in the insurance industry," Spitzer said, according to a Reuters report.
Since then, state and federal prosecutors have struck separate deals with key witnesses involved in the insurance probes. A key transaction to the investigations is a $500 million finite reinsurance deal between General Re and insurance behemoth American International Group Inc.
On May 26, Spitzer filed a civil complaint against AIG and its top two former officials that, among other things, revealed that Joseph H. Umansky, former president of AIG Reinsurance Advisors, had given testimony compelled under New York's criminal code. That disclosure makes it extremely difficult for federal officials to prosecute Umansky, according to Daniel C. Richman, a former federal prosecutor and professor at Fordham University School of Law in New York. Under a 1972 U.S. Supreme Court ruling, federal prosecutors must prove that their evidence comes from a source "wholly independent" of the compelled testimony. That difficult standard scuttled the prosecution, for instance, of former White House aide Oliver L. North in the Iran-contra affair.
"It's a huge burden," Richman said.
Umansky has not been charged with any wrongdoing. His lawyer, Seth L. Rosenberg, said, "Joe Umansky has cooperated fully with every internal and governmental investigation of AIG that has sought his cooperation."
Then on June 9 and 10, U.S. Attorney McNulty announced that two General Re executives had pleaded guilty in federal court to a single count each of conspiracy to violate federal securities laws in connection with the General Re-AIG deal. Both defendants, John Houldsworth, a former chief executive of an Irish subsidiary of General Re, and Richard Napier, a former senior vice president of the Stamford, Conn., company, agreed to cooperate with prosecutors, according to court papers. New York state laws against double jeopardy impair Spitzer's ability to prosecute the two men for the same underlying acts, experts said.
"If there's a lack of coordination, both prosecutorial entities will see their cases suffer," says Robert A. Mintz, head of white-collar criminal defense at New Jersey's McCarter & English LLP.
Jurisdictional jousting between state and federal authorities over white-collar cases has a storied history in New York, where Manhattan District Attorney Robert M. Morgenthau over decades has moved into banking and securities cases, which federal officials view as their turf. His failed prosecution of Bank of Credit and Commerce International in the early 1990s involved several clashes with the Justice Department.
The Spitzer-federal rivalry goes back to at least 2002, when Spitzer accused Merrill Lynch & Co. and stock analyst Henry Blodget of publishing tainted stock research that misled investors. The case triggered a wider probe of Wall Street research that was widely viewed as embarrassing to the SEC, which has primary responsibility to regulate the securities industry and eventually signed onto a $1.5 billion global settlement with a dozen brokerages.
The state and federal probes of insurance differ in important ways. Federal officials have been investigating the possible misuse of finite reinsurance since at least mid-2000, when the SEC first asked AIG for records relating to its deals with Brightpoint Inc., a Plainfield, Ind., telecommunications provider. The probe ended last year with AIG agreeing to pay $126 million to the SEC and the Justice Department, in a settlement that also involved finite reinsurance AIG had sold to PNC Financial Services Group Inc. of Pittsburgh.
Federal prosecutors in Virginia, meanwhile, have been probing General Re at least since October 2003, when they asked for records relating to finite reinsurance sold to Reciprocal of America, a Richmond malpractice insurer that collapsed the year before.
But the pace of the probe measurably quickened in October after Spitzer filed a suit accusing insurance brokers of bid-rigging, then turned his attention to other problems in the industry and to AIG and General Re. Joint interviews with witnesses began early in the year, people familiar with the matter said.
Cracks in the uneasy alliance soon appeared. On Dec. 30, Berkshire disclosed that the SEC had made a "request" for information on finite reinsurance, then a week later it disclosed that Spitzer's office issued a subpoena seeking "virtually identical documents and information."
Spitzer and the SEC issued subpoenas to AIG the same day, Feb. 14. The announcement and subsequent developments sent AIG's share price plummeting and ultimately led to the ouster of AIG's longtime chairman and chief executive, Maurice R. "Hank" Greenberg, the next month. Called to a deposition before SEC lawyers, federal prosecutors and Spitzer's staff on April 12, the day after the Buffett interview, Greenberg invoked his Fifth Amendment right against self-incrimination.
Experts say they expect state and federal authorities to patch things up soon, or for one agency to cede the lead to another, to avoid serious damage to either probe. "It was just inevitable that jurisdictions would bump elbows, and sometimes they're sharp," Fordham's Richman said. "But it's hard to imagine it happening for long."