General Re Settles Fraud Charges Over AIG, Pru Financials
Posted on January 19th, 2010
The Securities and Exchange Commission today charged General Re Corp. for its involvement in separate schemes by American International Group (AIG) and Prudential Financial, Inc. to manipulate and falsify their reported financial results.
The SEC said Gen Re agreed to pay $12.2 million to settle the charges.
In addition, in a non-prosecution agreement with the Department of Justice in connection with a related criminal investigation of Gen Re’s transactions with AIG, Gen Re agreed to pay $19.5 million to the U.S. Postal Inspection Service Consumer Fraud Fund. Gen Re also agreed to pay $60.5 million through a civil class action settlement to AIG’s injured shareholders. Gen Re previously forfeited to the government approximately $5 million in fees it earned for its participation in the scheme with AIG.
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“Gen Re arranged to sell financial products to AIG and Prudential for the sole purpose of enabling those companies to manipulate their accounting results and mislead investors,” said Andrew M. Calamari, associate director of the SEC’s New York Regional Office.
The SEC previously charged AIG with securities fraud and improper accounting, and the company settled the charges by paying more than $800 million among other remedies. The SEC also previously settled charges against AIG former chairman Maurice R. “Hank” Greenberg and former chief financial officer Howard I. Smith, and brought charges against former senior executives of Gen Re for their roles in connection with the scheme with AIG. The SEC separately charged Prudential with securities laws violations in 2008.
According to the SEC’s complaint against Gen Re, filed in U.S. District Court for the Southern District of New York, a foreign subsidiary of Gen Re entered into two sham “reinsurance” transactions with AIG in 2000 to improperly allow AIG to reverse the declining reserve trend and falsely report additions to both loss reserves and premiums written. Senior officials at Gen Re helped AIG structure the two sham transactions. The contracts show reinsurance transactions that appeared to transfer risk to AIG, but the transactions did not transfer risk.
The SEC further alleges that Gen Re separately entered into a series of sham reinsurance contracts with Prudential’s property and casualty division from 1997 to 2002. The contracts had no economic substance and purpose other than to allow Prudential to build up and then draw down on an off-balance sheet asset or “finite bank” parked with Gen Re. As a result of the sham transactions, Prudential improperly recognized more than $200 million in revenues in 2000, 2001, and 2002. Gen Re received fees totaling $8.1 million for structuring and executing the scheme with Prudential.
In determining to accept Gen Re’s settlement offer, the SEC said it took Gen Re’s remediation efforts and cooperation into account. Among the efforts SEC considered: Gen Re’s comprehensive, independent review of its operations conducted at the outset of the government’s investigations the results of which were shared with investigators; Gen Re’s “substantial assistance” in the government’s successful civil and criminal actions against individuals involved in the scheme with AIG; and Gen Re’s internal corporate reforms designed to strengthen oversight of its operations. Those reforms entail dissolving a subsidiary involved with the AIG transactions, appointing an independent director to its Board of Directors, forming a committee consisting of senior managers to review and approve complex transactions, requiring legal review of proposed finite or loss mitigation contracts, and fortifying its internal audit functions and underwriting rules.
The settlement is subject to court approval.
Sources:
Securities and Exchange Commission
U.S. Department of Justice
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Tags: General Re, Pru
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