Former Gen Re chief, execs indicted

NORFOLK, Va.—Are there bigger fish to fry?

That is the question now looming after federal jury criminal indictments were handed down and a U.S. Securities and Exchange Commission suit was filed last week against former General Re Corp. and American International Group Inc. officials, say observers. Both focused on a 2000 loss portfolio transaction.

Observers speculate that the indictments in particular may be used by the federal government to obtain plea agreements and "ladder up" to even higher officials, including possibly former AIG Chairman and Chief Executive Officer Maurice R. Greenberg and Gen Re CEO Joseph P. Brandon, who have not been charged.

Some observers also say the indictments signal federal authorities' continued zeal for investigating similar deals embarked on by other insurers and reinsurers (see story page 22). Their interest has led to the virtual disappearance of finite risk products from the market.

Last week, a federal grand jury in Norfolk, Va., indicted former General Re Corp. CEO Ronald Ferguson, former Gen Re Chief Financial Officer Elizabeth Monrad and the reinsurer's former assistant general counsel, Robert Graham, charging they conspired to commit fraud in connection with the transaction. Also indicted was Christian Milton, formerly AIG's vp-reinsurance.

The SEC also has filed a civil suit against the four individuals, as well as retired Gen Re Senior Vp Christopher Garand, charging them with aiding and abetting securities fraud.

Assistant Attorney General Alice Fisher said that, according to the indictments, the defendants "arranged a complex scheme to cook the books at AIG."

AIG conceded last year that the deal, a retrocessional loss portfolio transaction, did not transfer risk and restated its results to account for it as a deposit rather than as reinsurance. The indictment notes that "additional co-conspirators, not named as defendants herein, included senior-level executives at AIG and Gen Re."

None of the defendants still works at Gen Re. Mr. Ferguson retired as CEO of Stamford, Conn.-based Gen Re in 2001, and Ms Monrad left the reinsurer in 2003 to become CFO of New York-based TIAA-CREF, from which she resigned in November 2005. Mr. Graham retired from Gen Re in October of last year.

New York-based AIG terminated Mr. Milton last March. No other AIG officials face criminal charges stemming from the probe.

Mr. Brandon was not among those either criminally indicted or named as a defendant in the SEC suit, although he was served with a "Wells" notice last year, which informs recipients that the SEC is considering filing civil charges against them for violating securities laws. A Wells notice gives its recipient an opportunity to respond before the SEC takes action. A Gen Re spokesman could not be reached.

Observers say the defendants technically could face decades-long prison sentences, although such lengthy sentences are unlikely. They may also reach a plea bargain agreement, which was the case with the two former Gen Re officials indicted last year. John Houldsworth, former CEO of the reinsurer's Cologne Re Dublin unit, and Richard Napier, a former senior vp, pleaded guilty to criminal conspiracy charges related to the investigation in June.

Federal authorities will likely have a hard time winning their case if it does proceed to court, though, said Jacob S. Frenkel, a former SEC enforcement lawyer now with Shulman, Rogers, Gandal, Pordy & Ecker P.A. in Rockville, Md.

"It's going to be real tough to get a jury to care, absent victims and the other hallmark signs that tend to gather a jury's fancy," he said.

Mr. Graham's attorney, Alan Vinegrad, a partner in the New York office of Covington & Burling, said, "Rob Graham is an attorney of the highest integrity, who always acted in good faith and within the bounds of the law. ... He looks forward to having his day in court and expects to be vindicated at trial."

Mr. Garand's attorney, Robert J. Cleary, a partner at Proskauer Rose L.L.P. in New York and chair of the firm's corporate defense and investigations practice, said, "This came as quite a surprise that the SEC would see fit to file a complaint against Mr. Garand, and I was quite dismayed that they saw fit to file such a complaint without giving us the courtesy of letting us know this was about to happen and sending me a copy of the complaint."

He said, "I have spent a lot of time investigating this matter, and in the course of our own investigation, Mr. Garand voluntarily met with the SEC on multiple occasions. He answered all of their questions; he helped educate them on the complex nuances of the reinsurance industry, and through all of that it is crystal clear to me that Mr. Garand did absolutely nothing wrong."

Some observers say the indictments and lawsuits could be part of a government strategy. "These indictments may only be the beginning of the investigation and could, in exchange for a plea bargain, be used to draw in other, higher executives at either AIG or Gen Re, or lead to testimony uncovering other alleged fraudulent conduct," said Jerry Reisman, a defense attorney with Reisman, Peirez & Reisman in Garden City, N.Y. He noted the government followed such a strategy in its Enron Corp. investigation.

"The common strategy is to ladder up," agreed Mr. Frenkel. He added, though, that it may be significant that while five people were named as defendants in the SEC suit, only four were cited in the criminal indictments. In a criminal case, guilt must be proved beyond a reasonable doubt, while in a civil case, such as the SEC's, only a preponderance of evidence is required.

It is not clear whether the fewer number of criminal indictments here is "an indication as to whether prosecutors can reach Hank Greenberg, or if the SEC even will be able to do so," said Mr. Frenkel.

It is also unclear why the government was apparently unable to obtain plea agreements, he said. "It may be those four defendants chose to fight or the criminal case cannot go any higher," he said.

Robert Heim, an attorney with Meyers & Heim in New York, said he does not believe the scope of the investigation will be broadened to include either Mr. Greenberg or other CEOs such as Berkshire Hathaway Chairman Warren Buffett. General Re is a Berkshire subsidiary.

"Normally, when the government announces charges against multiple defendants like they did today, they include all of the defendants at one time, and, by leaving out Mr. Greenberg and Mr. Buffett, it's most likely that the evidence is not there to make a case against those two," he said.

New York Attorney General Eliot Spitzer has indicated, for instance, that Mr. Greenberg will not be criminally charged, although a civil suit against him continues.

Mark A. Hofmann contributed to this report.

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