Judge shows leniency in Gen Re case

HARTFORD, Conn.—The relatively light sentence imposed on former General Re Corp. Chief Executive Officer Ronald E. Ferguson for his conviction in a sham reinsurance deal may bode well for the remaining defendants, legal experts say.

U.S. District Judge Christopher Droney last week imposed a two-year prison term, a $200,000 fine and two years of supervised release in sentencing the first of five former Gen Re and American International Group Inc. executives convicted in February in the case.

The judge last month determined that AIG shareholders lost more than $500 million in the phony reinsurance deal--a figure that, under recommended sentencing guidelines, could have resulted in a sentence of life in prison.

However, the judge said he considered Mr. Ferguson's "character" as well as his long history of community service and volunteerism in imposing a sentence far below federal guidelines.

Judge Droney said he received more than 400 letters on behalf of Mr. Ferguson, saying he had "never seen such an outpouring of support" and that the letters "painted a picture of an extraordinarily good man."

Describing the case as a "tragedy," Judge Droney added, "We will never know why such a good man did such a bad thing."

Victory for defense

Legal experts say the two-year sentence is a victory for Mr. Ferguson and his defense team, while still sending the message of deterrence prosecutors had sought.

For Mr. Ferguson, "it's a very favorable sentence, and about as much of a departure as the defense could have hoped for," said Peter Henning, a professor at Wayne State University Law School in Detroit. He said a sentence of seven to 10 years in prison would not have been surprising.

The judge's stance signals "a move away from the mathematical calculations" of sentencing, said Ellen Podgor, an associate dean and professor at Stetson University College of Law in Gulfport, Fla. "The judge chose to look beyond the offense and, instead, looked at the offender."

Mr. Ferguson and four others were convicted in February on charges of conspiracy, securities and mail fraud and making false statements to the U.S. Securities and Exchange Commission.

Prosecutors alleged the defendants engineered a sham loss portfolio reinsurance transaction that helped AIG inflate its loss reserves by $500 million in 2000 and 2001. The deal, aimed at countering stock analysts' concerns about AIG reserve levels, transferred no risk to AIG and included an unwritten side agreement that AIG would refund Gen Re's $10 million premium and pay it a $5 million fee, the government charged.

After weeks of briefings and oral arguments, Judge Droney last month found that three days of AIG stock price drops in 2005 could be linked to disclosures about AIG's bogus loss portfolio deal with Gen Re. He said the declines resulted in shareholder losses up to $597 million.

Prosecutors had argued for "substantial" jail time to deter other executives who "may go down a similar path."

Before the sentence was read, Assistant U.S. Attorney Eric Glover said, "There isn't a more serious white-collar crime than manipulating the earnings of a public company," adding that Mr. Ferguson's conduct contributed to the erosion of the public's trust in the financial system.

Defense attorneys argued, and Judge Droney agreed, that unlike many corporate CEOs convicted of white-collar crimes, Mr. Ferguson neither sought nor achieved any personal financial gain. However, the judge rejected the defense argument that Mr. Ferguson had only a peripheral role in the scheme.

"He knew he was involved in a sham transaction and had many opportunities to stop it, but did not," Judge Droney said.

Michael Horowitz, Mr. Ferguson's attorney and a Washington-based partner with Cadwalader, Wickersham & Taft L.L.P., asked for leniency, citing Mr. Ferguson's age and his plans to become an ordained minister.

Defendant 'crushed'

"My life is in shambles. I come before you as a man who's been crushed by what has happened over the past four years," Mr. Ferguson told the judge prior to sentencing. He asked for "clemency" to finish his seminary education and "live my purpose to serve others."

Mr. Ferguson's colleagues, friends and his wife, Carol, also addressed the judge and portrayed him as an honorable, spiritual man who has led a life devoted to helping others.

While the leniency appeals and overwhelming support of his "quality of character" clearly affected Judge Droney's decision, "it remains to be seen if these are really good reasons for giving him a lighter sentence," Mr. Henning said.

"This is a sentence that would not have happened 10 years ago," Ms. Podgor said. As a result of several rulings by the U.S. Supreme Court, federal sentencing guidelines no longer are mandatory and federal judges seem more inclined to impose a penalty more proportionate to the crime, she said.

In addition, the judge's drastic departure from sentencing guidelines may help the remaining defendants "to the extent they take a similar approach in their pleas for leniency," Mr. Henning said. "I doubt the judge would give disparate sentences."

The remaining defendants--Elizabeth Monrad, former Gen Re chief financial officer; Christopher P. Garand, former Gen Re senior vp in charge of U.S finite underwriting; Robert Graham, former Gen Re senior vp and legal counsel; and Christian M. Milton, AIG's former vp for reinsurance--last month filed requests with the Hartford, Conn., federal court seeking lenient sentences far below federal guidelines.

Mr. Milton is scheduled to be sentenced Jan. 27, 2009. Ms. Monrad is scheduled to be sentenced on Feb. 10, 2009. Sentencing dates for the other two executives had not been set.

Meanwhile, Mr. Ferguson is free on $1 million bond while he appeals his conviction. While he was ordered to report to federal prison on Feb. 18, 2009, his attorney said he will ask the court to allow Mr. Ferguson to remain free while his appeal is pending.

For reprints of this story, please contact Lauren Melesio at 212-210-0707 or email lmelesio@crain.com