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Finite convictions overturned

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Finite convictions overturned

NEW YORK—Former executives of General Re Corp. and American International Group Inc. convicted in 2008 in connection with a bogus finite reinsurance deal have been given another chance to clear their names.

A three-judge panel of the 2nd U.S. Circuit Court of Appeals in New York last week overturned the convictions and ordered a new trial, ruling in part that the jury had been improperly instructed.

The defendants in the case—Ronald E. Ferguson, former Gen Re CEO; Christopher P. Garand, former Gen Re senior vp in charge of U.S. finite underwriting; Robert Graham, former Gen Re senior vp and assistant general counsel; Elizabeth Monrad, former Gen Re chief financial officer; and Christian M. Milton, former AIG vp for reinsurance—were convicted on various counts, including conspiracy, fraud and making false statements to the U.S. Securities and Exchange Commission.

Prosecutors had charged that the executives engineered a bogus loss portfolio reinsurance transaction that helped AIG inflate its loss reserves by $500 million in 2000 and 2001. The deal, aimed at countering stock analyst concerns about the New York insurer's reserves, transferred no risk to AIG and included an unwritten side agreement that AIG would refund Gen Re's $10 million premium and pay the reinsurer a $5 million fee.

All of the defendants were sentenced to prison and fined, but appealed their convictions.

The 2nd Circuit judges last week ruled that Connecticut District Court Judge Christopher Droney had erred in his failure to instruct his jury to determine whether the company executives directly caused the improper accounting of the sham reinsurance deal. The appeals court also said Judge Droney admitted inappropriate evidence about the deal's impact on the New York insurer's market performance.

While the panel considered meritless most of the defendants' arguments, which ranged from challenges about the evidence to the allegation that the government elicited false testimony, the judges found that the other issues warranted a new trial for the former executives.

The Connecticut U.S. Attorney's Office, which argued the case, said that it was reviewing the opinion and has no further comment.

Judge Droney had “analyzed the prejudicial components (appeals judges are) discussing now,” said a source close to the prosecution. “He went through it in painstaking detail and found it wasn't overly prejudicial.”

As part of its effort to prove the alleged misstatements about the reinsurance deal mattered to investors, the government tried to link them to AIG's declining stock price. Judge Droney hadn't allowed the prosecution to use a line graph tracing AIG's 12% stock price decline from February to March 11, 2005, but the government was allowed to show a “functionally identical chart” and three bar charts to the jury during opening statements.

The appeals court deemed the charts “prejudicial” in part because AIG's stock price drop took place amid unrelated allegations of bid-rigging, improper self-dealing, earnings manipulations and more. As a result, the defense had to choose between keeping that information out or allowing the jury to attribute AIG's price decline entirely to the Gen Re deal.

The ruling noted the “sufficiency” of the government's other evidence portraying the sham deal's importance to investors.

The 77-page decision discusses much at length, including the government's reliance on testimony from former Gen Re executives Richard Napier and John Houldsworth, who pleaded guilty to similar charges. While bolstered with phone call recordings, “certain factual inconsistencies in Napier's testimony are sufficiently obvious to raise an eyebrow,” the court said. Even so, the court found most of the defense's arguments regarding Mr. Napier meritless.

“The court's decision reverses the defendants' convictions and wipes the slate clean,” said Ms. Monrad's lawyer, Ira Feinberg of Hogan Lovells U.S. L.L.P. in New York.

Attorneys for the other defendants could not be reached or did not comment.

“It's a huge win for the defense because it's a tall mountain to climb to get a federal appeals court to throw out criminal convictions, particularly after a lengthy and complicated trial,” said Robert Mintz, partner at McCarter & English L.L.P. in Newark, N.J. Given the tremendous cost associated with retrying a case, it can only happen if judges find an error of such magnitude, the court decides it was impossible for the defendants to receive a fair trial, he said.

Experts say the prosecution can request a rehearing over the recent decision, either before the same panel or the full 2nd U.S. Circuit Court of Appeals.

“With high-profile cases, the odds of rehearing go up, but typically (rehearings) aren't granted,” said Wesley M. Oliver, associate professor at Widener Law in Harrisburg, Pa. Even when granted, rehearings typically result in the same decision, he said.

Alternatively, the government could immediately pursue a new trial. It could negotiate with the defense for a settlement, which might save both sides the cost of further litigation, experts say.

“It seems to me that the two things that the appeals court judges found wrong with the trial could be easily corrected in a retrial,” said Paul Rothstein, a professor of law at Georgetown University in Washington.

“It was a meritorious decision by the court,” said Philip Hilder, a former federal prosecutor who is in criminal defense at Hilder & Associates P.C. in Houston. “There were infirmities that needed to be addressed...and the government will have another bite of the apple.”