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PEMBROKE, BermudaThe U.S. Securities and Exchange Commission last week approved RenaissanceRe Holdings Ltd.'s proposed $15 million settlement of securities fraud charges stemming from a bogus finite reinsurance deal in 2001.
The effect of that deala two-part transaction with Inter-Ocean Reinsurance Co. Ltd., a finite risk reinsurer now in runoffwas to smooth and defer $26.2 million of RenaissanceRe's income from 2001 to 2002 and 2003, regulators alleged in a complaint against the company.
Pembroke, Bermuda-based RenaissanceRe acknowledged previously that the two transactions were improperly accounted for as insurance and failed to transfer enough risk to meet accounting standards, it subsequently restated three years worth of earnings.
Under the settlement, the reinsurer will pay a civil penalty of $15 million and a $1 disgorgement of ill-gotten gains. RenaissanceRe also entered a final judgment that permanently enjoins the company from future violations of federal securities laws, and the reinsurer must retain an independent consultant to review and make recommendations "concerning the adequacy of RenRe's internal controls, audit department and compliance function," the SEC said in a statement.
"This is yet another action arising from our ongoing investigation of the misuse of finite reinsurance products to commit securities fraud," Mark K. Schonfeld, director of the SEC's Northeast regional office in New York, said in a statement. "In this case, RenRe essentially played a shell game with its revenuehiding it in one year when it was not needed, only to reveal it in a later year when it would improve the bottom line."
The reinsurer did not admit or deny any wrongdoing as part of the agreement.
"We are pleased to have put this difficult chapter in our company's history behind us," Neill A. Currie, RenaissanceRe's chief executive officer, said in a statement. "Throughout the settlement process, a transition of leadership at the company and a volatile market environment, our company continued to serve its clients and deliver value to shareholders on an uninterrupted basis."
Robert J. Keyes, assistant regional director in the SEC's Northeast regional office declined to comment on why the settlementthe terms of which were originally announced by RenaissanceRe in July 2006took several months to be approved by regulators.
"While there may have been and probably was a logical administrative reason for the unusually long delay, it's certainly not helpful to a company that has agreed to terms and is trying to put an investigation in its past," said Jacob S. Frenkel, a former SEC enforcement lawyer who is now a partner at Shulman, Rogers, Gandal, Pordy & Ecker P.A. in Rockville, Md.
In addition, it remains unclear whether the $15 million penaltyfor which RenaissanceRe previously set aside reserveswill be made available to injured investors.
"We will evaluate what would be the best way to distribute the fund, and if we conclude that a distribution to investors is feasible and appropriate, we will propose a plan of distribution to the court," Mr. Keyes said.
Meanwhile, RenaissanceRe continues to face shareholder litigation. "The SEC settlement does not dispose of the consolidated securities class action lawsuit pending against the company and certain of its current and former officers. This class action lawsuit, if adversely determined or resolved, could subject the company to a material loss," according to Renaissance Re's 10K statement filed with the SEC last week.
The settlement also has no effect on civil fraud charges still pending in a Manhattan court against three former top RenaissanceRe executivesformer Chairman and CEO James N. Stanard, former Controller Martin J. Merritt, and former Senior Vp Michael W. Cashfor their alleged roles in orchestrating the Inter-Ocean deal.
Of the trio, Mr. Merritt is the only one to have agreed to a partial settlement in September with the SEC. As part of his settlement agreement, Mr. Merritt neither admitted nor denied any wrongdoing, and he consented to the entry of an antifraud injunction and other relief, deferring the settlement of any monetary charges (BI, Oct. 2, 2006).