Finite execs guilty

Former General Re Corp. Chief Executive Officer Ronald E. Ferguson leaves court after being found guilty of fraud and other charges.

HARTFORD, Conn.—Five former executives of General Re Corp. and American International Group Inc. sat grimly in a Hartford, Conn., courtroom last week after a federal jury found them guilty of fraud in helping AIG inflate its loss reserves with a reinsurance deal.

After hearing more than five weeks of testimony and deliberating for six days, the jury convicted the defendants on all charges against them, including conspiracy, securities and mail fraud, and making false statements to securities regulators.

Following the verdicts, U.S. District Judge Christopher F. Droney set May 15 for sentencing and continued their release on a $1 million bond each.

Defense lawyers said their clients will appeal.

Convicted in the case were former Gen Re Chief Executive Officer Ronald E. Ferguson; Christopher P. Garand, former senior vp in charge of U.S. finite underwriting for Gen Re; Robert Graham, former senior vp and legal counsel for the reinsurer; Elizabeth Monrad, Gen Re's former chief financial officer; and Christian M. Milton, AIG's former vp for reinsurance.

The guilty verdicts quickly revived a question that has lingered since the case began more than two years ago: Are more indictments to come?

After the verdicts, prosecutors suggested that they may not be finished: "The investigation continues," said Paul E. Pelletier, principal deputy chief for litigation with the U.S. Justice Department's fraud section. "We have a lot of work to do to go up the ladder."

Mr. Pelletier declined to identify whom prosecutors may target.

Maurice R. Greenberg, AIG's former CEO, and Joseph Brandon, current CEO of Gen Re, both were identified during the trial as among five unindicted co-conspirators, and observers have long speculated about whether they might eventually be charged in the case.

A lawyer for Mr. Greenberg flatly denied that the former AIG chief is guilty of any wrongdoing. A call to Mr. Brandon was referred to a Gen Re spokesman, who declined to comment.

In a 2006 indictment, prosecutors charged that the five Gen Re and AIG defendants engineered a sham loss portfolio reinsurance deal to help inflate AIG's loss reserves starting in 2000 to quiet stock analyst concerns about AIG's reserve levels. While the deal appeared to transfer risk to AIG, the defendants secretly agreed that AIG would not be billed for any losses and that the insurer would "prefund" Gen Re's purported $10 million premium for the deal and pay Gen Re a $5 million fee, prosecutors charged.

Defense lawyers strenuously attacked the testimony of two cooperating government witnesses—former Gen Re executives John Houldsworth and Richard Napier, both of whom have pleaded guilty to conspiracy. The government also presented dozens of Gen Re e-mails and several recorded phone conversations among some of the defendants to bolster its case.

Jurors asked to see transcripts of several of those conversations, all involving Ms. Monrad, and returned the transcripts to Judge Droney shortly before returning with their verdicts.

Several observers expressed surprise that the jury found all five defendants guilty on all counts despite their varying degrees of involvement in the reinsurance deal, saying they had expected a split verdict, a hung jury or acquittals on some counts.

Defense lawyers expressed dismay at the verdicts.

"This is a very sad day, not only for Ron Ferguson, but for our criminal justice system," Clifford Schoenberg, a lawyer for Mr. Ferguson with Cadwalader, Wickersham & Taft L.L.P., said in a statement. "We can only hope that Judge Droney or the Court of Appeals will reverse this grave miscarriage of justice."

Further prosecutions?

While neither Mr. Greenberg nor Mr. Brandon has been charged with any wrongdoing, evidence at trial showed that Mr. Greenberg initiated the deal in an October 2000 phone call to Mr. Ferguson, while Mr. Brandon was consulted early in the deal's development and communicated with others at Gen Re as it progressed.

Mr. Greenberg has previously acknowledged calling Mr. Ferguson, but has said he left details of the transaction to subordinates and believed it to be legitimate.

"Mr. Greenberg was not a defendant in the Hartford action and he neither initiated nor participated in an improper transaction," said Nicholas Gravante, a lawyer with Boies, Schiller & Flexner L.L.P who represents the former AIG chief. "Mr. Greenberg acted responsibly, ethically and lawfully during his career at AIG."

Further charges may depend on the willingness of one or more of the five convicted defendants to cooperate with prosecutors in hopes of reducing potentially long prison sentences, several legal observers say (see related story).

Such cooperation may be vital to any potential case against Mr. Greenberg, since there was little documentary evidence produced at the trial regarding his involvement in the deal beyond phone calls with Mr. Ferguson, observers say.

Prosecutors may not move beyond the five defendants without winning such cooperation, but if they get it, "then all bets are off and the government proceeds forward," said Philip H. Hilder, a former federal prosecutor now with Hilder & Associates P.C. in Houston.

Corroborating evidence would be important in such a case because prosecutors would face the credibility problem of offering testimony from a convicted defendant who previously maintained his or her innocence, Mr. Hilder added.

Peter J. Henning, a professor at Wayne State University Law School in Detroit, expressed doubt about further prosecutions, though, because of the credibility problem and because prosecutors likely already have all of the documentary evidence that is available and have not used it so far to bring additional charges.

"Barring one of the defendants revealing something previously unknown to the prosecution, I think it's unlikely the government would charge either one of those two," Mr. Henning said, referring to Messrs. Greenberg and Brandon.

Mr. Gravante, Mr. Greenberg's lawyer, said testimony at the trial actually undercut any assertion that Mr. Greenberg knew the deal was a sham. The government contended that the alleged conspiracy began with Mr. Greenberg's October 2000 call to Mr. Ferguson; Mr. Napier, one of the cooperating witnesses, said in his plea agreement that Messrs. Ferguson and Greenberg discussed structuring the deal as a no-risk transaction during that call.

Under cross-examination during the trial, though, Mr. Napier admitted that his earlier statement was wrong, and that the no-risk structure evolved over the following three weeks at Gen Re.

"If it became a problem, it became a problem after Mr. Greenberg was done with it," Mr. Gravante said of the transaction.

Prosecutors, meanwhile, appear to have little interest in further investigating any role played in the transaction by Warren E. Buffett, chairman of Gen Re parent company Berkshire Hathaway Inc. While lawyers for Mr. Ferguson and Ms. Monrad argued that they relied on Mr. Buffett's approval of the deal—pointing to evidence that he okayed the fee to Gen Re—prosecutors told the jury there was no evidence that Mr. Buffett was aware the deal was a sham.