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STAMFORD, Conn.--Joseph P. Brandon's resignation from General Re Corp. last week likely marks the end of the government's criminal investigation into the company and its chief executive over any role they may have played in helping American International Group Inc. inflate its loss reserves with a pair of sham reinsurance transactions, legal experts say.
Gen Re and Mr. Brandon have not been charged in the case but neither is completely off the hook, observers say. Both could still face charges or penalties from the U.S. Securities and Exchange Commission, which filed civil charges against five former Gen Re and AIG executives following their federal grand jury indictment in February 2006, they say.
Gen Re parent Berkshire Hathaway Inc. gave no reason for Mr. Brandon's departure April 14, saying only that Gen Re President Franklin Montross IV will succeed him as chief executive officer.
Observers last week said they expect a smooth transition and that Mr. Montross is a capable leader for the reinsurer (see story, page 25).
Berkshire Hathaway, Gen Re, Mr. Brandon and his attorney all declined to comment. Federal prosecutors involved in the Gen Re case did not return calls.
Observers say federal prosecutors likely pushed the reinsurer into ousting Mr. Brandon in return for closing the case against him and Gen Re.
In February, five executives from Gen Re and AIG, including former Gen Re CEO Ronald E. Ferguson, were convicted of conspiracy and fraud and are awaiting sentencing in May (BI, March 3; www.BusinessInsurance.com/GenReTrial).
During the trial, prosecutors identified Mr. Brandon, who succeeded Mr. Ferguson as CEO in 2001, as an unindicted co-conspirator who was kept apprised of the deal's development and approved a series of wire transfers that prosecutors charged were designed to conceal AIG's payment of $15 million to Gen Re for the transaction.
After the verdict, federal prosecutors suggested they might "go up the ladder" against others involved in the deal, sparking speculation that criminal charges might be filed against Mr. Brandon.
"Generally what happens is the clear message is sent that 'We won't go after the company...if you meet our demands, and our demands are that you remove anyone at a high level in connection with this,"' said Joel M. Androphy, a white-collar criminal defense attorney with Berg & Androphy in Houston.
"That's just common practice, especially...based upon what happened to Arthur Andersen," he said. The accounting firm was convicted in 2002 of obstruction of justice for shredding audit documents related to Enron Corp. Arthur Andersen went out of business even though the Supreme Court overturned that conviction in 2005.
Mr. Androphy said he doesn't believe the government would indict Gen Re or Berkshire Hathaway "so they could have probably called their bluff." But that's a hard decision to make because "if you bet the wrong way, your shareholders are going to wonder why the company thought the services of its CEO were more important than the survival of the corporation."
"I think (Mr. Brandon's departure) clearly was initiated and pushed by the federal prosecutors to try to get this done simply because they didn't want to have an unindicted co-conspirator...running a significant part of the Berkshire empire," said Chuck Hamilton, a Berkshire equity analyst with FTN Midwest Securities Corp. in Nashville, Tenn.
Legal experts say federal prosecutors most likely did not have enough evidence to charge Gen Re or Mr. Brandon, so his departure concluded the government's investigation.
Peter J. Henning, a criminal law professor at Wayne State University in Detroit and a former SEC prosecutor, said he doesn't see criminal charges being filed against Mr. Brandon unless one of the five convicted defendants "does a complete 180" and comes forward with new incriminating information. And that's "hard to imagine because it would torpedo their appeal," he said, noting the difficulty in maintaining innocence and then coming forward with incriminating information.
"So as far as the criminal case goes, I would suspect it's pretty much over," he said.
"While every case is different, historically, when you have people on that level who are prosecuted, the government, if it is going to go after the company, is going to charge the company in the same indictment because the basis against the company is the acts and conduct of those individuals who were indicted," said Michael B. Himmel, chairman of Lowenstein, Sandler P.C.'s white-collar criminal defense practice group in New York.
"One would conclude that as a consequence of the CEO stepping down, that's probably the last thing to close the books on General Re," Mr. Himmel said.
At the same time, if there was sufficient evidence against Mr. Brandon, it is likely that he would have been among the indicted executives from Gen Re and AIG, Mr. Androphy said.
"It's never a good idea to charge someone separately. You want them charged together so they can point the fingers at each other," he said.
"Federal prosecutors got four convictions of Gen Re people at trial and they said they were going to work their way up the ladder," said Jacob H. Zamansky, a former federal prosecutor who is now a securities attorney with Zamansky & Associates in New York. "Rather than continue the case against (Mr. Brandon) and the company, it appears they asked for his resignation."
"My feeling is they did not have sufficient evidence to go after (Mr. Brandon) on a criminal basis, but he still is in peril with the SEC," Mr. Zamansky said.
Mr. Henning said that rather than filing civil charges in federal court, the SEC is more likely to file administrative proceedings against Mr. Brandon.
"It wouldn't surprise me if they were negotiating a settlement with him without filing anything," Mr. Henning said, adding that he expects the SEC will reach a settlement with Gen Re as well.
In October 2005, Mr. Brandon was served with a Wells notice informing him that the SEC was considering filing civil charges against him for violating securities laws (BI, Sept. 12, 2005).
SEC attorney Andrew M. Calamari last week said that the agency intends to file a motion to lift the stay on its civil suit, which has been in place pending the Gen Re/AIG criminal case, and pursue its litigation.
Mr. Calamari would not comment on the investigation or whether the SEC intended to file any new charges.