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STAMFORD, Conn.—General Re Corp. last week agreed to pay $92.2 million and dissolve a subsidiary in Dublin to end investigations into the reinsurer's role in transactions that allegedly defrauded investors of American International Group Inc. and Prudential Financial Inc.
Gen Re, a subsidiary of Berkshire Hathaway Inc., agreed to pay $12.2 million to settle the charges brought by the U.S. Securities and Exchange Commission. Gen Re also agreed to pay the U.S. Postal Inspection Service Consumer Fraud Fund $19.5 million to settle a Justice Department investigation, and $60.5 million through settlement of a civil class action lawsuit brought by AIG shareholders, the SEC said in a statement.
Gen Re previously forfeited to the government $5 million in fees it earned for its participation in what the government said was sham reinsurance scheme with AIG. As part of its agreement with the Justice Department, Gen Re agreed to dissolve subsidiary Cologne Re Dublin, which helped structure the deals.
Calls placed to Gen Re seeking comment on the settlement, for which court approval is needed, were not returned.
According to the SEC's complaint filed in U.S. District Court for the Southern District of New York, Gen Re entered into two sham finite reinsurance transactions in 2000 with AIG. The transactions inflated AIG's loss reserves by $250 million in the fourth quarter of 2000 and $250 million in the first quarter of 2001, hiding a downward trend in loss reserves and premiums written, according to the SEC's investigation.
During the related federal trial of four former Gen Re executives and one former AIG executive involved in the deals, the court found that AIG shareholders lost between $544 million and $597 million as a consequence of the scheme.
Gen Re admitted that its senior executives, including former CEO Ronald E. Ferguson, were involved and knew that the true purpose of the transactions with AIG was to permit the New York-based insurance giant to falsely report its loss reserves to analysts, investors and the SEC in its filings.
“Hopefully, this (settlement) is the end of a sad episode,” said Bill Bergman, an analyst with Morningstar Inc. in Chicago. “Traditionally, leadership at companies within Berkshire Hathaway is trustworthy and that trust was developed over time...maybe that trust was misplaced.”
Four former executives of Stamford, Conn.-based Gen Re were convicted in February 2008, including Mr. Ferguson, who was sentenced to two years in prison and fined $200,000.
The three others—Christopher Garand, former senior vp in charge of U.S. finite underwriting; Robert Graham, former senior vp and assistant general counsel; and Elizabeth Monrad, former chief financial officer—also received prison sentences and fines.
Also convicted was Christian M. Milton, former AIG vp of reinsurance, who was sentenced to four years in prison and fined $200,000.
All are appealing their convictions.
Joseph P. Brandon, CEO of Gen Re since 2001, resigned from the post in 2008 amid the finite reinsurance allegations.
Mr. Brandon, whom prosecutors identified as an unindicted co-conspirator at the trial, was never charged.
The Wall Street Journal, citing people familiar with the matter, said that the SEC as part of the settlement told Gen Re that Mr. Brandon likely would not be prosecuted. A spokesman for the SEC declined to comment.
The SEC previously accused AIG of securities fraud and improper accounting, which the insurer settled by paying more than $800 million. In addition, Maurice R. Greenberg, AIG's former chairman and CEO, and Howard I. Smith, AIG's former chief financial officer, last year paid $15 million and $1.5 million, respectively, to settle SEC charges related to the Gen Re deal, among other transactions.
Separately, the SEC alleged that Gen Re entered into a series of sham reinsurance contracts with Prudential's property/casualty division from 1997 to 2002, which allowed Newark, N.J.-based Prudential to improperly report more than $200 million in revenues in 2000, 2001 and 2002.