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Appeals heard in Gen Re fraud case

Appeals heard in Gen Re fraud case

NEW YORK—Former executives of General Re Corp. and American International Group Inc. told a federal appeals court panel last week that their convictions in a sham finite reinsurance deal should be overturned.

Defense attorneys and prosecutors argued matters that ranged from the assumptions made about AIG's stock price to not calling Gen Re's former general counsel to testify during the trial.

During a hearing before the 2nd U.S. Circuit Court of Appeals in New York, lawyers made their arguments on behalf of 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.

The five were convicted in February 2008 on charges of conspiracy, securities and mail fraud, and making false statements to the U.S. Securities and Exchange Commission. All were sentenced to prison and fined, but appealed their convictions.

Prosecutors alleged 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 AIG'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 it a $5 million fee.

However, defense attorneys argued last week that the trial court took AIG's multibillion stock price drop in 2005 as proof that the finite reinsurance deal was “material,” requiring AIG to inform investors, but that prosecutors lacked evidence on what really hurt the stock price.

“There was a great deal of other bad news about AIG at the time,” the defense said in Ms. Monrad's brief, without specifying. The defense also said prosecutors redacted mention of alternate explanations for the stock drop, interfering with the trial's fairness.

But the defense could have presented evidence in the trial to show that the stock price was irrelevant and it didn't, said assistant U.S. Attorney Raymond Patricco. He also the defense raised no other reasons for the drop in AIG's stock price and that AIG's insurance reserves mattered to investors.

Mr. Ferguson's lawyer, Paul A. Engelmayer, a partner at Wilmer Cutler Pickering Hale & Dorr L.L.P., said evidence about events such as conversations that took place between Oct. 31, 2000, and Nov. 13, 2000, shouldn't have been included in the case. He said the alleged conspiracy didn't take place before Nov. 13.

But prosecutors said the evidence showed the alleged conspiracy began before Nov. 13, such as testimony about AIG's desire to address stock market criticism by doing the unusually structured deal.

The defense also argued that the prosecution's use of recorded phone calls conveyed to the jury that AIG routinely engaged in accounting fraud. As the sole AIG defendant, such evidence portrayed Mr. Milton as guilty by association and prejudiced the jury against him, argued said Kannon K. Shanmugam, a lawyer a partner at Williams & Connolly L.L.P. and Mr. Milton's attorney.

Meanwhile Mr. Graham's lawyer, Alan Vinegrad, a partner at Covington & Burling L.L.P., said the jurors should have heard testimony from Mr. Graham's boss, Timothy McCaffrey, who then was Gen Re's general counsel.

Mr. Vinegrad said Mr. McCaffrey would have shed light on important matters. For example, a Dec. 22, 2000, e-mail that Mr. Graham sent to Mr. McCaffrey said that how AIG books the deal “is between them, their accountants and God; there is no undertaking by them to have the transaction reviewed by their regulators.” While Mr. McCaffrey had been named as a possible witness, he never was called to testify.

“The government scared (Mr. McCaffrey) off,” Mr. Vinegrad said last week. “They realized they didn't want him on the stand in Mr. Graham's defense.” Testimony from Mr. McCaffrey would have provided character evidence about Mr. Graham, Mr. Vinegrad said.

Prosecutors criticized “conjecture” about what Mr. Graham might or might not have done, and cited Mr. McCaffrey's “self-interest in minimizing the fraudulent nature” of the AIG deal. They also said evidence of Mr. Graham's role in the scheme included taped phone calls, hundreds of pages of e-mails and documents, and testimony from cooperating co-conspirators.

The appeals court took the case under advisement and will issue a ruling at a later date.

Although not familiar with the specifics of the appeals, attorneys said defendants such as the five former executives typically have an uphill battle in overturning their convictions.

Robert A. Mintz, a former federal prosecutor who heads the white-collar criminal defense group at McCarter & English L.L.P, said that for the appeals court to overturn the convictions, it would have to find not only that mistakes were made but that they were material errors. “It's hard to assess the likelihood of their success without having sat through the trial, but generally speaking, appealing a criminal case is a battle,” he said.

Generally speaking, said Peter J. Henning, a professor at Wayne State University Law School in Detroit, the appeals court will favor preserving the convictions. “It's not impossible” to overturn them, Mr. Henning said. “But it's not easy.”