A dark day for former AIG and General Re executives

The spectre of lengthy prison terms
hangs over the heads of four former senior executives of reinsurer
General Re (Gen Re) and one former senior executive of American
Insurance Group (AIG). This unpleasant prospect follows their
conviction on 28 February by a federal jury on 16 counts of
conspiracy, securities fraud, false statements to the US Securities
and Exchange Commission (SEC) and mail fraud.

Those convicted are Ronald Ferguson, Gen Re’s CEO from 1987 to
2001; Elizabeth Monrad, Gen Re’s chief financial officer from 2000
to 2003; Robert Graham, Gen Re’s senior vice-president and
assistant general counsel from 1986 to 2005; Christopher Garand,
Gen Re senior vice-president and the head and chief underwriter
from 1994 to 2005; and Christian Milton, AIG’s vice-president of
reinsurance from 1982 to 2005.

Falsely increased loss reserves

At trial, the federal prosecutor presented evidence that the
defendants engaged in a scheme to falsely inflate AIG’s reported
loss reserves by using two sham reinsurance transactions between
subsidiaries of AIG and Gen Re in response to analysts’ criticism
of a $59 million decrease in AIG’s loss reserves for the third
quarter of 2000. The two sham transactions increased AIG’s loss
reserves by $250 million in the fourth quarter of 2000 and $250
million in the first quarter of 2001, masking a declining trend in
loss reserves in the face of premium growth.

Evidence presented at trial noted that when the investigation was
made public, AIG’s share price dropped by 15.3 percent between 14
February and 14 March 2005. AIG restated the transactions at issue
in filings with the SEC in May of 2005. In February 2006 AIG agreed
to pay $1.6 billion as settlement of federal actions brought
against it as a result of the sham reinsurance transactions by the
SEC and state actions brought against it by the New York Attorney
General and the New York Superintendent of Insurance.

Ferguson, Monrad, Milton and Graham each face a maximum term of
imprisonment of 210 years based upon their conviction on all
counts, and a fine of up to $46 million. Garand faces a maximum
term of imprisonment of 150 years and a fine of up to $29.5
million. The sentencing date for the five has been set for 15 May
2008.