General Re, AIG Fraud Cost $1.4 Billion, U.S. Says

From John Curry, September 26, 2008

Subject: AIG fraud cost 1.4 billion to shareholders (that's also pension investments!)...wonder how much Ohio pension systems lost?

....wonder how much STRS lost? Will STRS tell us OR will we see another "spin?" For those fans of governmental "deregulation"...here's your cake. It doesn't taste so good, does it? John

(Update2)
Bloomberg.com, September 25, 2008
By David Voreacos and Jane Mills

Sept. 25 (Bloomberg) -- American International Group Inc. shareholders lost as much as $1.4 billion because of a fraud that led to the convictions of five insurance executives, U.S. prosecutors told a judge.

U.S. District Judge Christopher Droney may sentence four former General Reinsurance Corp. executives, including ex-Chief Executive Officer Ronald Ferguson, and a former AIG manager to life in prison if he agrees with the estimate. Droney began a sentencing hearing today for the ex-executives, who were convicted in February of fraud and conspiracy charges. Defense attorneys say AIG investors lost no money in the fraud.

A federal jury in Hartford, Connecticut, found in February that the former executives used a sham transaction in 2000 to help AIG add $500 million in loss reserves, a key indicator of an insurer's health. AIG shares fell between 6 and 15 percent in early 2005 when media and company disclosures began revealing the inflated loss reserves, prosecutors said today.

``This 6 to 15 percent stock drop represented the deflation of the stock that was previously inflated by the lies'' about the loss reserves, Assistant U.S. Attorney Raymond Patricco argued. ``The defendants have not offered any plausible alternative explanation for why AIG's stock price dropped.''

The loss amount will help determine the sentences. Any loss larger than $400 million exposes the defendants to a possible life term under advisory sentencing guidelines. Prosecutors say the fraud led to investor losses of between $543 million and $1.4 billion. Droney didn't rule today on the size of the loss, or set specific sentencing dates for the five defendants.

Berkshire Hathaway

AIG, based in New York, is the largest U.S. insurer by assets. The company agreed last week to hand over a 79.9 percent stake to the U.S. government in exchange for an $85 billion loan to avoid collapse. General Re is owned by billionaire Warren Buffett's Berkshire Hathaway Inc.

Jurors convicted Ferguson, 66; ex-Chief Financial Officer Elizabeth Monrad, 53; Christopher Garand, 61, a former senior vice president; Robert Graham, 60, a former General Re assistant general counsel; and Christian Milton, 60, AIG's former head of reinsurance. Each defendant is free on $1 million bond.

The defendants dispute calculations by the government's expert, Jeffry Davis, who used two methods to determine loss. Graham attorney Alan Vinegrad said other ``confounding' factors contributed to the decline in AIG shares, including the March 14, 2005, announcement of the resignation of former CEO Maurice ``Hank'' Greenberg.

``People weren't happy that Hank Greenberg wouldn't be running the company anymore,'' Vinegrad said. ``He was a giant in the industry and now he's gone. It was a powerful, confounding factor.''

`Cared So Much'

Vinegrad said prosecutors must prove that ``investors cared so much that they actually sold their shares of stock'' because of the disclosures about the loss reserves.

``That's where the government's analysis falls apart,'' said Vinegrad, who spoke on behalf of all five defendants. ``The market did not care enough about this particular transaction standing in isolation to sell stock.''

Investors drove down AIG's shares for a variety of reasons, including disclosures about investigations by former New York Attorney General Eliot Spitzer and federal regulators, Vinegrad said. In a Sept. 5 court filing, prosecutors disputed the analysis of defense expert Rene Stulz, who said Greenberg's resignation helped cause the stock decline.

``Rather than responding to the Greenberg void, it is far more likely that the market reacted because it lost faith in the integrity of the company's management and the accuracy of its past financial statements as a result of the reports that its CEO personally participated'' in the fraud, prosecutors wrote.

Unindicted Coconspirator

Prosecutors, who didn't charge Greenberg with a crime, said he was an unindicted coconspirator. Greenberg has denied wrongdoing. Greenberg spokeswoman Amy Foote declined to comment on the government's arguments.

At the hearing, prosecutors also argued that Droney should order the defendants to pay restitution to 154 institutional investors. Monrad attorney Bruce Bishop countered that it was too unwieldy for Droney to determine the victims. He said any victims could be repaid through ``ample civil litigation.''

The case is U.S. v. Ferguson, 06-cr-137, U.S. District Court, District of Connecticut (Hartford).

To contact the reporters on this story: Jane Mills in Hartford, Connecticutt ; David Voreacos in Hartford, Connecticut, at dvoreacos@bloomberg.net.