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Jan 21

Buffett unit pays more than $90 million to settle

Posted by Stephen Taub in U.S. AttorneyRiskJustice DepartmentinsurancecomplianceCFOBusiness practicesAIG

Stephen Taub

Warren Buffett and Berkshire Hathaway skate away again.

 A reinsurance subsidiary of Buffett's Berkshire Hathaway has agreed to pay $92.2 million to a number of governmental agencies and investors for its role in a scheme to manipulate the financial results of two other insurance companies in a non-prosecution agreement.

Buffett himself was not named. However, the legal problems certainly taint the Oracle of Omaha. And his company agreed to a series of governance reforms.

According to regulators, General Reinsurance, a wholly-owned subsidiary of Berkshire Hathaway, engaged in separate schemes with American International Group and Prudential Financial to use "sham transactions" to manipulate those companies' financial statements. "Gen Re knowingly provided substantial assistance to both AIO and Prudential in connection with their own violations of the books and records and internal control provisions of the federal securities laws," the SEC stated in its complaint.

"General Re has admitted that its most senior management engaged in a scheme to falsely inflate AIG's reported loss reserves, a key indicator of financial health to insurance industry analysts and investors," according to an announcement from the Department of Justice.

This all stems from the so-called finite insurance scandal at the beginning of the millennium. In fact, back in February 2008, four former General Re executives, including a one-time CFO, as well as an AIG exec, were found guilty of participating in a scheme to manipulate the financial statements of AIG. The individuals were Elizabeth Monrad, the ex-General Re CFO; Ronald Ferguson, the company's former CEO; former senior vice presidents Christopher Garand and Robert Graham; and Christian Milton, AIG's vice president of reinsurance until March 2005.

On Wednesday, Gen Re agreed to pay $19.5 million to the U.S. Postal Inspection Service Consumer Fraud Fund. Gen Re also agreed to pay $12.2 million to settle SEC charges. In addition, the reinsurer agreed to pay $60.5 million through a civil class action settlement to AIG's injured shareholders. Keep in mind that Gen Re previously forfeited to the government approximately $5 million in fees it earned for its participation in the scheme with AIG.

The SEC previously charged AIG with securities fraud and improper accounting, and the company settled the charges by paying more than $800 million among other remedies. The SEC also previously charged AIG former chairman Maurice R. "Hank" Greenberg and former chief financial officer Howard I. Smith, as well as former senior executives of Gen Re for their roles in connection with the scheme with AIG.

The Commission separately charged Prudential with securities laws violations in 2008.

The Justice Department said the fraud was carried out through the use of two sham reinsurance transactions between subsidiaries of AIG and General 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. AIG restated the transactions in filings with the SEC in May 2005, according to Justice.

The SEC further alleged that Gen Re separately entered into a series of sham reinsurance contracts with Prudential's property and casualty division from 1997 to 2002. The contracts had no economic substance and purpose other than to allow Prudential to build up and then draw down on an off-balance sheet asset or "finite bank" parked with Gen Re, the regulator asserted. As a result of the sham transactions, Prudential improperly recognized more than $200 million in revenues in 2000, 2001, and 2002. Gen Re received fees totaling $8.1 million for structuring and executing the scheme with Prudential.

The DOJ said it would not prosecute General Re, however, since the company cooperated with the Justice Department and the SEC. The government also cited the company's willingness to conduct an internal probe; its disclosure to the Justice Department and the SEC of other unrelated finite reinsurance transactions of concern; its willingness to accept responsibility for the conduct of its senior officers; its agreement to undertake remedial measures; and its demonstration of future compliance with the federal securities laws and Generally Accepted Accounting Principles.

Under its deal, General Re agreed to a number of changes to policy and procedure. For example, it agreed to appoint an independent member to General Re's Board of Directors, who will also be a member of the Audit Committee. In addition, a Berkshire official must attend General Re's Audit c1ommittee meetings.  


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