Professional Documents
Culture Documents
I. Introduction
2. General Re, through its subsidiaries, is one of the world’s largest providers
of reinsurance services. General Re owns General Reinsurance Corporation (“Gen Re”), which
had and has reinsurance operations in the United States and elsewhere. Beginning in 1994, Gen
which had and has a subsidiary in Dublin, Ireland, known as Cologne Re Dublin (“CRD”).
provider of insurance and also provided financial services to other financial institutions. AIG was
incorporated in Delaware with its principal place of business in New York, New York. Certain of
AIG’s securities were registered with the SEC pursuant to Section 12(b) of the Securities
Exchange Act of 1934 and listed on the New York Stock Exchange.
including National Union Fire Insurance Company of Pittsburgh, Pennsylvania (“NUFIC”) and
Hartford Steam Boiler Inspection and Insurance Company of Hartford, Connecticut (“HSB”),
which it acquired in 2001. The financial information of NUFIC and HSB was consolidated into
2005, General Re, through its subsidiary Gen Re, Gen Re’s affiliate CRD, and the conduct of
certain of its most senior management, participated and assisted in a sham reinsurance
transaction with AIG, which AIG used to falsely report inflated loss reserves in its public
financial statements for Q4 2000, fiscal years 2001 through 2003, and the first three quarters of
2004. Loss reserves represent probable and reasonably estimable future loss claims on
underwriting policies that insurance companies are required to account for under Generally
Accepted Accounting Principles (GAAP). Periodic changes in loss reserves are reflected as a
separate expense on an insurance company’s income statement and aggregate loss reserves are
are required to report loss reserves in their financial statements filed with the SEC and in
insurance company’s loss reserve development because, among other things, it is an indicator of
whether management is sufficiently anticipating future loss claims against the company.
Management’s failure to adequately account for loss reserves for policies that the company is
underwriting may therefore impact the company’s future earnings. Because the adequacy of a
company’s loss reserves inherently involves judgments by senior management, the failure of
management to properly account for loss reserves may reflect on the business judgment of the
company’s management and the reliability of its financial statements. Evidence that showed that
the company’s management may have deliberately manipulated the company’s reported loss
reserves would also undermine the perceived integrity of the company’s management and the
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7. Gen Re, through certain of its then senior management and executives, as
transaction involving existing portfolios of reinsurance held by one of Gen Re’s overseas
affiliates, CRD, to one of AIG’s subsidiaries, NUFIC. The transaction, termed the Loss Portfolio
Transfer (“LPT”) by the parties, nominally exposed AIG to $600 million in potential loss for a
premium of $500 million. Two percent (2%), or $10 million, of the premium purportedly was to
be advanced by Gen Re to AIG (the “premium fee” or “2% fee”), and the remainder purportedly
to be held by CRD in an experience account, in which interest earned on the funds withheld
would be offset by claims against AIG under the LPT. In truth, as certain members of Gen Re’s
then senior management knew, (1) AIG’s management did not seek to bear any real risk under
the LPT; (2) AIG in fact would not and did not bear any real reinsurance risk under the LPT; (3)
AIG would and did pre-fund the premium through an apparently unrelated transaction; (4) CRD
would not and did not maintain an experience account in connection with the LPT; and (5) AIG
would and did provide Gen Re with an accommodation fee of $5 million, also via an apparently
unrelated transaction, that was not documented in the sham formal LPT contract (the
reinsurance transaction must transfer sufficient risk from the party seeking reinsurance (“the
reinsured”) to the party providing reinsurance coverage (“the reinsurer”) in order for the
purported reinsurer to account for the transaction as reinsurance, thereby permitting the reinsurer
to book additional loss reserves as liabilities. The purported reinsurer is also required to
independently determine whether it will be exposed to risk under the terms of a reinsurance
contract, as determined pursuant to GAAP, before it can account for the transaction as
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reinsurance under GAAP. A reinsurance transaction that does not qualify for reinsurance
accounting because it does not transfer sufficient risk must be accounted for by the reinsurer
using “deposit” accounting, resulting in the recording of deposit assets and deposit liabilities that
are separate from loss reserves. Whether or not the parties to a reinsurance transaction have
accounted symmetrically for a transaction (i.e., both parties will record the transaction either as
reinsurance or as a deposit), GAAP requires that the party recording the transaction as
reinsurance conduct its own separate analysis of risk transfer in the transaction.
9. Certain of Gen Re’s then senior management knew and understood that
AIG’s management did not wish to bear any real risk under the LPT and that AIG lacked
sufficient information to conduct its own independent actuarial assessment of risk transfer in the
LPT. These executives understood that since Gen Re would not transfer sufficient risk to AIG
under the LPT, AIG was not permitted under GAAP to account for the LPT as reinsurance, and,
therefore, was not permitted to record any loss reserves for the LPT. These executives had no
reason to believe that AIG was entering into the transaction for any purpose other than booking
additional loss reserves. These executives also understood that Gen Re (through its affiliate
CRD) would account for the transaction as a deposit, but that neither AIG nor Gen Re would
disclose in their financial statements the asymmetrical accounting treatment. Disclosure of the
asymmetrical accounting treatment could potentially have brought increased scrutiny of the
transaction from AIG’s auditors, regulators and investors, which, in turn, could potentially have
10. Some analysts were concerned by AIG’s disclosure that on October 26,
2000, its loss reserves for general property and casualty insurance had declined by $59 million.
The reinsurance transaction with Gen Re was wrongly used by AIG to falsely increase its
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reported loss reserves for general property and casualty insurance by $250 million in Q4 2000
and an additional $250 million in Q1 2001, thereby masking declines in general property and
casualty insurance loss reserves in the amount of $144 million and $187 million for each of those
quarters, respectively. The transaction also allowed AIG to report total loss reserves for general
property and casualty insurance that were improperly inflated by $500 million in every quarter
thereafter through Q3 2004. Certain of Gen Re’s then senior management had reason to believe,
furthermore, that AIG’s motive for entering into the transaction was for AIG to deceive analysts,
shareholders and members of the investing public about the true state of its loss reserves.
11. Notwithstanding their knowledge regarding AIG’s motive for entering the
transaction, certain of Gen Re’s then senior management and executives aided and abetted AIG
in the falsification of its financial statements. These executives at Gen Re, with the assistance of
an attorney then in Gen Re’s legal department: documented the fraudulent transaction, and
created a false paper trail to make it appear as if Gen Re’s affiliate CRD was soliciting
reinsurance from AIG’s subsidiary NUFIC, when in fact it was AIG that contacted Gen Re
understanding to use the balance of funds from unwinding an unrelated transaction with another
AIG subsidiary to fund the premium fee that Gen Re owed AIG under the purported LPT and to
fund the accommodation fee; created an additional false reinsurance transaction to justify the
movement of money from Gen Re to CRD to pre-fund the premium and to fund CRD’s portion
of the fee; and failed to disclose the true nature of the transaction to regulators through January
of 2005, when Gen Re disclosed the transaction and the facts surrounding it to the government.
12. On October 26, 2000, AIG announced that the company’s loss reserves for
general insurance underwriting had declined by $59 million in Q3 2000. AIG’s stock closed that
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day at $93.31 per share, down approximately six percent from its closing price the previous day
of $99.37. On October 31, 2000, a senior executive at AIG (hereinafter “AIG SE #1”), who was
United States v. Ferguson, et al., 06-137 (D. Ct. 2006), contacted Ronald E. Ferguson
(“Ferguson”), Gen Re’s then CEO, to propose a transaction between AIG and Gen Re that would
permit AIG to record between $200 to $500 million in loss reserves on its balance sheet for a six-
to-nine month period. AIG SE #1 also specified, however, that he/she wanted loss reserves from
Gen Re’s “long tail” lines of reserves, i.e., portfolios of reinsurance reserves for underlying
policies that would not mature into liabilities for the reinsurer in the near term. That same day,
Ferguson debriefed Richard Napier (“Napier”), then a senior vice president at Gen Re and the
primary relationship manager for AIG, on the substance of AIG SE #1’s request.
13. Ferguson directed Napier to consult with a senior executive of Gen Re’s
management team (hereinafter “Gen Re SE #1), who was identified as an unindicted co-
conspirator in the related federal criminal proceedings captioned United States v. Ferguson, et
al., 06-137 (D. Ct. 2006), about accommodating AIG SE #1’s request. Gen Re SE #1 suggested
to Napier that, among other things, in structuring the transaction it might be best to stay away
from Gen Re’s U.S. companies to avoid creating issues that might result if Gen Re reported large
fluctuations in its reported reserves in the United States. Gen Re SE #1 further suggested to
Napier that he should consider, among other possibilities, using reserves located at Cologne Re
Dublin.
Elizabeth Monrad (“Monrad”), the then CFO of Gen Re, and other members of senior
management, Napier wrote that he had confirmed with AIG that AIG only wanted “reserve
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impact” from the transaction and was not concerned about receiving funds for the reinsurance
premiums from Gen Re. Napier further wrote that the transaction appeared to be “in response to
analysts’s negative reaction to AIG’s reserve reductions at Q3.” Napier again advised Ferguson,
Gen Re SE #1, Monrad and others on November 7, 2000, that AIG’s interest in the transaction
may be related to analyst criticism of AIG’s Q3 2000 loss reserve decline and distributed an
analyst’s comment reflecting the market’s concern about AIG’s loss reserves.
concluded that the transaction should be structured using CRD. Monrad then contacted John
Houldsworth, the CEO of CRD, about the proposed transaction. In conversations on November
13 and 14, 2000, Monrad informed Houldsworth that AIG’s motivation for entering the
transaction was to address further stock market criticism of its loss reserves, and that AIG
wanted to book $500 million in reserves without being exposed to real risk of loss. Monrad also
informed Houldsworth that the deal had to be finalized by year end 2000, which corresponded
with the end of AIG’s fourth quarter for 2000. Monrad further advised Houldsworth that it was
important to use reserve portfolios in one of Gen Re’s subsidiaries outside the United States to
avoid regulatory reporting requirements. Finally, Monrad emphasized that it was important that
the transaction not be disclosed in CRD’s public filings in Ireland, and Houldsworth responded
Ferguson that AIG would probably book the transaction as reinsurance because AIG wanted to
record loss reserves associated with its underwriting business. Monrad further advised Ferguson
that because Gen Re would record the transaction as a deposit, the companies might have
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17. On November 15, 2000, Houldsworth circulated to Monrad, Napier and
others a draft contract for a reinsurance transaction between CRD (the reinsured) and NUFIC
(the reinsurer) for coverage in an aggregate amount of $600 million in exchange for a $500
million premium, 98% of which would purportedly be withheld by CRD in an interest bearing
“experience account,” against which CRD would charge claims. Houldsworth explained by
email that he understood that Gen Re and AIG did not intend to transfer “real risk” to AIG in the
transaction. Further, Houldsworth proposed that AIG would be denied access to CRD’s client
records supporting the reserves. Without access to information about the reserves, AIG’s
actuaries could not determine whether the contract transferred risk. Houldsworth also indicated
that CRD would “deposit account” for the transaction and that CRD would request “tight
confidentiality” from its outside audit firm in connection with their review of the transaction.
audience for the draft contract to be persons looking at the accounting for the transaction on
behalf of AIG.
19. After Monrad and Napier received Houldsworth’s draft contract, they
discussed the fact that the contract was designed to make it appear as if Gen Re transferred risk
to AIG, when in fact Gen Re would not charge AIG for any losses under the contract, rendering
the loss exposure of AIG inconsequential. They also discussed Gen Re’s ability to unilaterally
terminate the contract and Gen Re’s purported payment of a $10 million fee to AIG under the
terms of the contract. They further discussed the fact that AIG would have an “accounting
problem” if it booked loss reserves under the contract and that the contract presented
“reputational risk” for Gen Re. Napier subsequently briefed Ferguson on the structure of the
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20. On or about November 17, 2000, AIG SE #1 and Ferguson discussed
additional details of the transaction. Ferguson advised Napier about his discussion with AIG SE
#1, and Napier then informed Gen Re SE #1, Monrad and others that Ferguson and AIG SE #1
had agreed to a reinsurance transaction involving CRD and NUFIC; that the transaction would be
in two “tranches” in successive quarters (Q4 00 and Q1 01), each tranche involving $250 million
premium; that AIG would pay Gen Re a 1% accommodation fee; and that among the details to
be worked out later was how Gen Re would “recover” the $10 million “premium” fee it would
advance to AIG. Ferguson later cautioned the recipients of Napier’s email to “keep the circle of
Vice President and Chief Underwriter for finite reinsurance at Gen Re, and a member of CRD’s
produce a paper trail offering the transaction to [AIG],” when in fact it was AIG that had
solicited the transaction. That same day, in a conversation with Monrad and Napier, Houldsworth
again discussed whether AIG needed to create an offer letter to make it look like “a piece of risk
business,” and Monrad in turn suggested the need for a “paper trail” showing the gross cash
flows, including a wire transfer from CRD to AIG in the amount of $10 million, which Gen Re
that he was considering creating a phony “paper trail” to make the transaction appear legitimate.
In that conversation, Houldsworth also discussed the need for certain senior executives to “sign
off on the reputational risk” associated with the transaction, to which Garand suggested that
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23. Houldsworth subsequently drafted an offer letter from CRD to NUFIC
requesting NUFIC’s participation in the reserve transaction, when in fact he and others knew the
opposite was true. He forwarded the false offer letter to Monrad and to Gen Re’s then in-house
counsel, Robert D. Graham. Graham advised a then senior executive in Gen Re’s legal
the related federal criminal proceedings captioned United States v. Ferguson, et al., 06-137 (D.
Ct. 2006), in an email dated December 22, 2000, that CRD would “book the transaction as a
deposit,” that “[h]ow AIG books it is between them, their accountants and God,” and that “there
further advised Gen Re SE #2 that certain then senior management were aware of and had signed
off on the reputational risk associated with the transaction. In a conversation on December 27,
2000, Graham informed Houldsworth that, notwithstanding that meetings and conversations for
the transaction were occurring at Gen Re’s headquarters in Stamford, the “paper trail” of “deal
correspondence” should lead to CRD in Dublin. On December 27, 2000, Houldsworth sent the
contract for the first tranche ($250 million) of the LPT and the bogus offer letter to Christian
Milton, a senior vice-president, at AIG. The contract for the first tranche of the LPT was
III. Gen Re’s Executives Structure and Implement the Pre-Payment of the Premium Fee
be kept informed of any important matter involving AIG. On September 28, 2001, the contract
for the second tranche of the LPT was executed by the parties. As of this time, CRD had not paid
AIG either the purported $10 million premium fee and had not received the $5 million
accommodation fee, because the parties had not determined how AIG would return the $10
million to Gen Re. Certain of Gen Re’s then executives understood the need to structure a
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transfer of funds for AIG’s prepayment of the premium fee and AIG’s payment of the
accommodation fee that would not disclose any link to Gen Re’s purported payment of the $10
25. In December 2001, Gen Re and AIG devised a method for AIG to pre-
fund the premium fee that Gen Re purportedly “owed” AIG under the terms of the contracts and
to pay Gen Re the $5 million accommodation fee. Garand informed certain of Gen Re’s then
senior management that the undisclosed pre-payment of the premium fee and the accommodation
fee would be accomplished by using the balance of funds from an unrelated agreement between
Gen Re and one of AIG’s subsidiaries, HSB. This agreement would be unwound and leave Gen
Re holding a positive balance from the HSB deal of approximately $31 million in funds. Gen Re
would transfer to CRD some of the HSB balance to pre-fund CRD’s payment of the two percent
premium to NUFIC and to pay CRD its portion of the $5 million accommodation fee (which Gen
Re was sharing with CRD). At AIG’s request, an additional $9.1 million of the HSB balance
would be transferred to NUFIC rather than HSB. The remainder of the balance, approximately
$12.6 million in funds to CRD. The sum represented the prepayment of the two percent premium
of $10 million that CRD would forward to NUFIC under the terms of the LPT and CRD’s half of
the 5 million fee, with interest. Gen Re SE #1 authorized the wiring of funds based on another
contract in which Gen Re purported to reinsure CRD for up to $13 million in loss for a premium
of $400,000. CRD thereafter claimed losses to the full coverage against Gen Re, thereby
providing pretext for the transfer of $12.6 million (the amount of reinsurance coverage minus the
premium) from Gen Re to CRD. Had someone unfamiliar with the true details of the transaction
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looked at the documents, the effect would have been to conceal the true purpose of the transfer of
27. To facilitate the wire transfer of $9.1 million from Gen Re to NUFIC, an
additional reinsurance contract with no possibility of loss was created between Gen Re and
NUFIC. Gen Re SE #1 was provided this contract, and pursuant to it authorized wire transfers on
December 28, 2001, to NUFIC in the amount of $9.1 million and to HSB for the remaining
Ireland, to inventory transactions that might pose legal, regulatory, or reputational risk. On a
scale of one to ten, with one being the highest risk and 10 being the lowest risk, the inventory
review rated the LPT as a two. In connection with the review, Gen Re SE #2 made a
handwritten notation that there was a “hidden letter” associated with the LPT.
Gen Re and AIG discussed the possibility of commuting one or both of the two LPT contracts. In
July and August 2002, Gen Re SE #1 informed certain then senior executives that he personally
would communicate with AIG’s senior management regarding the LPT and oversee the future of
the LPT. Gen Re SE #1 ultimately decided against asking AIG to commute the transaction in
2002. The transaction remained in effect through 2004, when one tranche was commuted by the
parties. Gen Re’s failure to disclose the transaction prior to 2005 assisted AIG in falsely
inflating by $500 million its loss reserves for general insurance that were reported in its financial
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V. Actions By Gen Re SE#1 With Respect to the LPT in Late 2004
30. In October 2004, AIG informed Gen Re that it wanted to commute one
tranche of the LPT. Gen Re SE #1 initially informed another Gen Re senior executive that he did
Gen Re SE #1 objected to doing so at the time, stating that if Houldsworth were terminated, it
32. On another occasion, when that same Gen Re senior executive asked Gen
Re SE #1 about the LPT because of that executive’s concern about the propriety of the
transaction, Gen Re SE #1 denied knowledge of its terms. Gen Re SE #1 later told that same Gen
33. On November 22, 2004, AIG and Gen Re commuted the first tranche of
the LPT.
of the Securities & Exchange Commission, the Department of Justice, and the New York
Attorney General’s Office regarding the LPT, and shortly thereafter met with government
officials to disclose facts regarding the LPT transaction. This disclosure was of assistance to the
decision to issue a subpoena to AIG for specific information about the LPT. Since that time,
Gen Re, including its then recently hired general counsel, has fully and unconditionally
35. On or about February 14, 2005, AIG disclosed that it had received a
subpoena from the SEC relating to finite reinsurance activities. Subsequently, on February 18,
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2005, the Wall Street Journal, in an article admitted in part as GX 244A in the related federal
criminal trial in United States v. Ferguson et al., 06-137 (D. Ct. 2006), reported about the
possibility of a transaction between AIG and Gen Re that was designed to artificially increase
AIG’s loss reserves. On March 14, 2005, the New York Times, in an article admitted in part as
GX 248A in the related federal criminal trial in United States v. Ferguson et al., 06-137 (D. Ct.
2006), reported that AIG’s Board of Directors was examining the role of AIG’s senior
management in the transaction. During the period from February 14, 2005 to March 15, 2005,
AIG’s stock price fell approximately thirteen percent, from $71.49 per share to $61.92 per share.
Gen Re’s senior management, the United States District Court that presided over the criminal
case of Gen Re’s former executives determined that, for purposes of calculating the sentencing
37. On May 31, 2005, AIG issued restated financial statements for the fiscal
years 2000 through 2003. In its restatement, AIG concluded that insufficient risk was associated
with the LPT and that the LPT should not have been accounted for as reinsurance. AIG restated
its total loss reserves for Q4 2000, for fiscal years 2001 through 2003, and for the first three
quarters of 2004 to adjust for the false inflation of its loss reserves caused by the LPT.
38. There are other matters known to the parties that are not included in this
Agreed Statement of Facts because they are not relevant to the purpose of this Statement of Facts
or to the agreement between the Government and Gen Re which is entered into in connection
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