(CN) – Reinsurer General Re will pay $92.2 million to settle shareholder and SEC lawsuits for its role in manipulating the financial statements of American International Group and Prudential Financial, federal prosecutors said. Stamford, Conn.-based General Re is a subsidiary of Berkshire Hathaway, the holding company operated by famed investor Warren Buffett.
General Re will pay $19.5 million to the U.S. Postal Inspection Service Consumer Fraud Fund under a nonprosecution agreement with the Department of Justice. It will pay $60.5 million as part of a civil class action settlement with AIG shareholders and $12.2 million to settle SEC charges.
The SEC filed the settled complaint this week in Manhattan Federal Court. It states that a foreign subsidiary of Gen Re entered into two sham reinsurance transactions with AIG in 2000 to improperly allow AIG to reverse its declining reserve trend and falsely report additions to loss reserves and premiums written.
Senior officials at Gen Re helped AIG structure the sham transactions. The contracts show reinsurance transactions that appeared to transfer risk to AIG, but did not actually do so.
“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,” the Department of Justice said in a statement.
At a later criminal trial of four former General Re officers and one former AIG officer, the federal court found that AIG shareholders lost between $544 million and $597 million as a consequence of the fraud.
In addition, the SEC 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 or 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.
Prosecutors say that as a result of those sham transactions, Prudential improperly recognized more than $200 million in revenue in 2000, 2001 and 2002 and Gen Re received fees totaling $8.1 million for structuring and executing the scheme with Prudential.
The agreement requires General Re to maintain for 3 years internal corporate remediation provisions it has already implemented, including:
(1) appointment of an independent member to General Re’s Board of Directors, who will also be a member of the Audit Committee;
(2) attendance at General Re’s Audit Committee meetings by representatives of Berkshire Hathaway;
(3) creation of a Complex Transaction Committee, consisting of senior managers that, among other responsibilities, will review actuarial protocols for reinsurance contracts and will review on a quarterly basis certain reinsurance transactions to ensure that they are not designed to assist other parties in falsifying, manipulating and/or window-dressing its financial statements;
(4) enhance the review and reporting roles of its Internal Audit Group;
(5) establish a Risk Committee to examine risk exposure in underwriting transactions;
(6) implement enhanced underwriting rules for reinsurance and deposit transactions;
(7) ensure proper training and ethical compliance in risk-transfer protocols applicable to reinsurance contracts; and
(8) dissolve its subsidiary, Cologne Re Dublin, that had helped to structure the sham transaction.