Prosecutors say former AIG executives created a fraud

By Lynnley Browning

Published: February 12, 2008

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HARTFORD, Connecticut: Prosecutors in the trial of five former insurance executives insisted in closing arguments that the defendants had deliberately mounted a fraud to allow the American International Group to manipulate its financial statements.

But prosecutors avoided mention of Warren Buffett, the investor whose company, Berkshire Hathaway, owns General Re, which helped AIG on the questionable deal.

Instead Eric Glover, a U.S. prosecutor, told jurors and a packed courtroom Monday that four defendants from General Re knowingly worked with a fifth defendant, from AIG, to create a sham transaction that allowed AIG to inflate its loss reserves improperly by $500 million in 2000 and 2001. Buffett was not accused of wrongdoing.

The transaction, whose accounting AIG has acknowledged was improper, helped AIG to assuage analysts that its loss reserves - a crucial indicator - were not too low, which in turn bolstered its flagging share price.

AIG, the insurance company, paid General Re a $5 million fee for the deal - an unusual arrangement.

In their closing statements, defense lawyers questioned the reliability of two important government witnesses and criticized prosecutors for citing snippets of telephone conversations.

The summations, which continued on Tuesday, come after a five-week trial in U.S. District Court here. Jurors could begin deliberations as early as Wednesday.

The two most prominent defendants are Ronald Ferguson, the former chief executive of General Re, and Elizabeth Monrad, General Re's former chief financial officer.

In the indictment last year, AIG's former chief executive, Maurice Greenberg, was identified as an unindicted co-conspirator who was aware of the details of the deal. Greenberg has denied any wrongdoing.

Prosecutors have treaded lightly with Buffett, whom they had put on a witness list but did not call to testify. Buffett has cooperated with investigators.

By contrast, defense lawyers highlighted what they contended was Buffett's knowledge of the deal.

An e-mail message in January 2001 from Ferguson to Buffett, released in court papers, says: "Warren, just a quick note to let you know why I hesitated a moment when you mentioned the $5,000,000 fee on the reserve transaction. We are indeed charging a 1 percent fee but for some reason AIG decided to split the deal in to two $250,000,000 tranches one to be registered in 2000 and one in 2001."

In his closing statement - the first by the defense - Reid Weingarten, who represents Monrad, put the blame on a low-level, unindicted AIG accountant, whom he said had made an honest mistake that "traveled up the food chain."

Weingarten derided the prosecution's description of the transaction. "You think that's the first time it's happened in the economic world of America?" he asked the jurors. "There's a whole industry that does it."

For more than two hours, Glover, the prosecutor, focused on what he called the secret side agreements and fake documentation intended to hide the lack of real risk transfer between AIG and General Re - something needed for the deal to be legitimate.

"The defendants knew the true deal and documented the false one," Glover said. Avoiding complex arcana, he told the jurors to "follow the money" and to compare the workings of the deal to buying ordinary car insurance. "Remember that no one pays you to insure your car," he said of the $5 million fee.

Glover played telephone recordings that he said showed that the defendants, in particular Monrad, knew the deal was improper. In several of them, Monrad can be heard laughing, saying that with regard to the fee arrangement, "if we ever talked about it, our name would be mud."

Weingarten, Monrad's lawyer, slammed Glover for what he said was taking calls out of context.

Before the jury, Weingarten repeatedly pointed his finger and swept his arms. He repeatedly said, "Oh, my God!" in mock tones, apparently to illustrate his contention that nothing deliberately fraudulent had occurred. And he suggested that the unusual fee arrangement was in part motivated by Monrad's effort to "make up to" AIG for a failed film-financing deal with General Re.

Weingarten also questioned the memory and credibility of the two prosecution witnesses: John Houldsworth and Richard Napier, both former senior General Re executives, who have pleaded guilty to fraud.

The defendants are variously charged with 16 counts of conspiracy, including securities fraud, mail fraud and submitting false statements to the Securities and Exchange Commission, over 2000 to 2003.

The other defendants are Christian Milton, AIG's former head of reinsurance; Robert Graham, General Re's former senior vice president and assistant general counsel; and Christopher Garand, a former General Re senior vice president.