General Reinsurance Corp., a subsidiary of Warren Buffett's Berkshire Hathaway Inc. (BRKa), entered into settlements with the Justice Department and the Securities and Exchange Commission Wednesday concerning its role in fraud schemes by American International Group (AIG) and Prudential Financial (PRU).
In the settlement with the SEC, General Re agreed to pay $12.2 million to settle charges that it was involved in separate schemes by AIG and Prudential Financial to manipulate and falsify their reported financial results.
According to the SEC, General Re entered into two sham "reinsurance" transactions with AIG in 2000 to improperly allow AIG to reverse the declining reserve trend and falsely report additions to both loss reserves and premiums written. Senior officials at Gen Re helped AIG structure the two sham transactions.
The contracts, the SEC said, show reinsurance transactions that appeared to transfer risk to AIG, but the transactions did not transfer risk.
Additionally, the SEC charged General Re with entering 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 General Re.
As a result of the sham transactions, Prudential improperly recognized more than $200 million in revenues in 2000, 2001, and 2002. General Re received fees totaling $8.1 million for structuring and executing the scheme with Prudential.
In the settlement with the Justice Department, General Re agreed to pay $19.5 million to the U.S. Postal Inspection Service Consumer Fraud Fund for its role in the same AIG fraud scheme the SEC charged it with.
According to the department, 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.
The department said that when the investigation was disclosed to investors by AIG and through various media outlets between February 14 and March 14, 2005, shares of AIG stock dropped from $73.12 to $61.92. This resulted in shareholders losing between $544 million and $597 million.
General Re has admitted that its senior management who were involved in the scheme knew that the true purpose of the transactions was to permit AIG to falsely report increasing loss reserves in its statements to analysts, investors and in its SEC filings.
Additionally, General Re agreed to pay $60.5 million through a civil class action settlement to AIG's injured shareholders, and the company previously forfeited to the government approximately $5 million in fees it earned for its participation in the scheme with AIG.
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