Five executives, one from American International Group, Inc. (AIG) and four from General Re Corporation (Gen Re), were found guilty of fraud and conspiracy and face prison sentences and hundreds of millions dollars in fines.

Details of the case

The case stems from a 2005 civil lawsuit filed by New York Governor Elliot Spitzer, then the Attorney General of the state, against former AIG executives Maurice Greenberg and Howard Smith for improper accounting, bid rigging and other charges. AIG agreed to pay $1.6 billion to settle the civil matter. However, criminal charges were then filed against five additional AIG and Gen Re insurance executives.

The five were accused of inflating AIG’s loss reserves, a key indicator of a company’s financial health, through sham reinsurance transactions, by $500 million ($250 million in the fourth quarter of 2000 and another $250 million in the first quarter of 2001). These inflated reserves led insurance analysts and AIG’s investors to believe that the company was in better financial shape than it actually was – which led to an increase in its stock.

U.S. Department of Justice

According to a press release on the U.S. Department of Justice’s website:

The government presented evidence at trial that showed that each of the defendants knew that the true purpose of the transactions was to permit AIG to falsely report increasing loss reserves in its statements to analysts and investors and its filings with the Securities and Exchange Commission (SEC). The defendants structured a sham reinsurance transaction and created a phony paper trail to make it appear as though Gen Re had solicited reinsurance from AIG when the evidence demonstrated that the parties knew AIG wanted the transaction to manipulate its financial statements.

Additionally, the defendants entered into a secret side deal whereby AIG would never have to pay any losses under the contracts; AIG would return to Gen Re the $10 million in premiums Gen Re paid to AIG and AIG paid Gen Re a $5 million fee for entering into the transaction.

To view the press release, go to: http://www.usdoj.gov/opa/pr/2008/February/80_crm_141.html

The five were convicted of all 16 charges brought against them – including conspiracy, securities fraud, mail fraud and lying to the SEC. Each of the five defendants face prison time and four of the five face fines of up to $46 million, the other $29.5 million. Their sentencing is in May 2008.