U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19248 / June 6, 2005
ACCOUNTING AND AUDITING ENFORCEMENT
RELEASE NO. 2253 / June 6, 2005
SECURITIES AND EXCHANGE COMMISSION V. JOHN HOULDSWORTH , (S.D.N.Y. Civ. 05 CV 5325 (LP)
SEC CHARGES GEN RE EXECUTIVE FOR AIDING IN AIG SECURITIES FRAUD
The Securities and Exchange Commission today announced that it filed an enforcement action against John Houldsworth (Houldsworth), a former senior executive of General Re Corporation (Gen Re), for his role in aiding and abetting American International Group, Inc. (AIG) in committing securities fraud. In its complaint filed today in federal court in Manhattan, the Commission alleged that Houldsworth and others helped AIG structure two sham reinsurance transactions that had as their only purpose to allow AIG to add a total of $500 million in phony loss reserves to its balance sheet in the fourth quarter of 2000 and the first quarter of 2001. The transactions were initiated by AIG to quell criticism by analysts concerning a reduction in the company's loss reserves in the third quarter of 2000.
In partial settlement of the Commission's claims, without admitting or denying the SEC's allegations, Houldsworth consented to the entry of a partial final judgment which resolves all issues of liability against him but defers the determination of disgorgement and penalties until a later date. As part of his settlement, Houldsworth has agreed to cooperate fully with the Commission in its continuing investigation of this matter.
In its complaint against Houldsworth, the Commission alleges that Houldsworth and others at Gen Re worked with their counterparts at AIG to fashion two sham reinsurance contracts between Cologne Re Dublin, a Gen Re subsidiary in Dublin, Ireland of which Houldsworth was the Chief Executive Officer, and an AIG subsidiary.
The complaint details the conversations of participants in the planning meeting and other conversations that led to AIG's filing of fraudulent financial statements. On the basis of these conversations and other facts alleged, the complaint charges that all parties understood from the beginning that they were engaged in an undertaking to create sham transaction documents for the sole purpose of allowing AIG to make false accounting entries on its books.
As Houldsworth and others at Gen Re knew, AIG accounted for the sham transactions as if they were real reinsurance contracts that transferred risk from Gen Re to AIG, when all parties involved knew that was not true. As a result of AIG's accounting treatment for these transactions, the company's financial results showed false increases in reserves that AIG touted in the company's quarterly earnings releases for the fourth quarter of 2000 and the first quarter of 2001. Without the phony loss reserves, AIG's financial results in both quarters would have shown further declines in its loss reserves. In a press release dated March 30, 2005, AIG admitted that the accounting for these transactions was improper and would be corrected. In its 2004 Form 10-K filed with the Commission on May 31, 2005, AIG restated its financial statements to recharacterize the transactions as deposits rather than as reinsurance.
The Commission's complaint charges Houldsworth with aiding and abetting the violations by AIG and others of Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 of the Securities Exchange Act of 1934. Houldsworth, in addition to undertaking to cooperate fully with the Commission, consented to the entry of a partial final judgment permanently enjoining him from future violations of these provisions, barring him from serving as an officer or director of a public company and deferring the determination of civil penalties and disgorgement to a later date.
In addition, Houldsworth has agreed to a Commission administrative order, based on the injunction, barring him from appearing or practicing before the Commission as an accountant, under Rule 102(e) of the Commission's Rules of Practice. Houldsworth is licensed as a Chartered Accountant in England.
The Commission's investigation is continuing. The Commission acknowledges the assistance and cooperation by the U.S. Department of Justice Criminal Fraud Division and the U.S. Postal Inspection Service in this matter.