U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19552 / February 2, 2006
Accounting and Auditing Enforcement Release No. 2369 / February 2, 2006
SECURITIES AND EXCHANGE COMMISSION V. RONALD FERGUSON, ELIZABETH MONRAD, ROBERT GRAHAM, CHRISTOPHER GARAND, AND CHRISTIAN MILTON, Case No. 06 Civ 0778 (S.D.N.Y.)
SEC CHARGES ONE AIG AND FOUR GEN RE EXECUTIVES FOR AIDING IN AIG SECURITIES FRAUD
The Securities and Exchange Commission today announced that it filed an enforcement action against five former senior executives of General Re Corporation (Gen Re) and American International Group, Inc. (AIG) for helping AIG mislead investors through the use of fraudulent reinsurance transactions. Four of the former executives, Ronald Ferguson, Elizabeth Monrad, Robert Graham and Christopher Garand, were with Gen Re, while the fifth, Christian Milton, was with AIG. The complaint, filed today in federal court in Manhattan, alleges that the defendants and others aided and abetted AIG’s violations of the antifraud and other provisions of the federal securities laws by helping AIG structure two sham reinsurance transactions that falsely increased AIG’s loss reserves in the fourth quarter of 2000 and first quarter of 2001 by a total of $500 million. 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 its complaint the Commission alleges that Ferguson, Monrad, Graham, Garand, and others at Gen Re worked with Milton and others at AIG to fashion two sham reinsurance contracts between Cologne Re Dublin, a Gen Re subsidiary in Dublin, Ireland, and an AIG subsidiary.
The complaint details recorded conversations among the defendants and other evidence reflecting the planning and implementation of the sham transaction. On the basis of this evidence, the complaint charges that the defendants understood from the beginning that they were structuring a sham transaction involving the creation of phony documents for the purpose of providing apparent support for false accounting entries AIG made on its books.
As the defendants and others at Gen Re and AIG 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 Ferguson, Monrad, Milton, Graham, and Garand with aiding and abetting AIG’s violations 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. The complaint seeks permanent injunctive relief, disgorgement of ill-gotten gains, if any, plus prejudgment interest, civil money penalties, and orders barring each defendant from acting as an officer or director of any public company.
In connection with the same conduct alleged in the Commission’s complaint, the U.S. Department of Justice, Fraud Section, Criminal Division (DOJ) has filed federal criminal charges against Ferguson, Monrad, Graham, and Milton in the U.S. District Court for the Eastern District of Virginia.
The Commission’s investigation is continuing. The Commission acknowledges the assistance and cooperation by the DOJ, the U.S. Attorney’s Office for the Eastern District of Virginia, and the U.S. Postal Inspection Service in this matter.