Sunday, December 2, 2007

Ex-General Re Officials' Trial May Highlight Buffett

-- Two former General Reinsurance Corp. executives may argue at their trial that contracts they arranged with American International Group Inc. didn't defraud investors because their boss, billionaire investor Warren Buffett, knew what they were doing, defense lawyers said.

General Re's former Chief Executive Officer Ronald Ferguson and ex-Chief Financial Officer Elizabeth Monrad are among five defendants accused of helping AIG inflate reserves by $500 million in late 2000 and early 2001. Jury selection for the federal criminal trial begins Dec. 3 in Hartford, Connecticut.

Buffett, who isn't charged with wrongdoing, may testify for prosecutors, according to court papers. They're trying to prove executives at AIG, the world's biggest insurer, and General Re, a unit of Buffett's Berkshire Hathaway Inc., sought to deceive investors about AIG's ability to absorb losses. Maurice ``Hank'' Greenberg, AIG's former chief, is an unindicted co-conspirator, defense lawyers say in court filings.

``Buffett is an iconic figure,'' Monrad attorney Reid Weingarten said Oct. 10 at a pre-trial hearing in Hartford. ``He commanded enormous respect with Elizabeth Monrad. The evidence is beyond dispute that he knew about the transaction. He didn't stop it. It is incredibly important to our defense that Elizabeth Monrad believed Buffett was on board.''

Lawyers for Ferguson, 65, and Monrad, 53, claim in court papers that Buffett knew key details about reinsurance contracts at the heart of the case. They have argued in pre-trial motions that they had no intent to defraud and they relied on many people involved in the transaction, including Buffett.

`Factually Incorrect'

Buffett, 77, said claims by Ferguson and Monrad are ``factually incorrect,'' according to Debbie Bosanek, a spokeswoman for Omaha, Nebraska-based Berkshire. Greenberg, 82, has denied wrongdoing and his attorney, Robert Morvillo, said the ex-CEO believed he was involved in a legitimate transaction.

The trial centers on contracts dated Dec. 1, 2000, and March 31, 2001, initiated after analysts criticized AIG's reduction of loss reserves by $59 million in the third quarter of 2000.

Prosecutors say New York-based AIG paid a $5 million fee to Stamford, Connecticut-based General Re for the deal. The companies agreed AIG would incur no losses, even though the contract made it appear AIG could lose $100 million, prosecutors say.

AIG later reversed the transactions and agreed in February 2006 to pay $1.64 billion to settle probes of accounting and sales practices by former New York Attorney General Eliot Spitzer, the U.S. Securities and Exchange Commission and the Justice Department.

Fraud Charges

Prosecutors have brought conspiracy, securities fraud, mail fraud and false statements charges against Ferguson, Monrad and three others: Christopher Garand, 60, a former senior vice president in charge of finite reinsurance; Robert Graham, 59, former assistant general counsel; and Christian Milton, 60, the former head of reinsurance at AIG.

Two former General Re executives, John Houldsworth, 48, and Richard Napier, 56, have pleaded guilty and are expected to testify as government witnesses. Jurors also will hear recorded conversations and review e-mails, court records show. Opening arguments are scheduled for Jan. 7.

Statements by Ferguson and Monrad about Buffett's knowledge are wrong ``in all material respects,'' Bosanek said. In a March 2005 statement, Berkshire said Buffett ``was not briefed on how the transactions were to be structured or on any improper use or purpose of the transactions.''

Buffett's Company

Buffett, the world's third-richest man according to Forbes magazine, is CEO and chairman of Berkshire, which he built during the past four decades into a $200 billion company with businesses ranging from ice cream and bricks to insurance and corporate jet leasing. The company's shares, the most expensive on the New York Stock Exchange, sell for more than $137,000 each.

Lawyers for Ferguson and Monrad discussed Buffett in written responses to the SEC in 2005. The agency staff notified Ferguson and Monrad that it was contemplating enforcement actions.

``The record before the staff establishes that Mr. Ferguson's boss, Warren Buffett, had the same quantum of information about the transaction as Mr. Ferguson,'' said the so-called Wells submission dated Oct. 7, 2005.

``The documents show that Mr. Buffett approved the transaction and subsequently was involved in decisions concerning the fee that AIG paid to General Re and, in fact, made the ultimate decision about the fee,'' wrote Ferguson's attorneys.

No Intent

In her Wells submission, lawyers for Monrad said she never believed that AIG intended to violate securities laws.

``Ms. Monrad believed in 2000 that individuals at Berkshire, particularly Warren Buffett, were apprised of and updated on the contemplated transaction with AIG'' and ``they did not object to it,'' the lawyers wrote.

The SEC filed a federal civil lawsuit against the five defendants on Feb. 2, 2006. That case is pending in New York.

Prosecutors have told defense lawyers they intend to introduce evidence that Ferguson misled Buffett about the $5 million fee that AIG agreed to pay General Re, according to a letter from Assistant U.S. Attorney Eric Glover made public on Sept. 12.

Prosecutors also have identified Greenberg as an unindicted co-conspirator who initiated the so-called loss-portfolio transfer at the heart of the case, Ferguson attorney Douglas Koff said in a June 18 motion.

Greenberg's Role

``Mr. Greenberg is a central figure in the prosecution's case, i.e., an unindicted co-conspirator who allegedly conceived of the LPT as a way to carry out an alleged accounting fraud, and the one person at AIG with whom Mr. Ferguson allegedly discussed the LPT during unrecorded phone conversations,'' Koff said in the motion, which sought to compel AIG to comply with subpoenas.

Greenberg attorney Robert Morvillo said he couldn't comment on whether his client is an unindicted co-conspirator.

``There is no opportunity in the law to respond to an allegation in which you are not named as a party to a lawsuit,'' Morvillo said. ``He is not named as a defendant. He has no opportunity to challenge or respond to the characterization.''

Morvillo said Greenberg ``initiated the transaction in a phone call to Mr. Ferguson, but he believed he was initiating a totally legitimate transaction.''

Greenberg delegated structuring of the transaction to others because he doesn't get involved in such details, Morvillo said.

AIG's board ousted Greenberg in March 2005 and said it was ``improper'' for it to account for the deal as reinsurance. He's now trying to line up support from other AIG investors to sell parts of the company and spur current management to improve performance, according to a Nov. 2 regulatory filing.

The case is U.S. v. Ferguson, 06-cr-137, U.S. District Court, District of Connecticut (Hartford).

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