A former executive at American International Group Inc. and four at General Reinsurance Corp. won reversal of their convictions on charges that they defrauded AIG investors of as much as $597 million.
The U.S. Court of Appeals in New York yesterday ordered a new trial for ex-General Re Chief Executive Officer Ronald Ferguson, ex-Chief Financial Officer Elizabeth Monrad, ex-Senior Vice President Christopher Garand and ex-Assistant General Counsel Robert Graham. Former AIG Vice President Christian Milton also won a new trial. Federal jurors in Hartford, Connecticut, convicted them in 2008 after a six-week trial.
Prosecutors said the fraud involved a sham transaction in 2000 and 2001 to inflate AIG’s loss reserves by $500 million. It preceded the financial crisis of New York-based AIG, which got a bailout of $182.3 billion from U.S. taxpayers. The appeals court said the judge erroneously let prosecutors show jurors three charts with AIG stock-price data.
“The charts suggested that this transaction caused AIG’s shares to plummet 12 percent during the relevant time period, which is without foundation, and (given the role of AIG in the financial panic) prejudicially cast the defendants as causing an economic downturn that has affected every family in America,” a three-judge appeals panel ruled.
U.S. District Judge Christopher Droney also erred by improperly instructing the jury on causation, according to the 77-page opinion.
Free on Bail
Droney had sentenced Milton to four years in prison, Ferguson to two years, Monrad to 18 months, and Garand and Graham each to one year. They were free on bail pending appeal. Two General Re executives who pleaded guilty testified as prosecution witnesses and were sentenced to probation.
Prosecutors used the stock charts to show the transaction at the heart of the trial was important to investors, and to “emphasize the losses” it caused, according to the opinion. While two stock analysts and an AIG investor-relations manager testified to the transaction’s importance, prosecutors also could have called an expert, according to the three-judge panel.
“The expert could, for example, estimate the extent of the 12 percent drop attributable” to the transaction, they ruled.
The trial featured testimony about Warren Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., which owns General Re. He wasn’t charged with a crime and denied wrongdoing.
AIG said on Oct. 26, 2000, that premiums increased in the third quarter of that year as loss reserves for claims fell. Five days later, former AIG CEO Maurice “Hank” Greenberg called Ferguson and asked him to help with AIG’s reserves, a key measure of an insurer’s health.
Prosecutors said Greenberg was an unindicted co-conspirator. He denied wrongdoing and wasn’t charged with a crime.
Greenberg is still defending a civil lawsuit over the transaction filed in 2005 by Eliot Spitzer when he was New York attorney general.
“The decision does not affect this office’s case and it will proceed,” Lauren Passalacqua, a spokeswoman for the current attorney general, Eric Schneiderman, said in an e-mailed statement.
Greenberg’s attorney, David Boies, said the reversal “substantially weakens” the attorney general’s lawsuit because the convictions “have always been a critical underpinning” of the civil case.
“It’s always difficult for a prosecutor to admit that a case is disappearing on them,” Boies said in a telephone interview. “But an objective observer would say that there really is not a basis for continuing to waste taxpayer money pursuing it. Anybody who says this doesn’t affect their case is whistling past the graveyard.”
General Re agreed last year to pay more than $92 million to settle investor claims and end U.S. investigations over its role in sham transactions with AIG and Prudential Financial Inc.
The company agreed to pay $19.5 million to the U.S. Postal Inspection Service Consumer Fraud Fund, $12.2 million to the Securities and Exchange Commission and $60.5 million to AIG shareholders in a class-action settlement. General Re previously forfeited $5 million in fees linked to the AIG scheme. The deal let General Re avoid prosecution by the U.S. Justice Department and resolved an SEC lawsuit.
“We’re very gratified by the court’s decision,” said Frederick Hafetz, Milton’s attorney. “We look forward to the new trial for Mr. Milton.”
Lawyers for the other defendants and a Justice Department spokeswoman didn’t immediately return calls seeking comment yesterday.
“We’re very gratified by the court’s decision,” said Graham’s attorney, Alan Vinegrad.
General Re was involved in sham transactions with AIG from 2000 to 2005 and a Prudential division from 1997 to 2002 that helped the two companies manipulate financial statements, the SEC said in a complaint in federal court in Manhattan. General Re admitted it helped AIG overstate loss reserves by $500 million.
The case is U.S. v. Ferguson, 08-6211, U.S. Court of Appeals for the Second Circuit (New York).