September 27, 2006 by Canadian Underwriter
The US Securities and Exchange Commission has filed securities fraud charges against three former RenaissanceRe Holdings Ltd. Executives regarding an alleged finite reinsurance “sham” used to “smooth earnings.”
Charges of securities fraud were laid in a Manhattan federal court against RenaissanceRe’s former CEO James N. Stanard, its former controller Martin J. Merritt and former senior executive of Renaissance Reinsurance Ltd. Michael W. Cash. The SEC says the complaint “alleges that Stanard, Merritt, and Cash structured and executed a sham transaction” that was solely used to “smooth and defer over (US)$26 million of RenRe’s earnings from 2001 to 2002 and 2003.”
Under investigation are two contracts that seemed unrelated, but together created “a round trip of cash,” according to the SEC.
In the first contract, the SEC says RenRe purported to assign at a discount US$50 million of recoverables due to RenRe under certain industry loss warranty contracts to Inter-Ocean Reinsurance Company, Ltd. in exchange for US$30 million in cash, for a net transfer to Inter-Ocean of US$20 million.
The Commission says the reinsurer recorded an income of US$30 million upon executing the assignment agreement. The remaining US$20 million of its US$50 million assignment became part of what the SEC calls a “bank” or “cookie jar” that the reinsurer used in later periods to bolster income.
The SEC says in the second contract the reinsurer purported a reinsurance agreement with Inter-Ocean that was actually a “vehicle to refund to RenRe the (US)$20 million transferred under the assignment agreement plus the purported insurance premium paid under the reinsurance agreement.”
The complaint alleges that RenRe accounted for the transaction as a reinsurance agreement to transfer risk from RenRe to Inter-Ocean. The complaint also alleges that Merritt and Stanard misrepresented or omitted certain key facts about the transaction to RenRe’s auditors.
On Feb. 22, 2005, RenRe announced in a press release it would restate its financial statements for the years ended Dec. 31, 2001, 2002 and 2003.
The press release and a Form 10-K attributed the restatement of the Inter-Ocean transaction to accounting “errors” due to “the timing of the recognition of Inter-Ocean reinsurance recoverables.”
The SEC says it has come to a partial settlement with Merritt, who consented to the entry of an antifraud injunction and other relief.
Mark K. Schonfeld, director of the SEC’s Northeast Regional Office, says the charges are a result of the Commission’s ongoing investigation of the misuse of finite reinsurance to commit securities fraud.