January 20, 2010 by Canadian Underwriter
General Re Corporation has agreed to pay $12.2 million to settle charges by the Securities Exchange Commission (SEC) related to separate schemes by American International Group (AIG) and Prudential Financial, Inc. to manipulate and falsify reported financial results in 2000-02.
According to the SEC’s complaint against Gen Re, filed in U.S. District Court for the Southern District of New York, a foreign subsidiary of Gen Re entered into two questionable reinsurance transactions with AIG in 2000.
The transactions were designed to “improperly allow AIG to reverse its declining reserve trend and falsely report additions to both loss reserves and premiums written,” SEC said in a statement announcing the settlement. “The contracts show reinsurance transactions that appeared to transfer risk to AIG, but the transactions did not transfer risk.”
Also, the SEC alleged that Gen Re “separately entered into a series of sham reinsurance contracts with Prudential’s property and casualty division from 1997 to 2002.”
“The contracts had no economic substance and purpose other than to allow Prudential to build up and then draw down on an off-balance sheet asset or ‘finite bank’ parked with Gen Re,” the SEC said in a statement. “As a result of the sham transactions, Prudential improperly recognized more than $200 million in revenues in 2000, 2001, and 2002.”
In addition to paying $12.2 million to settle the charges, Gen Re agreed to pay $19.5 million to the U.S. Postal Inspection Service Consumer Fraud Fund.
The reinsurer also agreed to pay $60.5 million through a civil class action settlement to AIG’s injured shareholders.
Gen Re previously forfeited to the government approximately $5 million in fees it earned for its participation in the scheme with AIG.
“In determining to accept Gen Re’s settlement offer, the SEC took Gen Re’s remediation efforts and cooperation into account,” the SEC said. “Among the efforts SEC considered:
• Gen Re’s comprehensive, independent review of its operations conducted at the outset of the government’s investigations, the results of which were shared with investigators;
• Gen Re’s substantial assistance in the government’s successful civil and criminal actions against individuals involved in the scheme with AIG; and
• Gen Re’s internal corporate reforms designed to strengthen oversight of its operations.”