U.S. jury finds against risk manager in finite reinsurance deal

A Manhattan federal jury has found Timothy Harcharik, a one-time risk management director for cell phone distributor Brightpoint, liable on three counts of aiding and abetting securities fraud for his part in a finite reinsurance deal, A.M. Best reports.
Harcharik told A.M. Best and the court he was unaware the arrangement of a fraudulent finite insurance policy, issued by an American International Group company, was part of an accounting shell game.
The federal jury found Harcharik liable, but rejected a direct securities fraud charge against him.
The decision marks a victory for the U.S. Securities and Exchange Commission, which has been investigating the use of finite insurance and reinsurance transactions by some entities to smooth earnings, A.M. Best reported. The SEC and the justice department have filed criminal and civil suits pending against other individuals and entities, although the Brightpoint case is the first finite risk-related securities civil suit to go to trial.
According to the SEC, as reported by A.M. Best, Harcharik and Brightpoints then-chief accounting officer, John Delaney, created a blended fidelity coverage and retroactive policy that was designed, together with a senior executive with AIGs National Union Fire Insurance Company of Pittsburgh, to look like traditional, nonretroactive indemnity insurance.
The SEC argued the scheme was designed to cover up US$11.9 million in losses the company sustained in 1998. There was no risk involved in this transaction, the SEC argued before the court, and the transaction was simply a “round-trip” of cash from Brightpoint to AIG and back to Brightpoint.
In 2003, AIG agreed to pay a US$10 million civil fine to settle the case. The insurer did not admit or deny wrongdoing, A.M. Best noted.
Brightpoint and its executives, Delaney and Chief Financial Officer Philip Bounsall, also agreed to fines and a settlement, leaving Harcharik as the sole defendant in the case.
Delaney and Louis Lucullo, an AIG assistant vice president who handled the transaction for the insurer, all testified against Harcharik in court.