Insurance: SEC settles with General Re over AIG and Prudential

The SEC's statement is brutal: "The Securities and Exchange Commission today charged General Re Corporation for its involvement in separate schemes by American International Group (AIG) and Prudential Financial, Inc. to manipulate and falsify their reported financial results."

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 sham “reinsurance” transactions with AIG in 2000 to improperly allow AIG to reverse the declining reserve trend and falsely report additions to both loss reserves and premiums written. Senior officials at Gen Re helped AIG structure the two sham transactions. The contracts show reinsurance transactions that appeared to transfer risk to AIG, but the transactions did not transfer risk.

The SEC further alleges 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. As a result of the sham transactions, Prudential improperly recognized more than USD200 million in revenues in 2000, 2001, and 2002. Gen Re received fees totalling USD8.1 million for structuring and executing the scheme with Prudential.

“Gen Re arranged to sell financial products to AIG and Prudential for the sole purpose of enabling those companies to manipulate their accounting results and mislead investors,” said Andrew M. Calamari, Associate Director of the SEC’s New York Regional Office.

Gen Re agreed to pay USD12.2 million to settle the SEC’s charges.

In addition, in a non-prosecution agreement announced today by the Department of Justice in connection with a related criminal investigation of Gen Re’s transactions with AIG, Gen Re agreed to pay USD19.5 million to the U.S. Postal Inspection Service Consumer Fraud Fund. Gen Re also agreed to pay USD60.5 million through a civil class action settlement to AIG’s injured shareholders. Gen Re previously forfeited to the government approximately USD5 million in fees it earned for its participation in the scheme with AIG.