AIG Securities Fraud
In October 2000, some Wall Street analysts questioned the decline in American International Group (AIG) loss reserves. In an effort to quell these concerns, AIG entered into two sham reinsurance transactions with Cologne Re Dublin, a subsidiary of General Reinsurance, that had no economic substance but were designed to add $500 million in phony loss reserves to AIG’s balance sheet in the fourth quarter of 2000 and first quarter of 2001.
In 2005, New York Attorney General Eliot Spitzer began an investigation into the two reinsurance transactions. Soon afterwards, AIG came under market pressure, and admitted it had undertaken what could be construed as securities fraud. They admitted that the two reinsurance transactions had inflated AIG’s balance sheet and propped up AIG’s stock price. In the resultant stock crash, investors lost $500M in investments.
Cologne Re Dublin's CEO, John Houldsworth, agreed to turn state's witness for the Department of Justice and Securities and Exchange Commission, in agreement for a plea bargain. Houldsworth then pleaded guilty to conspiring to commit securities fraud, resultantly facing a sentence of up to five years in prison and $250,000 in fines. The final sentencing was placed on hold, subject to consequential SEC prosecutions.
The DOJ subsequently undertook successful prosecutions against four former Gen Re executives and one former AIG executive: CEO Ronald Ferguson was sentenced to two years in prison and fined $200,000; CFO Elizabeth Monrad was sentenced to 18 months in prison and fined $250,000; Senior Vice President Christopher Garand was sentenced to a year and a day in prison and fined $150,000; Senior Vice President and Assistant General Counsel Robert Graham was sentenced to a year and a day in prison and fined $100,000; AIG's Vice President Christian Milton was sentenced to four years in prison and fined $200,000.
In 2009, in front of U.S. District Judge Christopher Droney in Hartford, Houldsworth apologized. He was resultantly fined $5,000 and ordered to perform 400 hours of community service during a two year probation period.
On August 1, 2011, the United States Court of Appeals for the Second Circuit vacated the five Gen Re and AIG defendants’ convictions and remanded for a new trial, holding that the reported drop in share prices could not be attributed to the two reinsurance deals.
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