Judge Rules AIG Fraud Cost Shareholders up to $600 Million

Nov. 3, 2008 – A scheme to manipulate the financial statements of the world’s largest insurance company, American International Group (AIG), cost investors up to $600 million, a federal judge ruled on Oct. 31. The ruling means five defendants already convicted of charges that include fraud and lying to federal officials each could be sentenced to more than 17 years in prison.

U.S. District Judge Christopher F. Droney ruled the defendants caused AIG shareholders to lose between $550 million and $600 million in 2005 after company officials released information relating to the fraud, causing company stock prices to lose hundreds of millions in value. Prosecutors said the five defendants committed fraud when AIG officials paid General Re officials to purchase reinsurance policies from AIG in 2000 and 2001, inflating company reserves by $500 million and boosting AIG’s stock price.

Reinsurance policies are purchased by insurance companies to protect them against large claims by policyholders – such as occurs when a destructive hurricane makes landfall. General Re is a subsidiary of Berkshire Hathaway, and AIG was General Re’s largest customer at the time.

Attorneys for the five defendants, Ronald Ferguson, Christopher Garand, Robert Graham, Christian Milton and Elizabeth Monrad, argued investors had not lost money. The defendants in February were convicted of conspiracy, securities fraud, mail fraud and making false statements to the U.S. Securities and Exchange Commission.

Federal prosecutors had filed court papers citing an expert study concluding AIG shareholders lost between $1.2 billion and $1.4 billion from the fraud. Various studies performed by economics experts pegged total losses at between $350 million and $1.4 billion, depending on methodology used. One of the studies calculated the loss at between $550 million and $600 million – an amount the federal judge ruled valid.

Defendant Ferguson has said in court papers he anticipates a sentencing recommendation of life in prison, but prosecutors only suggested defendants should receive a “substantial” prison sentence. A probation department report recommended prison sentences of between 14 years up to more than 17 years for each defendant.

A federal jury in February found the five executives guilty on all 16 counts for which they were charged, including conspiracy, securities fraud, mail fraud and making false statements to federal officials. The fraud case arose in the aftermath of the collapses of Enron and WorldCom and subsequent federal investigations. Four of the five convicted executives worked for General Re. The fifth was an executive at AIG.