General Reinsurance (Gen Re) used an Irish subsidiary to hide a $500 million (€338 million) transaction from state regulators in the US, because under Irish regulations there was no requirement to disclose the deal, a former senior vice-president with the company has testified at the fraud trial of five insurance executives.
Richard Napier, who pleaded guilty to conspiracy, said his company did not want regulators to examine what prosecutors call a sham reinsurance deal that allowed American International Group (AIG) to inflate its loss reserves by $500 million.
Napier, testifying as a prosecution witness, said this "North American problem" led executives to use Cologne Re Dublin in Ireland.
"There would be reporting problems for a US subsidiary of Gen Re," Napier told federal jurors in Hartford, Connecticut, at the trial of former Gen Re chief executive Ronald Ferguson and four other defendants.
"Under Irish regulations, there was not a requirement to disclose it," he said.
Napier is the first co-operating government witness to testify about structuring the deal in late 2000. Jurors also heard recorded phone calls in which, prosecutors said, the defendants discussed the evolution of the deal and a secret side agreement. Defence lawyers said their clients had no intent to defraud, and the accounting was not criminal.
Mr Ferguson (65) is on trial with former Gen Re chief financial officer Elizabeth Monrad (53); Christopher Garand (60), a former senior vice-president; Robert Graham (59), a former assistant general counsel; and Christian Milton (60), AIG's former head of reinsurance.
They are accused of conspiracy, securities and mail fraud, and making false statements. All say they are innocent.
The case centres on contracts initiated after analysts criticised AIG's reduction of reserves in 2000. AIG appeared to provide $600 million of reinsurance coverage in exchange for a payment of $500 million in premiums that AIG booked as reserves, according to the indictment.
Gen Re's IFSC subsidiary, Cologne Re Dublin, was used as a home for this money.
Mr Ferguson had the blessing of his former boss, billionaire Warren Buffett, the defendant's lawyers said in a motion before the trial began.
Mr Buffett, chairman of Gen Re parent Berkshire Hathaway, has not been charged with wrongdoing and has denied any knowledge of improper dealings.
The Gen Re financial scandal spanned the globe from New York to Sydney, with Cologne Re Dublin taking a prime role in three "improper" deals in Australia, according to a report by Australian inspectors.
Australian regulators barred former Cologne Re Dublin chief executive John Houldsworth and former marketer Tore Ellingsen in 2004. Houldsworth has pleaded guilty to a criminal charge in the US in the case involving AIG. - (Additional reporting: Bloomberg)
