New Ruling Suggests Judge Could Send Insurance Execs to Prison for 20 Years

HARTFORD, Conn., Nov 03, 2008 (A. M. Best via COMTEX) -- AIG | Quote | Chart | News | PowerRating -- A federal judge in Connecticut has ruled that five former reinsurance executives who were convicted of securities fraud caused shareholders of American International Group to lose somewhere between $550 million and $600 million in 2005, when the improper accounting came to light and caused a decline in AIG?s stock price.

As a result, Judge Christopher Droney, who presided over the trial earlier this year, has assigned each defendant a minimum offense level of 36, which, under United States Sentencing Guidelines, instructs him to sentence each person to approximately 15 to 20 years in prison. Ronald Ferguson, the 67-year-old former chief executive officer of General Reinsurance Corp., was convicted on Feb. 29, along with Christopher Garand, Robert Graham, Christian Milton, and Elizabeth A. Monrad on charges of conspiracy, securities fraud, making false statements to the U.S. Securities and Exchange Commission and mail fraud.

The judge?s decision is in line with the prosecution's argument that the defendants should each receive no less than a term of 17 years in prison. He did not, however, agree with the prosecution?s position that the defendants must pay restitution.

Droney did not set a sentencing date, but has ordered defense attorneys to provide additional sentencing material within 21 days.

In his ruling, the judge rejected the defense argument that the alleged fraud caused no loss and one government theory that the loss ranged between $1.2 billion and $1.4 billion. Rather, Droney ruled that a reasonable estimate of the loss was another alternative calculation ? formulated by a government expert ? based on the AIG?s stock price movement on Feb. 14, March 14 and March 15 of 2005.

?On each of these days, new and significant information related to the LPT fraud was disclosed, and there was a statistically significant price reaction in AIG?s stock price,? Droney wrote in his ruling.

The LPT or loss portfolio transfer consisted of two sham reinsurance contracts and a fake offer letter that made it appear that Gen Re had transferred approximately $100 million in insurance risk ? the difference between the $600 million limit of liability and the $500 million in premiums ? to AIG when, in fact, no real insurance risk had been transferred.

At trial, prosecutors also presented evidence that showed that Gen Re was paying AIG $10 million in cash "premiums" when, in fact, Gen Re never would be out any cash on the transaction. The deal was designed simply to help AIG boost its loss reserves.

Since the conviction in February, family and longtime acquaintances of the defendants have written hundreds of letters to the judge pleading for mercy. For instance, roughly 370 people have written letters in support of Ferguson.

Attorneys for Ferguson have argued that even a 14-year prison sentence "might very well turn out to be life imprisonment" for their client (BestWire, Sept. 10, 2008).

The federal sentencing guidelines recommend graduated increases to a defendant?s offense level depending on the amount of loss caused by the offense. For instance, if the amount of loss caused is greater than $400 million, an automatic offense level of 30 is added to the guideline calculation. The recommended length of imprisonment for a 30-level offense by itself is 97 to 121 months. This level could also be enhanced depending on the number of victims and the criminal history of the defendant.

(By David Dankwa, senior associate editor, BestWeek: David.Dankwa@ambest.com)

More News:   Market Updates | Stock Alerts | All Trading News | Stock Index