The SEC has filed a lawsuit against Berkshire Hathaway’s (BRK.a) wholly owned subsidiary General Re Corporation, an insurer of insurance companies, alleging the reinsurance firm used sham transactions to help manipulate and falsify American International Group Inc. (AIG) and Prudential Financial Inc.’s (PRU) financial results, according to documents filed in a New York federal court on Wednesday.
The SEC complaint alleges, General Re knowingly entered into a series of sham reinsurance contracts with Prudential’s property and casualty division from 1997 to 2002 that allowed Prudential to improperly recognize more than $200 million in revenues in 2000, 2001, and 2002. According to the complaint, Gen Re received more than $8 million in fees for structuring and executing the scheme with Prudential.
In 2000, after analysts criticized AIG for declining loss reserves and its stock dropped, General Re entered into two sham reinsurance transactions that allowed AIG to reverse the declining reserve trend and falsely report additions to both loss reserves and premiums written, the SEC alleged.
Andrew M. Calamari, Associate Director of the SEC’s New York Regional Office said “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.”
SEC says “Gen Re agreed to pay $12.2 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 $19.5 million to the U.S. Postal Inspection Service Consumer Fraud Fund. Gen Re also agreed to pay $60.5 million through a civil class action settlement to AIG’s injured shareholders. Gen Re previously forfeited to the government approximately $5 million in fees it earned for its participation in the scheme with AIG.”