U.S. v. Ferguson, et al
(2nd Circuit August 1, 2011)
The Second Circuit federal appellate court vacated the 2008 and 2009 convictions of four executives of General Reinsurance and an executive of American International Group and the matter was remitted to the district court for retrial. The convictions stemmed from a finite reinsurance transaction designed to reallocate risk in a way that shored up AIG’s loss reserves which were believed to be depressing AIG’s stock price. The defendants were convicted of conspiracy, mail fraud, securities fraud, and false statements made to the Securities and Exchange Commission and were sentenced to prison terms ranging from one to four years.
While an ordinary reinsurance transaction an insurer purchases coverage from a reinsurer for all potential losses on policies it has issued, in finite reinsurance an insurer cedes a finite amount of risk to a reinsurer. Traditional reinsurance is generally used to lay off risk while finite reinsurance is used to accomplish specific accounting goals because it can be strategically designed.
Under accepted accounting standards, some risk of loss must be involved in a finite reinsurance transaction. The government contended that the deal made between AIG and General Reinsurance was an unlawful agreement intending to deceive AIG stockholders by booking a no-risk transaction as reinsurance.
The convictions were vacated based upon a finding by the Second Circuit that the district court (1) abused its discretion by admitting certain stock-price data into evidence and (2) improperly issued a jury instruction as to causation. The stock-price data and charts, showing a 12% decline in the relevant period when information detailing the transaction was published, were admitted to demonstrate that there was a substantial likelihood that the transaction and alleged accounting misstatements would be important to a reasonable investor. The appellate court held that the material was improperly admitted and prejudicial to the defendants because this transaction was only one of several problems besetting AIG at that time. There were also unrelated allegations of bid-rigging, improper self-dealing and earnings-manipulations that were publicized at that time.
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