Archive for the ‘Criminal actions’ Category.


In a case we have reported on previously, AIG purported to settle class action securities law claims arising from alleged finite reinsurance transactions between it and Gen Re. The district court, however, denied the parties’ joint motion for approval of the settlement, finding that it could not certify a settlement class because the “fraud-on-the-market” theory used to prove reliance was not viable under the facts of the case, resulting in a failure to satisfy the predominance requirement of Federal Rule of Civil Procedure 23(b)(3). The Second Circuit reversed, however, finding that the failure of the fraud-on-the-market theory was relevant only to a manageability analysis, and not to a predominance analysis. Since a court need not engage in a manageability analysis to certify a settlement class under the Supreme Court’s Amchem case, a settlement class could be certified. In re American International Group Securities Litigation, No. 10-4401-cv (2d Cir. Aug. 13, 2012)

This post written by John Pitblado.

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Julian Jeffrey Messent, a reinsurance broker who was head of the Property Division (Americas) of PWS International Limited, a London-based reinsurance broker, was convicted in London in late 2010 of corruption offenses, stemming from his supervision of payments made to various Costa Rican governmental officials. The payments were found to be bribes meant to steer reinsurance placement for Costa Rican government-owned utility organizations to PWS. For his placement of the contracts, Messent received large incentive bonuses between 1999 and 2002 from PWS. After a new President of Costa Rica was elected in 2002, newly appointed Costa Rican officials discovered the improper payments, and both the Costa Rican and U.K. governments undertook criminal investigations which led to Messent’s arrest in 2007. Messent appealed his sentencing of 21 months each on two counts of corruption (to run concurrently), as well as a fine of £100,000. The convictions were affirmed on appeal, the court noting “there can be no doubt that corruption of foreign government officials . . . is at the top end of serious corporate offending both in terms of culpability and harm.” Regina v. Messent, [2011] EWCA Crim 644 (Eng. Ct. App.).

This post written by John Pitblado.



The United States Court of Appeals for the Second Circuit has vacated the criminal convictions of Gen Re and AIG executives stemming from a finite reinsurance transaction with undisclosed payments, which allegedly was intended to improve AIG’s financial statements without transferring any significant risk. A jury had convicted all of the defendants on all charges. The matter was remanded for a new trial. After hundreds of pages of briefing and numerous arguments of prosecutorial misconduct, erroneous evidentiary rulings and improper jury charges, the Court of Appeals found only two bases for vacating the convictions: (1) the admission of three bar charts which linked the decline in AIG’s stock price to the transaction at issue; and (2) a jury charge “that allowed the jury to convict without finding causation.”

The stock price evidence was interesting because the court found that “the charged offenses here do not require a showing of loss causation ….” Nevertheless, the prosecution sought to use causation evidence “to humanize its prosecution” and show that the transaction harmed AIG stockholders who had purchased AIG stock for their retirement accounts or the college funds of their children. The evidence presented the defendants with a dilemma: to allow the jury to attribute the full stock price decline to the transaction or introduce prejudicial evidence “of other besetting scandals, wrongdoing, and potentially illegal actions at AIG.” The defendants sought to sidestep the problem by stipulating to materiality, but the government refused. The court found that the district court’s admission of the charts was inconsistent with other rulings on the stock price issue, and was prejudicial to the defendants.

With respect to the jury charge issue, the court noted that the defendants did not specifically object to the causation instruction, which was the product of competing suggestions by counsel, but that the instruction nevertheless warranted reversal under the plain error rule, as it “is improbable, let alone ‘absolute[ly] certain[],’ that the jury based its verdict on a properly instructed ground.”

This opinion contains an extensive but relatively concise discussion of the finite reinsurance transaction at issue, and of the fact that low risk finite reinsurance transactions are acceptable, “and have their uses,” unless they violate FAS 113, the so-called 10-10 rule, entail no risk, and amount to fraud. The court described how this particular transaction was deliberately structured to conceal certain credits and repayments from the companies’ outside auditors. The court rejected all but two of the defendants’ numerous challenges, including allegations that one key prosecution witness had committed perjury, although it suggested that the government be circumspect about how his testimony is presented in a new trial. A major “take away” from this opinion is the clear holding that finite reinsurance transactions can be the basis for criminal convictions of the executives involved in such transactions. United States v. Ferguson, et al., No. 08-6211-CR (2d Cir. August 1, 2011).

This post written by Rollie Goss.



On March 4, 2009, former General Reinsurance Senior Vice President Christopher Garand was sentenced to prison time, following his conviction for his involvement in a scheme to manipulate AIG's financial statements through finite reinsurance transactions. Mr. Garand was sentenced to one-year and one-day of jail time, two years of probation, a $150,000 fine and a Special Assessment of $1,000. Mr. Garand was ordered to surrender on April 22, 2009. Christian Milton (former VP of reinsurance for AIG), Ronald Ferguson (Gen Re's former CEO), Elizabeth Monrad (Gen Re's former CFO) and Robert Graham (former Gen Re senior VP and assistant general counsel) were also convicted in the scam. U.S. v. Garand, Case No. 06-CR-137 (USDC D.Conn. Mar. 4, 2009).

This post written by John Black.



The Supreme Court recently heard oral arguments on whether an arbitration agreement may provide for more expansive judicial review of an arbitration award than the narrow standard of review provided for in the Federal Arbitration Act. This case arose out of a property lease dispute between Mattel, the well-known toy manufacturer, and its landlord, Hall Street Associates. The parties agreed to arbitrate the dispute pursuant to the FAA procedures, but also agreed that a district court could overrule the arbitrator’s decision if the arbitrator’s “conclusions of law [we]re erroneous.”

The Ninth Circuit barred this type of court review, reasoning that private parties cannot expand the Congressionally-determined role of courts in reviewing arbitration awards. In contrast, the First, Third, Fourth, Fifth, and Sixth Circuits appear to have interpreted the FAA’s vacatur standards as non-exclusive standards which parties may supplement by agreement. While the Seventh Circuit has not squarely addressed the issue, it stated in dicta that the parties “cannot contract for a judicial review” of a labor arbitration award “because federal jurisdiction cannot be created by contract.”

After hearing oral arguments on the issue, the Supreme Court asked for additional briefing on three issues: (1) whether authority exists outside the FAA under which a party to litigation begun without reliance on the FAA may enforce a provision for judicial review of an arbitration award; (2) if such authority does exist, did the parties, in agreeing to arbitrate, rely in whole or part on that authority; and (3) whether the petitioner waived any reliance on authority outside the FAA for enforcing the judicial review provision of the parties’ arbitration agreement.

Hall Street Associates, LLC v. Mattel, Inc., No. 06-989.

This post written by Lynn Hawkins.



Last year, a federal grand jury in New Haven indicted four former senior executives of General Re Corporation and one former senior executive of AIG for their participation in a fraudulent scheme to manipulate AIG’s financial statements. Recently, three of the defendants issued multiple subpoenas to several insurance companies and their attorneys pursuant to Federal Rule of Criminal Procedure 17(c). The subpoenas were contested by both the government and the third party subpoena recipients.

Applying the legal standard set forth by the Supreme Court in U.S. v. Nixon, the district court concluded that the subpoenas were unenforceable because they sought materials outside the proper scope of Rule 17(c). Specifically, the materials sought by several of the subpoenas would only be useful as impeachment materials, and therefore failed Nixon’s admissibility requirement. Other subpoenas were to be found unenforceable because they failed Nixon’s relevancy requirement. United States of America v. Ferguson, Case No. 3:06cr137, (USDC D. Ct. Sept. 26, 2007).


Rulings with respect to indictment relating to allegedly fraudulent reinsurance transaction

A US District Court has denied motions to dismiss an indictment of six former officers of General Reinsurance Corp. and American International Group, which alleged that the two companies engaged in a fraudulent reinsurance transaction, which had the effect of boosting AIG's loss reserve for the fourth quarter of 2000 by $250 million, and by $250 in the first quarter of 2001. The transaction was allegedly entered into shortly after AIG reported that its year 2000 third quarter loss reserves declined $59 million from the previous quarter, after which AIG's stock price decreased. United States v. Ferguson, Case No. 3:06CR137 (D. Conn. Jan. 24, 2007). The decision disposed of ten different motions, which attacked the indictment and sought discovery.


District Judge files appellate brief in KPMG criminal tax case

In a highly unusual event, United States District Judge Lewis Kaplan has filed a brief with the United States Court of Appeals for the Second Circuit, defending his opinion relating to the arbitrability of issues relating to KPMG paying attorneys fees for defendants in a criminal tax action, which was the subject of a post on this blog on September 26, 2006. This brief was invited by the Second Circuit in an Order entered December 13, 2006, which provided in part: “Pursuant to Fed. R. App. P. 21(b)(4), we now invite the District Court to address, if it so chooses, the motion for leave to file a mandamus petition.” Stein v. KPMG, LLP, Case No. 06-4358 (2d Cir. Jan. 8, 2007).


Court denies arbitration of fee dispute in KPMG criminal tax case

In the massive criminal tax case against seventeen former partners and employees of KPMG, KPMG declined, under severe pressure from the government, to pay the attorneys' fees of the defendants. The District Court permitted the defendants to add KPMG as a defendant, and assert a claim against it for fees. The Court recently denied KPMG's motion for summary judgment, and set the claims seeking the advancement of fees for trial on an expedited basis. United States v. Stein, Case No. 05-crim-0888 and 06-civ-5007 (USDC S.D. N.Y. Sept. 6, 2006). The Court rejected KPMG’s contention that the fee issue was subject to arbitration under the partnership agreement, in part because not all of the defendants had been partners, but also on public policy grounds, due to the severe disruption that such a course would necessarily have had on the pending criminal case. This opinion may become of interest to reinsurers to the extent that there are criminal charges filed relating to finite reinsurance matters.