Updated from 1:14 p.m. EDT
The Justice Department and
Securities and Exchange Commission
scored a victory Monday in their investigation of
American International Group
John Houldsworth, an executive with
General Re subsidiary, pleaded guilty to criminal conspiracy in connection with a 2001 reinsurance transaction that is at the heart of AIG's accounting travails.
The 46-year-old Irishman has agreed to cooperate in the agency's ongoing investigation of the massive insurer, the SEC and Justice Department said.
Houldsworth headed up General Re's reinsurance unit and is currently on paid leave. He faces up to five years in prison for helping AIG mask its financial condition through the 2001 deal, which AIG has since conceded didn't encompass enough risk-transfer to be considered an insurance contract.
"John is cooperating fully with the U.S. DOJ and SEC and accepts full responsibility for his role in these matters," said Larry Byrne, a White & Case partner and former federal prosecutor. "He deeply regrets his actions in working with others to assist in this scheme."
Investigators say the General Re deal was part of a scheme to prop up the company's stock price by masking declines in its claims reserves and massaging quarterly earnings. Authorities contend the primary purpose of the transaction was to add $500 million in "phony loss reserves" to AIG's balance sheet in order to quiet Wall Street criticism.
AIG, in an undisclosed side agreement, paid Gen Re a $5.2 million fee for putting the deal together, according to a civil complaint filed by the SEC against Houldsworth.
The SEC complaint contains excerpts from several incriminating telephone conversations between Houldsworth and other Gen Re executives.
In one conversation, Houldsworth jokes to Elizabeth Monrad, Gen Re's former CFO, that "if there's enough pressure on their end, they'll find ways to cook the books, won't they?'' In another quoted conversation with Monrad, Houldsworth says, "There is clearly no risk transfer. You know there is no money changing hands.''
Monrad, who has been notified by the SEC that she could face civil charges in the investigation, is on a leave absence from the pension giant TIAA-CREF, where she is the CFO.
A person familiar with the investigation says Houldsworth's offices in Dublin were set up like a trading desk and all phone calls were recorded.
"AIG's fraud did not occur in isolation,'' said SEC director of enforcement Linda Chatman Thomsen. "With this case, we are holding accountable an individual who, even though outside AIG, knowingly assisted the company to manipulate its financial results."
AIG has since restated its financial results for the four years going back to 2001 to reclassify the General Re deal and various other transactions as loans. Its stock has lost about 20% of its value since news of the accounting errors surfaced and CEO Maurice Greenberg left the company in February.
General Re is a unit of Berkshire Hathaway, the publicly traded investment vehicle of Warren Buffett, who hasn't been charged with any wrongdoing in the probe.
Last week, New York Attorney General Eliot Spitzer filed a civil fraud charge against AIG, Greenberg and ex-CFO Howard Smith, who was fired this winter. The case is separate from the federal probes.
Spitzer, meanwhile, has cut his own deal with a former AIG executive. In exchange for immunity from criminal prosecution, Spitzer has secured the cooperation of Joseph Umansky, a top AIG executive. The civil fraud complaint refers on a number of occasions to potentially incriminating testimony from Umansky, who has already testified before a grand jury.
Spitzer's office is looking to bring potential criminal charges against several former AIG executives.
Authorities contend the Gen Re transaction began with a phone call from Greenberg to Ronald Ferguson, Gen Re's then-president, seeking to set up a deal that would transfer up to $500 million in loss reserves to AIG's balance sheet. The SEC complaint contends it was understood by Ferguson that AIG wouldn't assume any actual risk in the deal.
"The Gen Re CEO understood that what the AIG chairman was describing was not a bona fide reinsurance transaction, which would have required that AIG assume an actual insurance risk from Gen Re, but rather a transaction that would only look like reinsurance for AIG's accounting purposes,'' the SEC complaint says.