The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [510]
In 2003, after I started working on this book, both General Re and Ajit Jain’s Berkshire Re were condemned in a special investigation for selling finite reinsurance that allegedly contributed to the collapse of an Australian insurer, HIH.9 Two years later, General Re was accused of fraud by insurance regulators and policyholders in connection with the failure of a Virginia medical malpractice insurer, the Reciprocal of America. While the Department of Justice investigated the allegations extensively, no charges were brought against Gen Re or any of its employees.10 That same year, Eliot Spitzer’s investigation of the insurance industry prompted an investigation by Berkshire’s law firm, Munger, Tolles & Olson, which discovered that six employees, including General Re’s former CEO, Ron Ferguson, and its former chief financial officer, Elizabeth Monrad, had allegedly conspired with a customer, AIG, to aid and abet an accounting fraud. The alleged fraud was executed through a reinsurance transaction designed to deceive investors and Wall Street analysts (including me) by transferring $500 million in reserves to AIG to window-dress AIG’s balance sheet. In June 2005, two of the alleged conspirators, Richard Napier and John Houldsworth, plea-bargained and testified for the prosecution, while five others—four senior managers from Gen Re and one from AIG—were indicted on conspiracy and fraud charges.
The trial, conducted in federal court in Hartford, Connecticut, in January and February 2008, was noteworthy for the prosecution’s use of taped telephone conversations in which several of the defendants had repeatedly discussed the transaction in colorful terms. The defendants invoked the “Buffett defense,” saying that Buffett had approved the outlines of the structured transaction and was involved in setting the fee. Buffett was not charged with any wrongdoing, and prosecutors said he was not involved. General Re’s CEO Joseph Brandon, who was listed among various unindicted co-conspirators in the case, was repeatedly cited by the defendants’ lawyers as having knowledge of the deal. He had cooperated with federal prosecutors without asking for immunity. General Re chief operating officer Tad Montross was also named by the defendants as having knowledge of the transaction. Neither he nor Buffett, however, was listed among the unindicted co-conspirators. None of the three men testified in the case.
I was subpoenaed by the prosecution as both a fact witness and expert and testified that I would “almost certainly” have not upgraded AIG to a “strong buy” in early 2000 had I known the company’s true financial position. Under cross-examination I testified about my acquaintance with all of the defendants. I know some of them better than others, but have always had high regard for all of them. I also testified about my relationship with Warren, that I was writing this book, and that Joe Brandon has been a close friend since 1992. I wasn’t asked about Tad, but I’m also acquainted with him.
In February 2008, all five defendants were convicted on all counts in the indictment. They face sentencing as this book goes to print; the potential sentences range up to life imprisonment, although the odds seem to be that the terms will be much lower than that. The convicted defendants have said that they will appeal.
Currently I am also under subpoena from former AIG CEO Hank Greenberg in a related case brought against him by the New York Attorney General’s office. At this writing, Berkshire Hathaway has settled with neither the SEC nor the Department of Justice. In April 2008, General Re’s CEO Joe Brandon resigned to help facilitate a settlement between the company and government authorities.
Accordingly, I cannot comment further on the case at this time. Warren Buffett’s personality, however, is laid out in this book; readers