Executives at Berkshire Hathaway Inc.'s General Re unit knew four years ago that American International Group Inc. would use a reinsurance transaction to ''cook the books," according to phone transcripts cited in a suit from regulators.
John Houldsworth, a former General Re executive who this week agreed to plead guilty to a criminal charge of conspiring to misstate AIG's finances, discussed the planned transaction in a November 2000 phone call with the insurer's chief financial officer at the time, Elizabeth Monrad.
''They'll find ways to cook the books won't they?," Houldsworth said to Monrad, according to a civil complaint the Securities and Exchange Commission filed Monday in conjunction with the plea agreement. The comment prompted Monrad to laugh, and then Houldsworth continued, ''It's up to them! We won't help them to do that too much. We'll do nothing illegal!"
The SEC said in court papers that Monrad and Houldsworth, as well as General Re senior vice president Richard Napier and former chief executive Ronald Ferguson, knew what was intended by New York-based AIG, which last month corrected its accounting on that deal and an array of other transactions. Warren Buffett, the billionaire chairman of Berkshire Hathaway, in April said the company will be judged by whether it has ''knowing participation" in the misdeeds of clients.
The transaction, which improperly boosted AIG's reserves for claims, sparked an accounting investigation in October that last month led AIG to restate five years of financial reports and lower net income by $3.9 billion, or 10 percent. The deal also triggered AIG, the world's largest insurer, to oust Maurice ''Hank" Greenberg as chairman and chief executive in March.
''The government now has a cooperating witness within the executive suites of General Re," said James Cox, a securities law professor at Duke University in Durham, N.C., about Houldsworth's agreement with the Department of Justice. ''The natural thing is to look at the other participants."
Houldsworth, who worked in General Re's Dublin office and was fired after agreeing to the plea, will also settle the SEC suit, said his attorney, Larry Byrne. His sentencemay include jail time, said former federal prosecutor Robert Mintz. Houldsworth, 46, is the only person who has been sued by the SEC in the matter. Attorneys for Greenberg, 80, and Ferguson, 62, declined to comment. Napier's attorney, Charles Carberry, didn't return phone calls or an e-mail, and Napier didn't return a call to his office.
Monrad's lawyer, Paul Shechtman, said that ''when all the facts are known, it will be clear that Ms. Monrad acted properly." AIG spokesman Chris Winans declined to comment.
General Re is the largest US reinsurer and typically helps other insurers manage their risk from claims. In the case involving Houldsworth, General Re bought the reinsurance from AIG.
Greenberg initiated the deal with a phone call to Ferguson in late 2000, according to the SEC's complaint and a civil suit that New York Attorney General Eliot Spitzer filed against AIG and Greenberg last month. Greenberg wanted to appease analysts worried about reserve levels, without taking on additional risks, the regulators said.