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Criminal Actions

SEC SETTLES CLAIMS AGAINST INDIVIDUAL AND ENTITIES IT CLAIMED USED INVESTMENTS IN REINSURANCE BUSINESS TO FINANCE LAVISH LIFESTYLE

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A federal district court in Connecticut has entered final judgments pursuant to agreements between the SEC and three defendants—David Haddad, Trafalgar Square Risk Management, LLC, and New England RE, LLC—in a case alleging that Haddad deceived investors into investing in Trafalgar and New England RE by representing that he would use their investments to grow these businesses, when in reality he used those investments to fund his own lavish lifestyle and pay off earlier investors.

According to the SEC’s complaint, Haddad created Trafalgar in 2009 and held it out to be, variously, “a stop-loss insurance sales underwriting consulting and marketing firm and a private investment firm that aggregates funds to invest in entities including marketing firms, managing general underwriters, third party administrators, and reinsurance companies.” The SEC alleged that, over the next seven years, Trafalgar took in commissions and fees that far exceeded its legitimate business expenditures, that Haddad spent Trafalgar’s cash to pay his personal expenses, and that, when this spending outpaced Trafalgar’s income, Haddad began raising money from investors to make up the difference. The SEC alleged that Haddad misled investors by falsely claiming that he would use their money to grow Trafalgar’s business, failing to tell them that he would be spending their money on his personal expenses and promising high returns that the business could not support. The SEC further alleged that Haddad created New England RE in 2014, purportedly to operate as a reinsurer that would market, underwrite, and bind stop-loss insurance coverage to self-insured employers, but actually as a vehicle for soliciting investments that he could use to pay off investors in Trafalgar and to finance his personal expenditures. The SEC claimed that Haddad and the two entities violated section 17(a) of the Securities Act and section 10(b) of the Exchange Act by deceiving investors through false statements and omissions into investing in Trafalgar and New England Re.

The three separate final judgments—with respect to New England Re, Trafalgar, and Haddad—were entered pursuant to the consent of the SEC and each of the defendants, with defendants neither admitting nor denying the factual allegations contained in the complaint. Per those judgments, defendants are permanently restrained from further violating the securities laws and from soliciting investments in securities without providing written disclosures regarding their “prior regulatory history,” and they must pay $1,097,257.07 in disgorgement, prejudgment interest, and civil penalties.

S.E.C. v. Haddad, et al., Civil Action No. 3:18-Cv-00055 (D. Conn. January 18, 2018)

This post written by Jason Brost.
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SECOND CIRCUIT REVERSES DENIAL OF SETTLEMENT CLASS CERTIFICATION IN AIG/GEN RE FINITE REINSURANCE SECURITIES LITIGATION

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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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U.K. COURT AFFIRMS 21-MONTH SENTENCE FOR REINSURANCE BROKER CONVICTED OF GOVERNMENT CORRUPTION

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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.

CRIMINAL CONVICTIONS RELATING TO GEN RE-AIG FINITE REINSURANCE TRANSACTION VACATED BY COURT OF APPEAL

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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.

FORMER GENERAL RE SENIOR VP SENTENCED TO A YEAR AND A DAY

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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.