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APPELLATE DIVISION HOLDS THAT TRIABLE ISSUES EXIST IN NEW YORK AG’S CASE AGAINST FORMER AIG EXECUTIVES CONCERNING GEN RE FINITE REINSURANCE TRANSACTION

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After settling with AIG for $1 billion, the New York Attorney General remains in pursuit of two former AIG executives—former CEO Maurice “Hank” Greenberg and former CFO Howard Smith—in connection with their alleged roles in a finite reinsurance transaction between AIG and Gen Re and a transaction between AIG and Capco Reinsurance Company, an offshore shell company that AIG allegedly used to disguise unfavorable loss ratios from the investing public. The appellate court affirmed the denial of defendants’ motion for summary judgment on the AG’s claims, which are brought under New York’s Martin Act and Executive Law section 62(12). The appellate court held that the claims are not preempted by federal securities laws and that triable issues exist based on the record evidence. The court also reversed the trial court’s grant of summary judgment to the AG on liability with respect to the Capco transaction. State of New York v. Greenberg, No. 401720/05 (N.Y. App. Div. May 8, 2012).

This post written by Ben Seessel.

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PLATINUM UNDERWRITERS IS THE EIGHTEENTH FOREIGN REINSURER ALLOWED TO OPERATE UNDER FLORIDA’S REDUCED COLLATERAL REQUIREMENTS

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By Consent Order dated December 13, 2011, the Florida Office of Insurance Regulation approved the application of Bermuda reinsurer Platinum Underwriters Bermuda, Ltd. to operate in Florida with posting less than 100% collateral. The Order recites Platinum’s fulfillment of statutory criteria, and notes Platinum’s demonstration of $1.366 billion in capital and surplus and favorable ratings from two accepted agencies. According to the Office’s December 14, 2011 press release, Platinum is the sixteenth Bermuda reinsurer approved to use Florida as its port-of-entry state, in addition to a Germany company and a U.K. company. In the Matter of: Platinum Underwriters Bermuda, Ltd., Case No. 122414-11-CO (Fla. Office of Insurance Regulation Dec. 13, 2011).

This post written by John Pitblado.

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NAIC ADOPTS REINSURANCE COLLATERAL REDUCTION AMENDMENTS TO CREDIT FOR REINSURANCE MODEL LAW AND MODEL REGULATION

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On November 6, 2011, the NAIC Executive Committee-Plenary adopted revisions to the NAIC’s Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786). The revisions, as finally adopted, are substantially in the form covered in our Special Focus analysis of the revisions adopted in September by the Financial Condition (E) Committee, with one notable addition. The Model Law, in new Section 2(J), now imposes certain notification requirements on a ceding company when its reinsurance recoverables from a single reinsurer (or group of assuming companies) exceed specified levels of the ceding company’s surplus or gross written premium. Note: The redlining in these documents is from the NAIC, and apparently shows the differences between the just adopted versions and the previously existing text of the model law and model regulation.

This post written by Anthony Cicchetti.

LLOYD’S PERMITTED TO OPERATE IN FLORIDA WITH REDUCED COLLATERAL AS “ELIGIBLE REINSURER”

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Underwriters at Lloyd’s, London was approved by Consent Order of the Florida Office of Insurance Regulation to become the seventeenth reinsurer admitted under Florida’s law allowing foreign reinsurers to post reduced collateral, upon demonstration that it is financially sound and highly rated by eligible ratings institutions. As set forth in the Consent Order, Lloyd’s reported capital and surplus of $29.9 billion, well-exceeding Florida’s $250 million requirement. In re Underwriters at Lloyd’s, London (Fla. O.I.R. Oct. 6, 2011).

This post written by Michael Wolgin.

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.