Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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.

SPECIAL FOCUS: MULTI-STATE SURPLUS LINES RISKS: WILL THERE BE MEANINGFUL TAX-SHARING AMONG THE STATES?

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The Nonadmitted and Reinsurance Reform Act, a piece of the Dodd-Frank Wall Street Reform and Consumer Protection Act, contemplates tax sharing agreements among the states to facilitate the equitable distribution of surplus lines premium tax revenues. In this Special Focus article, Karen Benson discusses how those agreements have largely failed to manifest.

This post written by Karen Benson.

ALLEGED REINSURANCE-RELATED MORTGAGE KICKBACK CLASS ACTION SUIT DISMISSED BASED ON SUBSTITUTION OF FDIC AS RECEIVER FOR NOW-DEFUNCT LENDER

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On July 21, 2008 and August 20, 2008 we reported on the early stages of a class action lawsuit filed by mortgage loan borrowers against now-defunct Washington Mutual, Inc. (“WaMu”), for alleged violations of the Real Estate Settlement Procedures Act. The borrowers contended that WaMu collected illegal kickbacks from private mortgage insurance providers who had agreed to reinsure the borrowers’ mortgage insurance with WaMu’s captive reinsurer. After WaMu failed the court substituted as a party the FDIC in its capacity as receiver for WaMu. The court has now granted FDIC’s motion to dismiss the action. The court held that the relief sought by the borrowers, treble damages under RESPA, constitutes a penalty, which, under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, may not be awarded against the FDIC in its capacity as receiver. Alexander v. Washington Mutual, Inc., Case No. 07-4426 (USDC E.D. Pa. June 28, 2011).

This post written by Michael Wolgin.

COURT OVERTURNS SUBPRIME MORTGAGE REINSURANCE-RELATED BREACH OF CONTRACT RULING

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In a breach of contract action, Plaintiff Ambac Assurance sought to recover damages for the loss of more than $1 billion from investment accounts created to fund notes it guaranteed issued by a special purpose vehicle established to reinsure term life insurance policies. Ambac alleges that plaintiff J.P. Morgan Investment Management (“JPMIM”) failed to manage the accounts, and instead continued to hold toxic subprime securities in the accounts while its corporate parent (J.P. Morgan Chase) reduced its exposure to the same type of securities because they “could go up in smoke.” JPMIM moved to dismiss based on Ambac’s concession that JPMIM adhered to the contractual limitations on purchasing subprime securities. The New York Appellate Division reversed a New York Supreme Court ruling dismissing the action, and held that, at this stage of the proceedings, the court should have accepted the plaintiff’s allegations as true, given the plaintiff every possible inference, and simply ascertained whether the plaintiff’s allegations evidenced a cognizable cause of action (which the Appellate Division concluded Ambac had done). The case was remanded to the Supreme Court for further proceedings. Ambac Assurance UK Limited v. J.P. Morgan Investment Mgmt., Inc., No. 09-650259 (N.Y. App. Div. July 14, 2011).

This post written by John Black.

COURT COMPELS ARBITRATION UNDER U.S. SUPREME COURT’S RECENT CONCEPCION DECISION, ADDRESSING INTERPLAY WITH STOLT-NIELSEN

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A court has recently compelled arbitration in a pending putative class action lawsuit, based on the U.S. Supreme Court’s AT&T Mobility LLC v. Concepcion decision. The case involved a class action suit against title insurers for alleged price fixing. After the case had proceeded “for some time,” Concepcion was decided, which held that (1) the FAA preempts various state laws that invalidate arbitration agreements and that (2) courts must compel arbitration even in the absence of the opportunity for plaintiffs to bring their claims as a class action. The defendants then moved to compel arbitration. Plaintiffs resisted, arguing that the holding of Concepcion was limited to arbitration agreements that contained an express waiver of class treatment (the agreements in this case were silent on class issues). Plaintiffs contended that defendants had never been barred from seeking class arbitration previously, and had thus waived their right to seek arbitration at that late-stage of the litigation. The court disagreed and compelled arbitration, holding that a demand for class arbitration would have been futile prior to Concepcion due to the Supreme Court’s Stolt-Nielsen decision, which precluded class arbitration unless there was “a contractual basis for concluding that the party agreed to do so.” There may be further decisions sorting out the interplay between these two Supreme Court decisions. In re California Title Insurance Antitrust Litigation, Case No. 08-01341 (USDC N.D. Cal. June 27, 2011).

This post written by Michael Wolgin.