(2005) Investigation of Insurance Puts Buffett in a Spotlight (AIG meltdown)

.....investigators on three continents are examining Buffet's Berkshire insurance affiliates .......the company is in the unfamiliar position of having to defend its integrity. Berkshire insurance affiliates are involved in what investigators describe as possible financial manipulation at insurance giants like AIG and Zurich Financial Services Group.

Investigators are trying to determine the extent of senior executives who oversaw insurance operations that sold products at the core of international regulatory scrutiny.

The broad investigation into the insurance industry has already brought down top executives including Maurice R. Greenberg, the former chief executive of AIG.........regulators are looking at a deal Mr. Greenberg struck in late 2000 with the General Re Corporation, a unit of Berkshire athaway......described as being "at the center of the storm."

Although he is known for multi $billion returns on investments in Coca-Cola, The Washington Post, Gillette and other concerns, Berkshire is an Omaha holding company that owns major insurers including National Indemnity and General Re. As Berkshire's insurance offerings have evolved, it has crafted ever more esoteric products that in theory exist to help users insulate themselves financially from the world's calamities.

But in practice, law enforcement officials and regulators say, users have deployed these same products to manipulate corporate earnings or mask underlying financial woes.

The SEC; DOJ; the NYAG, Eliot Spitzer; and regulators in Ireland, Britain and Australia are all shining investigative spotlights on arcane products known as finite reinsurance - with General Re figuring in each of those investigations. Fitch Ratings, a firm that monitors insurers, criticized finite reinsurance in a recent report, noting that its "primary purpose is not true risk transfer in the traditional sense, but financial statement enhancement"........ in many instances the suspect buck stopped at Berkshire's door.

(2005) Court Papers Detail Bonuses at A.I.G.
(company registered in Panama-—offshore mney-launder haven)
By LYNNLEY BROWNING, NY TIMES, May 19, 2005

Fresh details have emerged in court papers about the inner workings of a private offshore company that had been paying big bonuses to top executives of the insurance giant American International Group (AIG). The company, Starr International, awarded tens of millions of dollars in payouts over a two-year period at a time when it was ineligible to do so under its own operating laws, according to the court papers, which cite internal A.I.G. documents. The new details are contained in an amended lawsuit that was filed late Tuesday in Delaware Chancery Court by a Louisiana pension fund that is suing A.I.G. and its directors over what it calls questionable dealings. Those dealings are said to include undisclosed related-party transactions conducted by A.I.G. with StarrInternational and with another A.I.G.-affiliated private company, C. V. Starr & Company.

Starr International, which is registered in Panama, is A.I.G.’s largest shareholder, with nearly 12 percent of A.I.G. stock, now worth around $16 billion. The company is run by A.I.G.’s recently ousted chairman and chief executive, Maurice R. Greenberg, and by a handful of other senior former A.I.G. executives, all hand-picked by him. Mr. Greenberg is president and chief executive of Starr International, and owns about 8.3 percent of the private company.

Federal and New York investigators have been looking at the Starr affiliates as part of their investigations into questionable transactions by A.I.G. Starr International, according to A.I.G.’s 2000 annual report, is not supposed to set aside A.I.G. shares for executives during any two-year period in its compensation plan when A.I.G. does not report growth in its earnings per share. Nevertheless, when A.I.G. had no such growth around 2000 and 2001 because of claims stemming from the Sept. 11 terrorist attacks, Starr International set aside Shares totaling $41.7 million, the court papers say. A spokesman for A.I.G. declined to comment.

Even though Starr International had been a long-term incentive compensation pool for A.I.G.’s top 700 executives and managers, all of its payouts were decided upon within the private company, without the participation or approval of A.I.G.’s own executive compensation committee, according to the court papers.

The pension fund, the Teachers’ Retirement System of Louisiana, filed its original complaint in December 2002, but amended its lawsuit to include charges of breach of fiduciary duty stemming from questions raised since then by investigators, as well as from various settlements and announcements by A.I.G. In March, A.I.G. made an extraordinary disclosure that “internal mismanagement” and “improper accounting” had bolstered its results, and said earlier this month that correcting those errors would shave $2.7 billion of net worth from the company. A.I.G. also said that it would begin expensing Starr International’s compensation as required by standard accounting practices, something it had not done previously.

The amended complaint now includes the second private company, C. V. Starr, as a defendant. Stuart Grant, an attorney at Grant & Eisenhofer, the Delaware law firm representing the pension fund, declined yesterday to say why Starr International was not also a defendant. In an unusual move, the amended complaint asks the Delaware judge overseeing the case to place the assets of C. V. Starr in a court-appointed trust, for the benefit of A.I.G. shareholders.

C. V. Starr is a lucrative private holding company owned and run by top A.I.G. executives and incorporated in Delaware. It is known internally within A.I.G. as “the billionaires club,” according to the complaint. C. V. Starr sells specialized insurance policies with A.I.G.’s name on them and, according to previous court papers, had a net profit of $102 million from 1999 through 2002. C. V. Starr pays its approximately 80 partners, all A.I.G. executives, undisclosed dividends and benefits from its undisclosed profits.

The pension fund argues that all of the money paid by A.I.G. to C. V. Starr, in the form of various commissions, should go to A.I.G. shareholders, since A.I.G. can do the work that C. V. Starr does. The amended complaint discloses that A.I.G. paid direct commissions to C. V. Starr of $495.2 million from 1999 to 2003. The figure is $24.5 million more than A.I.G. disclosed to shareholders in its own S.E.C. filings, according to the complaint. Direct commissions are payments for the production of business.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.