Cuomo v. Greenberg

• Decision Date: 08 May 2012
• Citation: 946 N.Y.S.2d 1,95 A.D.3d 474,2012 N.Y. Slip Op. 03546
• Parties: The PEOPLE of the State of New York by Andrew M. CUOMO, etc., Plaintiff–Respondent, v. Maurice R. GREENBERG, et al., Defendants–Appellants. The Chamber of Commerce of The United States of America. Amicus Curiae.
• Court: New York Supreme Court — Appellate Division

95 A.D.3d 474

946 N.Y.S.2d 1

2012 N.Y. Slip Op. 03546

The PEOPLE of the State of New York by Andrew M. CUOMO, etc., Plaintiff–Respondent,

v.Maurice R. GREENBERG, et al., Defendants–Appellants.

The Chamber of Commerce of The United States of America. Amicus Curiae.

Supreme Court, Appellate Division, First Department, New York.

May 8, 2012.

Boies, Schiller & Flexner LLP, Cambridge, MA (Charles Fried of the bar of the State of Massachusetts, admitted pro hac vice, of counsel), Boies, Schiller & Flexner LLP, Armonk (David Boies of counsel), and Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C., New York (Robert G. Morvillo of counsel), for Maurice R. Greenberg, appellant.

Kaye Scholer LLP, New York (Vincent A. Sama of counsel), for Howard I. Smith, appellant.

Eric T. Schneiderman, Attorney General, New York (Richard Dearing of counsel), for respondent.

Mayer Brown LLP, Washington, DC (Andrew J. Pincus of counsel), for amicus curiae.

GONZALEZ, P.J., TOM, SAXE, CATTERSON, RICHTER, JJ.

Order, Supreme Court, New York County (Charles E. Ramos, J.), entered October 21, 2010, which, to the extent appealed from, denied defendants Maurice R. Greenberg's and Howard I. Smith's motions for summary judgment dismissing the Martin Act (General Business Law § 352–c[1][a] and [c] ) and Executive Law § 63(12) claims as against them, and granted the Attorney General's motion for summary judgment on the issue of liability with respect to one of two challenged transactions, modified, on the law, to deny the Attorney General's motion, and otherwise affirmed, without costs.

Introduction

The Attorney General brought this action against American International Group (AIG), its former CEO (Maurice R. Greenberg) and its former CFO (Howard I. Smith) alleging that defendants violated Executive Law § 63(12) and the Martin Act based upon their role in fraudulent transactions designed to portray an unduly positive picture of AIG's loss reserves and underwriting performance. AIG, formerly the largest insurance company in the world, entered into a settlement agreement with the Attorney General with respect to these and other claims, paying over $1 billion in damages and penalties. The details of the challenged transactions are as follows.

The GenRe Transaction

In the third quarter of 2000, AIG reported that its loss reserves (funds set aside to pay future claims on policies) had declined by $59 million from the previous quarter, while its net premiums increased by 8.1%. In the industry, this could be viewed as an indication of a company's deteriorating financial condition. In an effort to shore up its loss reserves, Greenberg called Ronald Ferguson, the CEO of General Reinsurance Corporation (GenRe), to discuss the possibility of AIG's entering into a loss portfolio transfer (LPT) involving “finite reinsurance” with GenRe. Greenberg testified at his deposition that he made the call in October 2000, based upon his concerns about AIG's loss reserves. He testified that he remembered inquiring about borrowing some of GenRe's reserves through an LPT. He did not remember the details of the conversation but testified that he told Ferguson that AIG would pay GenRe if it was willing to accommodate the request.

After the conversation, Ferguson designated Richard Napier, a senior GenRe executive, to handle the details from GenRe's end. Greenberg appointed Chris Milton, a senior vice president at AIG and the head of reinsurance, to work out the details for AIG.

Greenberg testified that he had a second telephone conversation with Ferguson in November 2000 and that Ferguson told him that GenRe could provide AIG the product it had requested. Greenberg also testified that he had contemporaneous discussions with Milton and Smith concerning the GenRe transaction, but denied any knowledge of its fraudulent nature. Smith testified at his deposition that Milton advised him of the general terms of the GenRe deal. The actuaries testified that Smith was responsible for recording the transaction. Moreover, Smith participated in the meeting regarding commuting the GenRe transaction from an LPT to profits. Although AIG's underwriting practices required internal actuarial review of any proposed insurance agreement over $20 million, no underwriting analysis of the GenRe transaction was directed or performed.

The draft contract between AIG and GenRe provided, in general terms, that GenRe would pay AIG $10 million to assume a specified amount of risk, namely $100 million for six to nine months. The premium was $500 million on a 98% funds withheld basis, meaning that GenRe could charge AIG only for losses beyond the $500 million premium (up to a $600 million cap on losses).

The Attorney General alleges that the $100 million loss exposure was illusory, that at least half of the contracts covered by the GenRe transaction had already been reinsured by other carriers and thereby carried no risk to AIG, and that AIG and GenRe had separately agreed that, for accommodating AIG in its request to structure the transaction as no risk, GenRe was paid a $5 million fee, and the $10 million premium payment was secretly returned to GenRe through other, unrelated agreements. In his deposition in this litigation, Napier testified that the parties “involved” in the separate side deal included Greenberg, Ferguson, and Milton. Greenberg denied knowledge of both the no-risk nature of the GenRe transaction and the side deal concerning the fee and the return of the premium.

According to generally accepted accounting principles, an LPT can only be recorded as loss reserves if the risk insured exceeds a 10% chance of a 10% loss. If, as the parties presently concede, there was no risk of loss in the GenRe transaction, it should have been recorded on AIG's financials as a deposit. Instead, AIG recorded $250 million in loss reserves for the fourth quarter of 2000 based upon the GenRe transaction and an additional $250 million in loss reserves for the first quarter of 2001, consistent with Greenberg's intent when he reached out to Ferguson, to shore up the reserves. Had these amounts not been credited in this manner, AIG would have had a $187 million decline in its loss reserves by the first-quarter of 2001. In a press release regarding AIG's 2001 first-quarter financial picture, Greenberg is quoted as being pleased with a number of favorable financial indicators, including the reversal of the loss reserve declines.

In 2001, 2002, and 2003, Greenberg and Smith certified AIG's 10–K financial disclosure reports with the SEC, each year recording the $500 million from GenRe as loss reserves. In 2003 and 2004, Greenberg participated in decisions regarding characterizing the GenRe transaction, and, in late 2004, $250 million was commuted to profits.

In early 2005, AIG received subpoenas from the Attorney General and the SEC for information regarding the GenRe transaction. AIG retained outside counsel to perform an internal investigation, and Pricewaterhouse Coopers (PwC), the auditor, initiated an expanded audit to review AIG's prior financials and certain transactions. Barry Winograd, the PwC partner in charge of the audit, testified at his deposition that he had frequent contact with Greenberg throughout the investigation and that Greenberg was particularly interested in PwC's findings with respect to GenRe.

In March 2005, AIG issued a press release admitting that the GenRe transaction documentation was improper, stating that in light of the lack of evidence of risk transfer, the transactions should have been recorded as deposits. Defendants subsequently resigned their positions as CEO and CFO of the company. On May 31, 2005, following defendants' departures from AIG, the company's new management filed AIG's 10–K for 2004, restating the financials submitted from 2000 to 2004. In the restatement, AIG explained that “[GenRe] was done to accommodate a desired accounting result and did not entail sufficient qualifying risk transfer. As a result, AIG has determined that the transaction(s) should not have been recorded as insurance.”

In June 2005, two GenRe executives pleaded guilty to participating in a conspiracy to commit securities fraud for their role in the GenRe transaction. In February 2008, four other GenRe executives were convicted on federal criminal charges with respect to the GenRe transaction. Those convictions were reversed upon evidentiary errors and the case was remanded for a new trial ( see United States v. Ferguson, 553 F.Supp.2d 145 [D.Conn.2008], revd.676 F.3d 260 [2011] ).

The Capco Transaction

Beginning in the early 1990s, various AIG subsidiaries were writing auto warranty insurance policies. In late 1999, an actuarial consultant retained by AIG concluded that the company was facing an underwriting loss ratio of 265% in this area. At his deposition, Greenberg admitted that AIG's auto warranty business up until the late 1990s “was not handled properly,” that he was annoyed about the situation, and that he may have referred to the situation as a “debacle.” Greenberg also admitted giving specific instructions to Charles Schader, about reforming the auto warranty business, and testified that he had regular calls with Schader, and other employees, about his concerns, including on weekends. These calls concerned “everything from ... consultation of outstanding contracts and policies, claims handling, and mitigation of loss.”

Greenberg also testified that he directed an internal audit of AIG's auto insurance business to review the auto warranty business and to explore ways to mitigate projected losses. The parties do not dispute the details of the transaction structured to meet these objectives between AIG and CAPCO Reinsurance Company, Ltd. (CAPCO), an offshore shell company controlled by AIG. AIG, which did not treat CAPCO as a consolidated entity on its financial statements, sold shares in the shell company over time so as to trigger recognition of $162.7 million in...