The AIG Fraud Case: Using the Market to Set Jail Sentences


Under new federal guidelines, defendants in major stock market scam cases could face prison terms ranging from 30 years to life. In the coming weeks, five former insurance industry executives, including Ronald Ferguson, former CEO of General Reinsurance, are due to appear in federal court in Hartford.

US District Court Judge Christopher F. Droney will try them for their role in a sham transaction that widened the deficit of American International Group (AIG). When the deal was disclosed in 2005, prosecutors argued it caused a 6% to 15% drop in AIG’s stock price. As a result, the defendants, who were convicted of fraud last February, could face a life sentence.

While the case involves events that seem remote from the current financial crisis, it highlights an issue that is sure to be crucial if prosecutors are seeking retribution for losses suffered in the market in recent weeks. Under the guidelines, the lowest possible sentence for someone guilty of securities fraud is zero to six months. But several factors can lengthen the time spent behind bars, including the size of the shareholder loss, the number of victims, and whether the defendant is an officer or director of a public company. . In 2003, in response to the implosion of Enron and WorldCom, and other scandals that cost investors billions, lawmakers have sharply increased the penalties. Now, instead of a few years in prison, frauds resulting in securities losses exceeding $400 million could cost a defendant a life sentence.

Given the magnitude of the losses associated with the subprime mortgage debacle, prosecutors are likely to be able to threaten the alleged culprits with life imprisonment. “It has an unhealthy influence on prosecutors, empowering them to unfairly influence sentence negotiations. “, Argues Reid H. Weingarten, lawyer in Washington representing Elizabeth Monrad, former financial director of Gen Re, found guilty of fraud. “Going after the maximum sentence is probably popular in these chaotic times, but it has absolutely nothing to do with the actual seriousness of the misconduct. “, he adds. Indeed, judges in recent securities fraud cases discovered draconian guidelines and applied them in much less time,

In the case of AIG, the insurer’s stock fell from 71.49 to 61.92 in the month following the disclosure of the Gen Re transaction and a subsequent investigation was conducted by Eliot Spitzer, the Attorney General of New York. (Since then, AIG shares have depreciated to below 3 due to subprime-related losses; which has forced the government to issue a massive bailout). Prosecutors for the five defendants argue that a whole host of factors caused AIG stock to crash three years ago, including the forced departure of AIG executive Maurice “Hank” Greenberg. The defendants, including Christian Milton, a former head of reinsurance at AIG, plan to appeal their convictions.

For many, sentencing depends on the highly complex and controversial discipline of market loss determination. Both parties have hired financial experts to determine how much of the damages suffered by shareholders could be directly linked to the fraudulent inflation of the loss of AIG’s reserves. The defendants say the amount was zero, meaning under the guidelines they would face a year or two in jail at most. Prosecutors, seeking a life sentence, claim losses reached $1.4 billion. Such disparate findings are not uncommon, defense attorneys say. This indicates that it is more of an art than a science. “At the end of the day, you’re making all kinds of rudimentary assumptions,” says David Topol, a lawyer in Washington who listens to shareholder lawsuits for insurers. “When you get to a huge disparity, obviously someone is wrong.”

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