U.S. v. Ferguson: Second Circuit Reverses Convictions for Four Gen Re Executives and One AIG Executive

In United States v. Ferguson, 2011 WL 3251464 (2d. Cir. Aug. 1, 2011), the court vacated the convictions of four executives of General Reinsurance Corporation (“Gen Re”) and one executive of American International Group, Inc. (“AIG”) (together, “defendants”).  The court remanded the case for a new trial.  

The case involved allegedly misreported reinsurance arrangements.  Loss reserves are liabilities that estimate expected claims on insurance contracts.  When new policies are written, analysts expect loss reserves at insurance companies to go up.  Loss reserves can be transferred between companies through reinsurance agreements.  In these agreements, an insurer purchases insurance from a reinsurer and cedes substantial risk to the reinsurer.  According to the Financial Accounting Standards (“FAS”) section113, a reinsurance transaction must have significant risk for the reinsurer.  An industry rule of thumb requires that a transaction with more than a 10% chance of incurring a loss greater than 10% is acceptable under FAS 113.  Any transition that does not meet these criteria cannot be booked as reinsurance.

In late October 2000, AIG and Gen Re began negotiations for a reinsurance deal in which AIG would be the reinsurer of Gen Re.  The government alleged that the defendants crafted a no-risk reinsurance transaction; AIG would “borrow” a range of Gen Re’s loss reserves without incurring any of the risk as a reinsurer normally would.  A jury convicted all defendants of all charges.

On appeal, the defendants alleged the district court abused its discretion in admitting bar charts showing AIG’s stock price into evidence and in issuing various jury instructions.  The defendants also alleged prosecutorial misconduct.  

The court agreed that the bar charts should not have been admitted.  The charts, the court reasoned,  suggested that the transaction at issue alone  caused AIG shares to decline 12% during the relevant period.  The  reinsurance transaction, however, was only one of many problems plaguing AIG at the time.  Thus, there were other possible causes for the decline in stock prices in addition to the challenged transaction.  

The court also held that the district court incorrectly instructed the jury.  The statute required proof that defendant “willfully cause[d]” the act that resulted in the offense.   In an attempt to accommodate phrasings offered by both parties, the court constructed a jury instruction that addressed the requisite act ("did the defendant act") and the requisite mental state but not causation.  As a result, the court held, the instruction allowed the jury to convict without a finding of causation.   

The court also addressed allegations of prosecutorial misconduct.  Defendants alleged, among other things, that the government knew a witness was testifying falsely involving what the court described as a claim for eliciting perjury.   Given the inconsistencies in a key witness’s testimony, the court agreed there was some indicating that the  the witness may not have testified truthfully.  Although expressing skepticism over the claim, the court declined to resolve the issue, having already  reversed on other grounds.  As the court noted:

Since we are vacating the judgments on the grounds discussed above, we need not reconcile these cases or decide whether the prosecution's actions amounted to misconduct. (Our decision would have been hindered by the defendants' gamesmanship; and their fact-intensive arguments are blunted by the underdeveloped record.) No doubt it is dangerous for prosecutors to ignore serious red flags that a witness is lying, and the government will doubtless approach Napier's revised recollections with a more skeptical eye on remand. At the same time, Napier's inconsistent statements concern facts that could not have been conclusively verified by the government, and the potential that Napier had lied in these respects was fully presented in cross-examination and summation to the jury, which resolved the credibility issue against the defendants.

The primary materials for this case may be found on the DU Corporate Governance website.