US, SEC, Gen Re: Liberty Mutual Has No Right to Ask for Gen Re’s $12.2 Million SEC Settlement

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March 17, 2010 Wednesday 04:38 PM EST

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US, SEC, Gen Re: Liberty Mutual Has No Right to Ask for Gen Re's $12.2 Million SEC Settlement

Meg Green

NEW YORK

The U.S. Securities and Exchange Commission and General Re Corp. agree Liberty Mutual Insurance Co. should not be allowed to intervene in Gen Re's finite reinsurance settlement with the SEC.

Liberty Mutual, which claims it is the victim of finite reinsurance fraud, has asked a federal court to give it $12.2 million of the $92.2 million Gen Re agreed to pay to settle the SEC's allegations of fraud involving the former Prudential Financial property/casualty companies.

Both Gen Re and the SEC filed motions in the U.S. District Court Southern District of New York on March 12, asking the court deny Liberty Mutual's attempt to intervene.

Liberty Mutual's motion "is a legally meritless and opportunistic attempt to end run" around its agreement to arbitrate any reinsurance claims remaining from Liberty Mutual's purchase of PruPac, Gen Re said in its court filing.

Plus, the $12.2 million Liberty Mutual is seeking is "separate and distinct" from Gen Re's disgorgement of $8.1 million illicit fees, plus interest of $4.1 million, the SEC said.

In February, Liberty Mutual, which acquired the former PruPac companies in 2003, asked U.S. District Judge Loretta A. Preska to allow it to intervene in the SEC's case with Gen Re to lay claim to those funds it says Gen Re still owes (BestWire, Feb. 16, 2010).

Earlier this year, Berkshire Hathaway's Gen Re agreed to pay a total of $92.2 million and dissolve a Dublin subsidiary to resolve federal charges relating to sham finite reinsurance contracts with American International Group Inc. and PruPac (BestWire, Jan. 20, 2010).

The SEC claimed Gen Re entered into a series of sham reinsurance contracts with Prudential's property/casualty division from 1997 to 2002. The contracts had no economic substance and purpose other than to allow Prudential to build up and then draw down on an off-balance sheet asset or "finite bank" parked with Gen Re, the SEC said. As a result of the sham transactions, Prudential improperly recognized more than $200 million in revenues in 2000, 2001, and 2002. Gen Re received fees totaling $8.1 million for structuring and executing the scheme with Prudential. Prudential didn't admit or deny the allegations and consented to a permanent injunction (BestWire, Aug. 7, 2008).

As part of the larger settlement, Gen Re agreed to disgorge $12.2 million -- the $8.1 million in fees from the PruPac deal, plus interest.

In court papers, Liberty Mutual said it was unaware of the sham reinsurance transactions that Gen Re and PruPac were involved in. When Liberty Mutual purchased PruPac, it expected to receive $41 million from PruPac's reinsurance policies with Gen Re. To date, Gen Re has paid Liberty Mutual only $29 million.

The disgorged sum mirrors the about $12.1 million Gen Re still owes Liberty Mutual, Kevin J. Fee, attorney for Liberty Mutual, said in a letter to the court. "Liberty Mutual, therefore, asserts that in equity and fairness, it should receive the disgorged sum, rather than the U.S. Treasury," he argued.

However, both Gen Re and the SEC say there is no relation between the money Liberty Mutual claims it is owed and the disgorged $12.2 million.

Also, Gen Re asserts Liberty Mutual has already agreed four times to arbitrate any reinsurance disputes involving Gen Re and PruPac, and should seek to arbitrate any reinsurance money it is owed, rather than get in the middle of the SEC settlement.

On Feb. 8, the court ordered the SEC to keep the $12.2 million paid by Gen Re in a separate interest-bearing account pending resolution of the motion.

General Re Group's currently has a Best's Financial Strength Rating of A++ (Superior). Liberty Mutual Insurance Cos. currently have a Best's Financial Strength Rating of A (Excellent).

(By Meg Green, senior associate editor, BestWeek: [email protected])

March 18, 2010

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