In a 77-page decision handed down this morning, the U.S. Court of Appeals for the Second Circuit vacated the convictions of five former insurance executives whom prosecutors had alleged engaged in a fraudulent reinsurance transaction. A new trial has been ordered. United States v. Ferguson, et al., No. 08-6211-cr (L) (2d Cir. Aug. 1, 2011). A copy of the court’s decision is available here.
At its core, the criminal complaint involved a finite reinsurance transaction. According to the government, in 2000, American International Group had become convinced that decreased loss reserves reported on its balance sheet were depressing its stock price. Prosecutors alleged that it therefore decided to reinsure contracts for which reinsurance had already been purchased, which eliminated all risk of loss. The effect of the transaction, according to prosecutors, was to increase loss reserves on AIG’s balance sheets. According to the court’s opinion, roughly five years later, following investigations by the SEC and the New York State Attorney General, AIG concluded that the transaction did not transfer sufficient risk to be treated as reinsurance; and it restated its financials. AIG’s stock price subsequently declined 12%.
The appeals court reversed the insurance executives’ convictions because it found that the district court’s evidentiary rulings were inconsistent, and overly prejudicial – in essence, the government was allowed to use charts and other information to suggest that the reinsurance transaction alone, and disclosure of the transaction as a result of regulators’ investigations, caused the stock price decline. According to the appeals court, the information that the court allowed into evidence “prejudicially cast the defendants as causing” the recent economic downturn, which was error.
The court also vacated the defendants’ convictions because certain jury instructions were improper.