What Price Waterhouse?
~ ~ ~
The poop on Pricewaterhouse’s Coop
Sightings from The Catbird Seat
~ o ~
PricewaterhouseCoopers (or PwC) is the world's largest professional services firm. It was formed in 1998 from a merger between Price Waterhouse and Coopers & Lybrand. PwC is the largest of the Big Four auditors, whose other member firms include Deloitte Touche Tohmatsu, Ernst & Young and KPMG.
PricewaterhouseCoopers earned aggregated worldwide revenues of $20.3 billion for fiscal 2005, and employed over 130,000 people in 148 countries.
In the United States, where it is the fourth largest privately owned organization, it operates as PricewaterhouseCoopers LLP.
http://en.wikipedia.org/wiki/PricewaterhouseCoopers
December 16, 2008
THE FINTAG NEWSLETTER
Madoff part 2.
Last Thursday the news broke and it hardly registered a blip on the news radar. Today we face financial meltdown of the hedge fund industry and the loss of tens of billions of dollars and the destruction of livelihoods.
Yesterday I looked critically at the investors who had not read the prospectuses or carried proper due diligence. The problem with Madman Madoff's funds is you could only touch them by investing through feeder funds. These feeder funds were promoted by interested parties who put layers of fees on top and sold them as proper fund of funds.
Take the Fairfield Sentry fund. It has a proper Auditor - PWC, an administrator and a custodian - Citco. It is a BVI fund and is managed by a well known Investment Manager. So far, so good. Ok, the custodian only looks after 5% of the assets (the other 95% are looked after by Madoff) but unless you like reading small print it looks like fine.
The biographies of the managers are respectable, including Jeffrey Tucker who used to work as a lawyer for the SEC. The fund has a board including 2 directors located in risk adverse Switzerland. One of the directors is not paid which is strange but I guess he must be paid elsewhere. Thankfully, Goldman Sachs is a sub custodian although I think Refco must have been a misprint.
The Investment objective is "The Fund seeks to obtain capital appreciation of its assets principally through the utilization of a nontraditional options trading strategy described as "split strike conversion", to which the Fund allocates the predominant portion of its assets. This strategy has defined risk and profit parameters, which may be ascertained when a particular position is established ..." and sounds quite convincing.
I am not so sure about the Investment Restrictions including "e) no more than 10 percent of the Net Asset Value of the Fund may be invested in securities of countries where immediate repatriation rights are not available;" but I like the fact US citizens are excluded - "The Fund will require as a condition to the acceptance of a subscription that the subscriber represent and warrant that he has a net worth in excess of U.S. $1,000,000 and is not a U.S. person".
The 13 year track record averages in excess of 10% a year and its volatility is very low indeed. The fund has grown and subscriptions exceed redemptions so it must be a popular.
Excellent. So where did it go wrong? Well PWC have some explaining to do. It looks like they never validated the underlying investments. Madoff obviously just gave them the NAVs and they took them as red. Citco's care of duty is to look after the assets and it has done so. Shame it only looked after 5% but that is better than nothing. The manager should perhaps have carried out some proper due diligence on the underlying but then it made so much in fees it got a bit punch drunk.
So there you go. A sound investment run by people who didn't quite do their jobs. I take back all my negative posturing and instead tell you how I see it through a slew of crap cartoons and virals....
October 6, 2008
PwC Zapped in $97.5-million Settlement
The auditor, accused by Ohio of violating securities laws in its work with AIG, will pay one of the highest amounts ever for an accounting firm in a class action.
Alan Rappeport, CFO.com
PricewaterhouseCoopers agreed to pay $97.5 million to the state of Ohio to settle a class-action lawsuit on behalf of investors in troubled insurer American International Group, which uses PwC as its independent auditor.
The "partial" settlement, on Friday, came after the Ohio Public Employees Retirement System, the State Teachers Retirement System, and the Ohio Police and Pension Fund filed a lawsuit seeking damages for investors who bought AIG securities from 1999 to 2005. In the complaint, PwC was accused of violating securities laws relating to a market division scheme allegedly involving AIG that was disclosed in 2004 and improper accounting for reinsurance and other transactions.
In May 2005, AIG's accounting problems led to a $3.9-billion restatement, and removal of former CEO Maurice Greenberg.
The settlement is among the 10 highest to be paid by an accounting firm to settle a securities fraud class action lawsuit, according to Nancy Rogers, Ohio's attorney general. The arrangement, however, still needs to be approved by the U.S. District Court for the Southern District of New York in Manhattan.
"This important settlement represents a tremendous result for investors," said Chris Geidner, principal assistant attorney general. "We are pleased with this milestone and will continue to vigorously pursue investors' claims against the remaining defendants in the case."
"We have decided to settle the case at this stage to avoid the enormous litigation costs that would be incurred if the case continued against the firm, while at the same time eliminating any potential exposure," said Steve Silber, a PwC spokesman told The Columbus Dispatch. "The settlement does not contain an admission of wrongdoing by the firm, and we continue to believe that our work was in accordance with professional standards."
AIG currently is facing another lawsuit filed in May by the Jacksonville Police and Fire Pension Fund. The Florida fund accused the insurer of manipulating the market by making false statements about its financial health before disclosing a first quarter loss of $7.8 billion. PwC is not implicated in that lawsuit and in February it gave a warning sign of AIG's problems when it found that there was a "material weakness in its internal control" relating to the accounting of its credit default swaps portfolio.
Last month the U.S. government agreed to an $85 billion bail out of AIG in exchange for warrants to purchase 80 percent of the company, which is selling off several units of its business to repay the loan.
http://www.cfo.com/article.cfm/12371528?f=alerts
See also: RICO in Paradise
June 6, 2008
Prosecutors said
seeking AIG data
Associated Press
WASHINGTON - Federal prosecutors have asked the Securities and Exchange Commission for material from its probe of whether American International Group Inc. overstated the value of mortgage-linked contracts, according to a newspaper report Friday.
The request to the SEC from prosecutors in the Justice Department and the U.S. Attorney's office in Brooklyn, N.Y., could lead to a criminal investigation of the matter, in addition to the SEC's civil inquiry into AIG. The development was reported in Friday's editions of The Wall Street Journal, which cited unnamed people familiar with the matter.
New York-based AIG, one of the world's largest insurance companies, paid a then-record $1.64 billion in February 2006 in a settlement with federal and New York state authorities over alleged deceptive accounting practices.
The current SEC investigation focuses on AIG's valuation of credit default swaps, which function as insurance policies against defaults, including those backed by subprime mortgages, The Journal reported.
The company in February told the SEC that its outside auditors had found significant weakness in how it reports the value of certain credit default swaps. AIG also said the auditors had concluded that the company "had a material weakness in its internal control over financial reporting and oversight" related to how it determines default probabilities and expected losses on the underlying securities.
Due largely to writedowns related to credit default swaps of more than $20 billion through March, the company posted the two biggest quarterly losses in its history: a $7.8 billion loss for the first quarter, following a loss of nearly $5.3 billion in the fourth quarter.
SEC spokesman John Nester in Washington and Bob Nardoza, spokesman for the U.S. Attorney's office in Brooklyn, on Friday both declined to confirm or deny investigations by the agencies.
AIG spokesman Chris Winans also would not confirm a federal probe. He said AIG has always cooperated with regulators and has "consistently and promptly" provided best estimates of its portfolio valuations and potential exposures of its financial products amid the recent uncertainty in the credit markets.
The finding of material weakness doesn't mean that the company has reported inaccurate financial results, Winans said. "We have clean audited financial statements with no qualifications from our auditors," he said.
< < < FLASHBACK < < <
October 24, 2007
Arthur Levitt and AIG -
Gone Over To The Dark Side, Artie?
I waited to post this story about AIG's reappointment of PricewaterhouseCoopers as their external auditor. I am incredulous. I was slightly apoplectic too, but then I calmed down.
After all, greater minds than mine, like the famous Arthur Levitt, have made sure that, "AIG's selection process was designed and executed with integrity, and the Audit Committee's evaluation of the proposals was both fair and impartial. AIG did an exceptional job."
It seems Levitt was hired by AIG in 2005 to spruce up their image in the wake of Elliot Spitzer's investigation of AIG. Mr. Levitt's tenure at that time was expected to be less than a year as a special consultant to the Board, but it has obviously taken longer than that to address AIG's governance problems and will continue to take longer to fix them completely, if that's possible. Mr. Spitzer was the former Attorney General for the State of New York and is now their Governor.
The audit committee of AIG's board of directors spent 12 months on the RFP process, which is part of the company's 2006 settlement with the New York Attorney General's Office, said AIG spokesman Chris Winans.
The agreement, Winans said, required AIG to take actions above and beyond the normal annual review of its relationship with the company's independent auditor. This RFP is something we did as part of the settlement agreement, he said. It requires us to do the RFP process for the 2008 fiscal year.
In 2006, AIG agreed to pay a total of $1.64 billion to settle litigation stemming from New York state and federal investigations of its accounting, financial reporting and insurance brokerage practices, and claims related to workers' compensation premium taxes.
Mr. Levitt, therefore, is not a court appointed monitor based on a settlement with the SEC, a la Mr. Breeden and KPMG, but a shill for AIG.
Interestingly enough Mr. Levitt has a long and contentious history with PwC. It all goes back to reforms he wanted to make to how the audit firms did and didn't do business and how PwC was the big stubborn holdout. This was in spite of the fact that they had been nabbed big time with serious independence violations and the SEC could have disqualified the audited financial statements of all of their clients (and caused them to have to resign from those clients) if they had not cooperated with the regulators at the time. For a history of this sword fight, go here.
So it's all the more surprising that Arthur Levitt was willing to stand by and put his imprimatur on the charade which is the reappointment of PwC at AIG. After all, AIG's shareholders are suing PwC. And PwC has been AIG's auditor for as long as they have been in trouble.
I have seen some Google searches regarding this "RFP" process wherein other firms, in particular Deloitte, are searching for more details about why they weren't chosen. Let me give them all a clue... The fix was in.
I have requested via the Freedom of Information Act provisions for the State of New York Attorney Generals office, a copy of the RFP, the responses, the evaluation process and the grading of all proposal submissions. I have heard no response from them. Given that this was a public agency mandated process, I would assume that public disclosure would be mandated. Will make for interesting reading, if so. How can anyone for the Attorney General's Office be sure that it was a fair and competitive process if they also do not see and approve the process that AIG conducted?
As for Mr. Levitt, I am disappointed. I guess everyone has to make a buck. But I had hoped he would do it by being on the side of the investor and the other stakeholders of AIG, and not on the side of perpetuating the myth of a job well done by PwC as AIG's auditor.
Update: One of my favorite writers on these subjects reminded me:
"If you really want to have some fun with this, remember also that Levitt can't let go of
his affiliations inside the Beltway -- now acting as co-chair of the so-called Paulson
committee, along with Don Nicholaisen. Looking at the list of members, it's almost
sure to be MOTS..."
DOW CORNING CORPORATION
SILICONE BREAST IMPLANT PRODUCT LIABILITY
American Institute of Certified Public Accountants
Kathryn J. Wilkiki, Assistant Professor of Accountancy
Providence College, Providence, Rhode Island
Maureen L. Craig, Corporate Area Controller
Dow Corning Corporation, Midland, Michigan
~ ~ ~
Spencer Tillinghast hung up the phone and sighed. Christmas was only a few weeks away and the winter of 1991 had, so far, been mild. However, his employer, Dow Corning Corporation (DCC), was faced with another disappointment with respect to the silicone breast implant product. The legal department had just informed him that a judge awarded a sizable amount to another woman who had sued for leakage of silicone breast implants. This time, the award was $7.3 million!
Spencer had been a controller at Dow Corning in Midland, Michigan for the past ten years, starting at the company in 1981. As the controller, he had the responsibility to make final decisions about several financial reporting issues to prepare the annual report to the company’s bondholders. In addition, it was his responsibility to work with the external auditors at Price Waterhouse.
Since this last lawsuit had resulted in a adverse verdict against DCC, he anticipated recording a liability and writing a footnote to the financial statements to explain the outcome of the litigation. His more immediate problem was how to report other claims that were already pending, and other unasserted claims that he anticipated might materialize when news of the judgment broke. At this point, the lawyers would be involved with filing appeals. He was not sure whether they would be able to assess possible losses under future claims....
For more, GO TO > > > The Downfall of Dow-Corning
From: Trini whistleblower <whistleblowertt@gmail.com>
Date: Mar 19, 2006 8:29 PM
Subject: CLICO Fraudulent Transactions Covered up by PWC
To: tips@pcaobus.org
PriceWaterhouseCoopers are at it again. First it was with AIG and now it is with the Colonial Life Insurance Company (CLICO) in Trinidad and Tobago.
The following are the brief details :
1) There is impropriety in the accounting treatment of expenses and guarantees in the CSI CLICO mutual fund.
2) There is collusion by PwC to knowingly allow materially incorrect presentation of those transactions.
3) CLICO is transferring assets to / from the mutual fund in breach of the law.
4) The CSI Mutual fund has a $800 Million deficit
5) Funds are being withdrawn by the Chairman in breach of the law and sent to Miami.
The Central Bank is incapable of doing a proper investigation since their staff are not adequately trained or qualified to do a proper life insurance audit . The SEC in Trinidad on the other hand have no investigative ability and are a ' non entity'.
We need to protect the Policyholders!!!!!!!
Trini Whistleblower
* * *
Date: Wed, 15 Nov 2006 16:44:53 -0400
From: " Trini whistleblower" <whistleblowertt@gmail.com>
To: "Balynsky, Paul" <BalynskyP@pcaobus.org>, ewilliams@central-bank.org.tt, info@central-bank.org.tt, keith.daniel@tt.pwc.com, letters@ttol.co.tt, "Malabanan, Gloria" <MalabananG@pcaobus.org>, guardianlife@ghl.co.tt, express@trinidadexpress.com, chiefstate@ag.gov.tt, permsec@ag.gov.tt, william.lucie-smith@tt.pwc.com, thecatbird@the-catbird-seat.net, snicholls@central-bank.org.tt
Subject: CLICO ACCOUNTING FRAUD
It is now confirmed that Clico submitted fraudulent financial statements that was audited by PriceWaterhouseCoopers. The SEC and Central bank are doing nothing because both parties have been compromised. Icatt is not investigating because some of the executives are from Pwc.
Clico has not produced any Mutual Fund Accounts to this date and has dropped the rate to 5% to close down the fund before anyone investigates. They have used the mutual fund (much like how Enron used dummy companies) to inflate earnings and hide liabilities. PWC was an accomplice to this by signing the audit reports. They are not releasing the mutual fund reports because it would reveal the accounting fraud.
This is the first of hundreds of bulletins that will be sent to people across the world.
Trini whistleblower.
March 29, 2006
PwC settles dotcom fraud case
By John Oates, The Register
PricewaterhouseCoopers (PwC) has made an out-of-court settlement with shareholders of e-district who alleged the accountancy giant had failed to discharge its legal responsibilities.
The case had been due in court in June, and all details of the settlement are remaining secret.
E-district was the last bubble on board the dotcom bandwagon. It claimed one million users and raised almost £30m selling shares to institutions before it floated on AIM. PwC was the firm's accountant.
But it all came falling down in 2001 when the CEO was suspended over gaps between real and claimed revenues, page impressions and number of users. At the end of 2000 it claimed 2.6m active users but an investigation in early 2001 found just over 50,000 registered users.
The company blamed the ex-CEO Steven Laitman. He was accused of bringing money into the company and falsely labelling it as revenue from sales agencies.
PwC was being sued by 110 shareholders because it was the company accountant and auditor.
A statement for the accountants said the firm was happy to draw a line under the matter. More from the Independent here. ®
www.theregister.co.uk/2006/03/29/pwc_settles_out_court/
April 11, 2005
Tough Questions For AIG’s Auditors
Regulators are probing if PwC let the
financial shenanigans slip through
By Joseph Weber, Mike McNamee, Marcia Vickers & Diane Brady
Business Week
Where were the auditors? Now that American International Group Inc. has admitted to a clutch of accounting improprieties and is mulling whether to restate its past results, an all-too-familiar question is emerging: Why didn’t the auditor catch what was going on?
Were misdoings hidden from AIG’s longtime auditing firm PricewaterhouseCoopers, or did the firm turn a blind eye to problems it should have seen? Indeed, some of the searing heat that has so far felled AIG Chief Executive Maurice R. “Hank” Greenberg and several other execs could soon scorch the $17.5 billion accounting giant....
Because of its role as a dominant force in auditing and accounting for insurance companies, PricewaterhouseCoopers’ outfit is bound to get an especially close going over from regulators and shareholders alike. Certainly. the outfits were close. PwC or its predecessor companies, such as Coopers & Lybrand, had done work for AIG going back more than 20 years.
How deep were the ties? Recently ousted Chief Financial Officer Howard I. Smith, whom AIG fired for refusing to cooperate with investigators in the latest probes, had worked at Coopers & Lybrand for 19 years and was the head partner in its New York insurance practice before joining AIG in 1984...
More important, PwC was AIG’s auditor through its long years of questionable dealings. AIG on Mar. 30 said that deals with a Barbados-based insurance company, for instance, may have been incorrectly accounted for over the past 14 years, because an AIG-affiliated company may have been secretly covering that insurer’s losses. If AIG has to unwind its dealings with the Barbados company, it may be forced to take a big earnings hit.
More recently, PwC appears to have dropped the ball on the now-notorious reinsurance deals between AIG and Berkshire Hathaway Inc.’s General Re Corp.
In those deals, General Re transferred $500 million in anticipated claims and premiums to AIG. At issue for PwC: Did the auditor do its job by verifying that AIG was assuming risk on claims beyond the $500 million, thus allowing AIG to account for the deal as insurance. That’s Accounting 101 in any reinsurance transaction. But the company itself now admits the business should have been accounted for as a deposit rather than as insurance.
“The auditor obviously should really stop and think about this because the transaction really doesn’t pass the smell test,” say Penn State’s [Edward] Ketz.
In its statement, AIG has admitted that some of the paperwork associated with the deals were improper – but it’s not clear whether the deals were illegal or how much PwC was told about them. ...
“These seem like things you’d expect an auditor to look at,” says New York attorney Gerald H. Silk, a plaintiff’s lawyer whose firm has brought cases against Arthur Andersen and other big auditing firms. “There are sufficient red flags.”...
How vulnerable could PwC be? Already, institutional shareholders, who sued AIG last fall when its stock began a 21% plunge amid the investigations, are considering roping the auditing firm into a class action.
“As the case develops we’ll be bringing in other responsible parties,” says Thomas A. Dubbs, a New York lawyer for three big Ohio pension funds that have lost tens of millions of dollars on their AIG holdings. Dobbs, working on behalf of the Ohio Attorney General in the class action, adds that PwC may be among the shareholder targets. And regulators say PwC could also face regulatory action.
PwC’s level of culpability could take years to sort out. ... Already, though, it is looking at a hefty blemish on its role as a leader in insurance accounting.
The growing tumult born of AIG’s questionable accounting is just beginning.
For more, GO TO > > > Claims By Harmon; More Claims: PricewaterhouseCoopers; Dirty Gold in Goldman Sachs; Dirty Money, Dirty Politics & Bishop Estate; The Un-American Insurance Group; The Great Nest Egg Robberies; The Strange Saga of BCCI
January 12, 2005
PricewaterhouseCoopers face HUGE fine,
claimed trade secrets revealed
The Cleveland Plain Dealer reports that PricewaterhouseCoopers LLP could be fined $345 Million because it stalled and mishandled the production of documents in two lawsuits.
The cases [Hayman, et al v. PricewaterhouseCoopers, Case No. 1:01-CV-1078 (N.D. Ohio)] in U.S. District Court in Cleveland stem from Pricewaterhouse’s relationship with Telxon Corp., a troubled maker of hand-held computers and bar-code scanners.
While the fine is newsworthy by itself, it looks like the court is releasing information that PWC claims to be their trade secret.
Magistrate Patricia Hemann’s recommendation isn’t new. She issued her report in July, but Pricewaterhouse persuaded the court to keep it under seal, arguing it revealed trade secrets about the firm.
Judge Kathleen O’Malley, who will make the final ruling in the cases, disagreed with Pricewaterhouse and put Hemann’s report back on the public docket on Tuesday. O’Malley can adopt the recommendations in whole or in part or can come to her own conclusions.
At one point, Pricewaterhouse said it had produced more than 55,000 documents, along with indexes, to comply with Telxon’s requests. The firm initially balked at handing over its electronic databases because it said they contained trade secrets.
You would think that PWC’s competitors are scurrying over to Pacer to download the report. It’s document No. 204 from the docket sheet.
May 11, 2004
Warnaco Settles Fraud Case With SEC
PricewaterhouseCoopers, former auditor for
apparel maker, to pay $2.4 million to settle charges.
NEW YORK - Warnaco Group Inc., its former auditor PricewaterhouseCoopers LLP, ex-CEO Linda Wachner and others have agreed to pay $4 million to settle charges related to the company’s financial disclosures, federal regulators said Tuesday.
Under the terms of the agreement, PwC will pay a $2.4 million penalty, the Securities and Exchange Commission said. Wachner will give back $1.33 million, the amount of her 1998 bonus plus prejudgment interest.
Former general counsel Stanley Silverstein will return $165,772, reflecting the value of his 1998 bonus plus interest.
Former chief financial officer William Finkelstein agreed both to pay a $75,000 civil penalty and to disgorge his 1998 bonus. His total fine comes to $264,464.
In addition, the commission said Finkelstein consented to an order prohibiting him from acting as an officer or director of a public company for four years.
The SEC said Warnaco – whose brands include Calvin Klein Jeans, Chaps Ralph Lauren sportswear and Warner’s intimate apparel – was charged with securities fraud for issuing a false and misleading press release about its financial results for the 1998 fiscal year.
On March 2, 1999, according to the SEC, Warnaco issued a press release touting “record” results for 1998. What the press release didn’t say was that Waranco had already discovered a $145 million inventory overstatement that would require the company to restate and significantly lower its financial results for the prior three years.
A month later, the company filed its 1998 annual report. That filing, according to the SEC, correctly accounted for the $145 million overstatement but misled investors by characterizing it as a write-off of “startup-related costs.”
In reality, according to the SEC, the overstatement resulted from poor inventory accounting and internal controls. The commission faulted Wachner, Finkelstein, and Silverstein for the misstatements, both in the initial press release and the 1998 yearly report.
The SEC responded by accusing Warnaco of committing securities fraud when it issued the press release. Regulators also charged PwC, Warnaco’s auditor at the time, with aiding and abetting reporting violations in the annual report. Finkelstein was charged separately with aiding and abetting the company’s fraud, the SEC said....
The defendants agreed to settlements without admitting or denying the allegations in the complaints, the SEC said.
January 28, 2004
Auditor Concern Arises
at Tyco Trial
Lawyers for the former chief executive of Tyco International, L. Dennis Kozlowski, asked a New York judge to keep prosecutors from asking the company’s former outside accountant about his lifetime ban from auditing public companies.
The former accountant, Richard P. Scalzo, was barred from auditing public companies in a settlement with the Securities and Exchange Commission. The judge, Michael Obus of State Supreme Court in Manhattan, said he was inclined to bar prosecutors from asking Mr. Scalzo about the subject at the fraud trial of Mr. Kozlowski and Tyco’s former chief financial officer, Mark H. Swartz.
The S.E.C. accused Mr. Scalzo of “recklessly” issuing fraudulent audits after ignoring evidence that executives were looting Tyco. Mr. Kozlowski and Mr. Swartz have been on trial since September, charged with stealing $170 million by hiding bonuses and secretly arranging for the forgiveness of company loans.
Mr. Scalzo’s role as the partner at PricewaterhouseCoopers overseeing Tyco’s audits has been a crucial issue. Defense lawyers said that bonuses the two men were accused of stealing from Tyco were disclosed to Mr. Scalzo.
A lawyer for Mr. Kozlowski told jurors at the start of the trial that Pricewaterhouse gave the “Good Housekeeping Seal of Approval” to the payments....
For more, GO TO > > > Tracking the Tyco Flock
January 7, 2004
BERKSHIRE HATHAWAY UNIT
ACCUSED OF FRAUD
By Bernard Condon, Forbes
One of Warren Buffett’s companies is fighting charges it helped a customer cook its books.
For insurance gumshoes, it’s an improbable a scenario as finding a man with a smoking gun standing over a corpse. The scam is for a company to lend money to another but call it “insurance” instead so the borrower doesn’t have to put debt on its balance sheet. The problem is, the perpetrators are usually smart enough not to put any incriminating stuff in writing.
That is, unless they work for Warren Buffet.
In a case filed in November in U.S. District Court in Richmond, Va. that state’s insurance commissioner accuses General Reinsurance, a subsidiary of Buffett’s Berkshire Hathaway, of helping a now-defunct medical and legal malpractice insurer dress up the books with just such a disguised loan, among other “secret” deals.
And he says he had e-mails from Gen Re to prove it.
Gen Re, based in Stamford, Conn., says it has e-mails of its own exonerating it and that it was only named as a defendant because it has lots of money. Hanging in the balance are 18,000 doctors and lawyers with $200 million in unreimbursed claims who were forced to scramble for replacement insurers.
It’s a complicated suit and it’s not clear where bad – but legal – industry practices end and fraud, if there’s any, begins. But the case follows the collapse of four American, Australian and British firms caught in allegedly similar schemes and an SEC settlement in September to keep American International Group from hawking such bogus insurance (FORBES, Oct 6, 2003).
Seeds of trouble
The seeds of today’s troubles were planted in 1989 when the privately held malpractice insurer Reciprocal of America asked Gen Re for help moving money offshore to cut its tax bill. Gen Re agreed to pay future claims under some ROA policies in exchange for customers’ premiums – that is, it reinsured ROA. But then it passed much of this claims risk to another reinsurer, a Bermuda outfit called First Virginia that was run by ROA management and paid little in U.S. taxes.
At first, providing this not-uncommon middleman service was no problem for Gen Re. But insurance claims started flowing in, and money flowed out of First Virginia.
In 1998 Gen Re helped bolster First Virginia’s finances by taking some risk back from the Bermuda company – in effect reinsuring its reinsurer. But this was “sham reinsurance,” according to the complaint. Gen Re allegedly worked out a secret deal obligating ROA to “make [Gen Re] whole” if it go stuck with big claims, according to a letter written by a Gen Re executive that is cited in the suit.
In effect, ROA would be paying back Gen Re for providing First Virginia with a “booking benefit” or “loan,” to quote the Gen Re executive in two subsequent e-mails.
How to get this money back to Gen Re without anyone’s noticing? ROA, the Gen Re letter instructed, would simply “renew at higher attachments.” Translation: ROA would pay inflated fees for Gen Re services in future years.
Gen Re says there was no “deal,” and indeed it lost $15 million or so despite this “noncontractual understanding.”
As malpractice claims climbed, Gen Re struck a few other reinsurance deals shifting risk back to ROA and allegedly helped to keep them secret. Gen Re says it disclosed the deals in a March 2001 letter to ROA auditor PricewaterhouseCoopers, which is also charged in the suit.
PricewaterhouseCoopers won’t comment on specific allegations but calls the Virginia regulator’s charges “baseless” and notes that even the suit states ROA had misled it.
When ROA was seized in January 2003, financial filings showed $47 million in net worth. The suit says the real figure is $4 million.
The complaint is seeking triple damages under federal racketeering statutes. Gen Re say it will ask the court to dismiss it as a defendant.
Those e-mails, though, could get in the way.
May 25, 2003
Critics Decry SEC's Corporate Settlements
by Marilyn Geewax, Atlanta Journal-Constitution
WASHINGTON -- This past week, the Securities and Exchange Commission reached settlements with both WorldCom Inc. and PricewaterhouseCoopers LLP, forcing the companies to pay penalties for wrongdoing.
But some victims of corporate misdeeds ask: Why isn't the SEC hauling the scofflaws into court to let jurors decide the punishments?
"The SEC should be enforcing the law to its fullest extent," not negotiating compromises, said Mitch Marcus, a former WorldCom manager who founded BoycottMCI.com to lobby for stiff punishment. Compared with the suffering of investors, WorldCom ended up with "a very, very insignificant fine."
But the SEC says a settlement offers several advantages. By negotiating an agreement, the government can impose swift punishment that forces changes in corporate behavior to prevent future crimes, said Thomas Newkirk, associate director of the SEC's enforcement division.
"You get things much more quickly than would otherwise be the case," Newkirk said.
"The typical litigation case probably takes between two and three years," he said. "One needs to balance the benefit of getting remedial provisions into place now, as opposed to getting them three years from now."
WorldCom agreed last week to settle fraud charges by paying $500 million, the largest penalty ever proposed for accounting fraud. In New York, U.S. District Court Judge Jed Rakoff is expected to decide in June whether to approve it.
Also last week, the SEC announced that PricewaterhouseCoopers LLP agreed to pay $1 million to settle allegations of improper conduct related to its audits of SmarTalk TeleServices, a now-bankrupt provider of prepaid telephone cards and wireless services.
With the lure of a settlement, the SEC can force almost immediate changes to protect shareholders and others from further victimization, Newkirk said.
For example, after the WorldCom accounting fraud was revealed last June, "we got a monitor put into place to make sure we didn't have another Enron-type situation where the managers were giving themselves big bonuses on the way out of the door," Newkirk said. "We also got controls put into place to fix what was wrong with their record keeping and the accounting."
In the PricewaterhouseCoopers case, the firm agreed to establish new document-retention policies.
J. Boyd Page, a securities attorney in Atlanta, agreed that settlements typically offer more benefits than long court battles.
"Settlements can make sense because white-collar crime is ofttimes very, very complicated," Page said. "It can take weeks on end simply to present a case" to the jury after years of investigative work.
As the case drags on, costs mount, he said. "There is a huge cost of going to trial, just in terms of absolute dollars, to retain lawyers, pay experts and pay employees to sit in a courtroom instead of doing their own jobs," he said. "Furthermore, trials, whether you win or lose, can be quite devastating simply because of adverse publicity."
But Page said the reluctance to go to trial can harm shareholders who want to sue.
"From a plaintiff's perspective, I prefer to go to trial because during the course of that, there is a lot of testimony developed, a lot of documentary evidence made public," he said. "That type of evidence often bolsters the claims of individual investors who have lost their life savings."
The settlements also fail to help victims of corporate wrongdoing by allowing the perpetrators to avoid admissions of guilt. The WorldCom settlement allowed the company to declare that it does not admit guilt.
Page said companies insist on that provision because typically, "they remain subject to a number of class-action civil lawsuits. An admission of guilt would pretty much stop them from fighting those lawsuits."
May 22, 2003
Pricewaterhouse Fined $1 Million
SEC: Firm revised work papers in SmarTalk audit
By Matt Andrejczak, CBS MarketWatch
WASHINGTON - The Securities and Exchange Commission has fined PricewaterhouseCoopers $1 million for “improper professional conduct” in connection with its audit of SmarTalk Teleservices, a bankrupt provider of prepaid telephone cards and wireless services.
The SEC charged that PWC failed to comply with generally accepted accounting principles when auditing SmarTalk’s 1997 financial statements and later tried to cover it up by revising its working papers.
At issue was a $25 million restructuring reserve PWC created for the anticipated costs related to SmarTalk’s purchase of six prepaid telephone card businesses.
The reserve failed to conform to accounting standards because the costs were not proper restructuring costs, the SEC said. In addition, SmarTalk improperly understated its current operating expenses by charging them against the faulty reserve....
In the settlement, the SEC also charged former PWC auditor Philip Hirsch, who was the lead accountant on the SmarTalk audit.
PWC, the No. 1 U.S. accounting firm, and Hirsch settled the charges without admitting or denying the findings....
This is not the first time PWC has run afoul of SEC rules. In July 2002, PWC paid $5 million to settle alleged violations of auditor independence rules....