The House Judiciary Committee wants to know why the Justice Department abruptly dropped a federal criminal probe into allegations of insurance fraud at Berkshire Hathaway’s General Reinsurance (Gen Re) unit. In a letter sent to Paul J. McNulty dated July 9, 2007, the Judiciary Committee asked detailed questions about the aborted investigation. McNulty was the U.S. Attorney in Alexandria, Virginia at the time. In March 2006, McNulty left that position to become the Deputy Attorney General. He is now a partner at Baker & McKenzie in Washington, D.C. I don’t believe there has been a response to the Judiciary Committee’s questions.

The Committee wants to know whether anyone pressured McNulty or his successor, Chuck Rosenberg, the current U.S. Attorney, to close down the investigation. The letter asked McNulty a direct question and one that deserves an answer:

Did you, or to your knowledge, did any other Department of Justice employee, discuss these cases with any individuals associated with or speaking for General Reinsurance, Berkshire Hathaway, or (Berkshire CEO) Mr. Warren Buffett?

The case was also looked at by the Justice Department’s Inspector General, Glenn Fine. It has been reported that evidence was presented the Inspector General’s office indicating that federal officials may have destroyed more than 100 boxes of grand jury information in April 2007. That was just days after the Virginia Lawyer’s Weekly published an article titled “Further Federal Indictments In Reciprocal Case Unlikely.”

It appears that the driving force behind the criminal investigation of Gen Re was David Maguire, the Assistant U.S. Attorney in Alexandria who was charged by McNulty with handling the case. Maguire had worked on the criminal prosecution of the top executives at Reciprocal of America (ROA), a major Virginia insurance company that was declared insolvent in January 2003. As we have written about in previous issues, the collapse of ROA resulted in unpaid liabilities totaling more than $500 million. It was reported that the work of Maguire, his experts, and a handful of FBI agents led to the February 2003 guilty pleas of former ROA President Kenneth Patterson and former ROA CFO Carolyn Hudgins. Patterson was sentenced by a federal judge to 12 years in prison and Hudgins to 5 years in prison. They are both currently serving their sentences in federal prisons in Texas.

Gen Re company – a unit of the Omaha, Nebraska-based Berkshire Hathaway – was also involved in the ROA case. While a case was being built against Gen Re, it seems there were powerful folks working against this effort. It was reported that lawyers for the giant reinsurer were pressuring the government to drop the case or settle it as part of an overall global settlement with other matters the government was looking at involving Gen Re. The investigation was derailed shortly after McNulty left in March 2006 to become the Deputy Attorney General at the Justice Department.

Our firm has been involved in some massive and extremely significant civil litigation that involved Gen Re and the ROA matter. This case is still pending in a Tennessee court. We know a fraudulent scheme that included, but was not limited to, the execution of “side letter agreements” between the reinsurer and ROA, resulted in a misleading balance sheet impression for the insurance regulators. Gen Re was permitting the insurer to literally “‘rent” reinsurance certification, but there was no true shifting back of risk. The case involves the largest single insurance collapse in the history of Virginia. That collapse cost more than $500 million and has left more than 80,000 policyholders with an insolvent and liquidated insurer. The case exposed a serious problem existing in the reinsurance industry.

From the mid 1980s until approximately 2001, ROA grew from a small marginally capitalized Virginia reciprocal insurer of approximately 100 hospitals and a few hundred doctors and lawyers into four commonly managed reciprocal insurers of more than 80,000 insureds in many different states across the country. This phenomenal growth would never have happened without everybody involved believing that ROA was fully reinsured by Gen Re and without ROA receiving consistently high ratings from A.M. Best, a national respected ratings service of insurance companies, which also believed ROA was truly backed by Gen Re.

Unfortunately, for more than eighteen years, material facts about the true nature of ROA’s reinsurance relationship with Gen Re were falsely represented and concealed from Best, the insurance commissioners, state legal and medical societies and hospital associations that endorsed ROA to its members, and the insureds themselves. The losses that drove ROA into insolvency were the very losses that were supposedly covered by reinsurance contracts with Gen Re. I hope that the House Committee gets some real answers. In the meanwhile, we are continuing our efforts in the civil case on behalf of the State of Tennessee. Because we are involved in this most important civil case, we are staying out of the congressional inquiry. Our goal is to get a good result for our client in the civil litigation. The criminal aspects should be handled by the appropriate prosecutors and we are not involved in that effort.

Source: Corporate Crime Reporter

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