The legal system stumbles over its different arms

[Miklos Vasarhelyi <miklosv@andromeda.rutgers.edu>]

June 8, 2005

A.I.G. Insider May Spark Turf Battle

By JENNY ANDERSON

Joseph H. Umansky, a former

American International Group senior executive, was known inside the
company as a troubleshooter. In the sprawling, multitiered investigation
of A.I.G. and former top executives, he may be a source of trouble.

Mr. Umansky was a senior vice president in the corporate division of the
insurance giant A.I.G. as well as president of A.I.G. Reinsurance
Advisers, a reinsurance unit. As the go-to guy for complex reinsurance
deals and a part of the inner circle of executives who dealt closely with
the former chief executive, Maurice R. Greenberg, he was intimately
involved in many of the deals that regulators and A.I.G. itself have
found to be improper. 

Mr. Umansky has agreed to cooperate with the New York attorney general,
Eliot Spitzer, in exchange for immunity, according to a person briefed on
the terms of his deal. His immunity, however, complicates a parallel
investigation being conducted by the Justice Department and the
Securities and Exchange Commission.

In granting Mr. Umansky immunity, Mr. Spitzer has laid bare his intent to
go after Mr. Greenberg. A state grand jury has been convened to weigh
possible criminal charges against individuals. Mr. Spitzer - while moving
first among regulators by filing a civil complaint, which names the
company, Mr. Greenberg and the former chief financial officer, Howard I.
Smith - has also fired the first shot in what could be an ugly turf war
among state and federal regulators over who takes the lead in prosecuting
a huge high-profile corporate scandal.

Because of Mr. Spitzer's offer of immunity, if federal authorities try to
prosecute Mr. Umansky, they will have to prove that the evidence they
obtain was not information obtained through Mr. Umansky's immunized
testimony. That will be challenging, because reference to that testimony
is included in Mr. Spitzer's complaint, a highly unusual move, according
to lawyers in the case.

Representatives of the Justice Department, S.E.C. and Mr. Spitzer's
office declined to comment.

"Once Umansky has landed the prize of outright immunity from the
state, he and his lawyer will be reluctant to accept anything but that
from the feds," said Robert Mintz, head of the white-collar defense
practice of the law firm of McCarter & English and a former federal
prosecutor. 

Mr. Umansky's cooperation as a government witness also presents
challenges should cases come to trial. "A witness who played a
significant role in the fraud who is granted immunity is subject to the
criticism that they essentially got away with the crime and did so by
throwing other innocent parties under the bus," Mr. Mintz
said.

Mr. Umansky does not appear to have a cooperation agreement with federal
prosecutors. A former senior executive of General Re, John Houldsworth,
plans to plead guilty this week to a criminal count of conspiring with
others to help doctor A.I.G.'s books. He has agreed to cooperate with
federal prosecutors and the S.E.C.

Mr. Umansky, a fit 58-year-old with reddish-brown hair and rimless
glasses, lives in a modest townhouse in West Orange, N.J., with his wife.
He has four daughters and nine grandchildren. A 22-year veteran of
A.I.G., he oversaw complex reinsurance deals that appear to have served
as little more than vehicles by which A.I.G. could shift high-profile,
worrisome underwriting losses into less worrisome investment losses. He
is one of the 80 elite shareholders of C. V. Starr, a privately held
insurance company run by Mr. Greenberg, with 125 shares. Mr. Greenberg,
by comparison, has 4,000 shares and Mr. Smith has 1,800. 

Mr. Umansky had various roles within A.I.G. In addition to being
president of Reinsurance Re, he helped oversee the integration of
American General, a life insurer that A.I.G. bought in 2001. He was in
charge of special projects, which included setting up and monitoring of
certain offshore deals.

He created and was intimately involved with Union Excess, an offshore
reinsurance company that makes up a significant part of A.I.G.'s
restatement of $4 billion in profits over five years and $2.3 billion of
its net worth.

Some inside A.I.G. resented Mr. Umansky's troubleshooting, seeing him as
someone eager to find fault in others. 

Mr. Umansky, declined to comment. 

"Joe Umansky worked at A.I.G. for more than 22 years," said his
lawyer, Seth Rosenberg at Clayman & Rosenberg in New York.
"During that period he had a broad range of responsibilities. The
transactions that have been called into question were initiated by others
in senior management. His involvement in them was a small part of what he
did at A.I.G."

Even though he was a major figure in the problem transactions, he was
highly cooperative, explaining to an internal A.I.G. committee how
certain transactions worked and who was involved in them, say three
people involved in the investigations. Eventually, Mr. Rosenberg was able
to cut a deal with Mr. Spitzer that offers broad protection to Mr.
Umansky. After his decision to cooperate, Mr. Umansky retired from the
company. 

Mr. Umansky is a central figure in the schemes outlined in Mr. Spitzer's
complaint. In one instance, Mr. Umansky testified that Mr. Smith, the
former chief financial officer, directed a plan to categorize
underwriting losses as investment losses. Such a transaction would allow
A.I.G. to report better underwriting results, the core business of
insurance (essentially estimating risk and charging premiums high enough
to cover those while still affording a profit). 

In a April 2000 memo to Mr. Greenberg and Mr. Smith, Mr. Umansky wrote:
"Our objective was to convert an underwriting loss into a capital
loss. The approach we devised is unique but conceptually quite
simple." 

That approach involved investing in a shell corporation called Capco to
take on the losses, then ultimately shutting down the entity and
registering it as an investment loss. The scheme called for Mr. Umansky
go to Switzerland to meet with A.I.G.'s private bank in Zurich to find
non-American investors to be part of the deal. By September 2001, Mr.
Umansky reported the scheme was working and reported, "I want to
close down the structure as soon as possible," according to the
complaint. 

A.I.G. disclosed on March 30 that the Capco transaction was an
"improper structure" and restated $200 million in previously
reported capital losses as $200 million in underwriting losses between
2000 and 2003. 

Mr. Umansky also testified that he created a company in Barbados called
Union Excess, which reinsured A.I.G. business. While A.I.G. had no direct
stake in Union Excess, by telling regulators it did not control the
entity, A.I.G. was able to gain favorable insurance accounting for any
deals it did with Union Excess, allowing A.I.G. to offload troubled
portfolios from its own books. Mr. Umansky played a critical role in
orchestrating what A.I.G. business Union Excess would do, say people who
attended meetings of the Union Excess board of directors, blurring the
line about who truly controlled Union Excess.

Mr. Spitzer's complaint contends that A.I.G. misled New York State
insurance regulators about the true nature of Union Excess. 

A.I.G. says it will now consolidate Union Excess onto its books, reducing
its net worth by $1.1 billion, but such a move may provoke a legal
challenge from Mr. Greenberg. Some shareholders' investment in Union
Excess was protected through an option from Starr International, another
private company controlled by Mr. Greenberg. In addition, Starr
International is responsible for excess liabilities of Union Excess,
beyond about $515 million and up to a certain limit. 

As Mr. Greenberg weighs whether to fight for Union Excess - an unusual
battle considering that Union Excess is a liability - Mr. Umansky may
again play a central role.

Miklos A. Vasarhelyi
KPMG Professor of AIS
Rutgers University
Director Rutgers Accounting Research Center
315 Ackerson Hall
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