HARTFORD, Conn. (AP)--The former chairman and CEO of the world's largest insurer initiated a deal that lead to five ex-executives being charged with participating in a scheme to manipulate the company's financial statements, a federal prosecutor said Monday during opening arguments at their trial.

Four former executives of Berkshire Hathaway Inc.'s (BRKA, BRKB) General Re Corp. and a former executive of American International Group Inc. (AIG) are charged in the scheme involving AIG's financial statements.

Prosecutor Raymond Patricco said former AIG CEO Maurice "Hank" Greenberg, who has not been charged in the case, started the scheme in 2000, after AIG's stock price dropped 6%, representing a loss of $12 billion to shareholders. The price dropped because loss reserves had declined.

"Greenberg and AIG came to Gen Re for this deal," Patricco said.

Greenberg, who headed the New York-based company for nearly 40 years, has denied any wrongdoing. He was referred to as an unindicted coconspirator in an indictment.

Allegations of accounting irregularities, including the Gen Re transactions, led to his resignation in 2005.

At issue in the trial of the former executives are two reinsurance transactions between AIG and Stamford-based General Re. Reinsurance policies are backups purchased by insurance companies to completely or partly insure the risk they have assumed for their customers.

Prosecutors said the transactions were initiated by an AIG senior executive to quell criticism by analysts of a reduction in AIG's loss reserves in the third quarter of 2000. The indictment alleges that the aim was to make it appear that AIG increased its loss reserves by about $500 million in 2000 and 2001, pacifying the analysts and investors and artificially boosting the company's stock price.

"But the evidence in this case will show that deal was nothing more than a sham transaction," Patricco said. "The defendants in this case knew what appeared in the contracts was a lie."

Prosecutors said Greenberg called his friend, former General Re CEO Ronald Ferguson, who is one of the defendants, and told him that AIG wanted to increase its loss reserves by $500 million, but did not want to bear the risk.

Ferguson agreed to the deal Greenberg proposed, Patricco said.

For a reinsurance transaction to be legitimate, there must be a transfer of risk, which was lacking in the deal in question, prosecutors said.

"The evidence in this case will show the defendants knew this would be a no-risk deal for AIG," Patricco said.

Greenberg and the company later reported in earnings reports that the loss reserves had gone up.

"Plain and simple, ladies and gentlemen, the statements about AIG's loss reserves were lies," Patricco said.

In opening arguments, Patricco never mentioned billionaire investor Warren Buffett, who could play a role in the trial. Some of the executives say they believed Buffett was involved and supported the deal that led to the charges. Buffett leads Berkshire Hathaway.

But prosecutors say they only named Buffett, who has not been charged with any wrongdoing, as a potential witness to rebut any suggestion by the defense that he was involved in or approved the deal.

The former General Re executives charged were Ferguson, chief executive from about 1987 through September 2001; Elizabeth Monrad, chief financial officer from June 2000 through July 2003; Robert Graham, a senior vice president and assistant general counsel from about 1986 through October 2005; and Christopher P. Garand, a senior vice president from 1994 until 2005.

Also charged was Christian Milton, AIG's vice president of reinsurance from about April 1982 until March 2005. Patricco said Monday that he lost $360,000 when the stock price dropped.

The defendants have pleaded not guilty to the charges.

AIG filed a restatement in 2005 related to the transactions and agreed to pay a record $1.64 billion in a settlement with federal and New York authorities.

In 2005, two senior Gen Re executives, John Houldsworth and Richard Napier, pleaded guilty to conspiracy to falsify SEC filings in connection with the investigation and are awaiting sentencing.

If convicted of all the charges, Ferguson, Monrad, Milton and Graham each face up to 230 years in prison and a fine of up to $46 million. Garand faces up to 160 years in prison and a fine of up to $29.5 million.

The trial is expected to last about two months.

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Source: Dow Jones Newswires

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