Alan Vinegrad, who represents former Gen Re Senior Vp and legal counsel Robert Graham, grilled key government witness John Houldsworth, former chief executive officer of Gen Re’s Cologne Re Dublin unit, about Mr. Graham’s work reviewing the terms of a 2000 loss portfolio contract with American International Group Inc.

Mr. Graham added several clauses to the draft contract, including language making AIG potentially liable for extra-contractual obligations and losses in excess of policy limits on the underlying business, along with a provision governing AIG’s ability to inspect Cologne Re Dublin records, Mr. Houldsworth confirmed under questioning from Mr. Vinegrad, who is with Covington & Burling L.L.P. in New York.

“You never said to him, ‘Rob, you don’t need to give AIG access to our records because they’re never going to come look at them anyway?’” Mr. Vinegrad asked.

Mr. Houldsworth answered that he did not.

In a recorded December 2000 conversation about the contract, Mr. Houldsworth is heard to say that having the extra clauses in the contract could help in case Gen Re needed to “play hardball” with AIG later.

“You didn’t say, ‘We need all these clauses in there in case our secret side deal falls apart,’ did you?” Mr. Vinegrad asked.

“No, I did not,” Mr. Houldsworth answered.

The testimony came as defense lawyers continued cross-examination of Mr. Houldsworth, who pleaded guilty to conspiracy in the case and is cooperating with the government.

Prosecutors charge that five former executives of Gen Re and AIG engineered the loss portfolio deal to allow AIG to inflate its loss reserves by $500 million to counter concerns among stock analysts about AIG’s reserve levels. The defendants agreed that the deal would transfer no real risk to AIG and that AIG would refund a $10 million premium payment from Cologne Re Dublin and pay Gen Re a $5 million fee.

Charged along with Mr. Graham are Ronald E. Ferguson, Gen Re’s former CEO; Christopher P. Garand, former senior vp in charge of U.S. finite underwriting for Gen Re; Elizabeth Monrad, the reinsurer’s former chief financial officer; and Christian M. Milton, AIG’s former vp for reinsurance.

Mr. Houldsworth previously testified that Cologne Re Dublin had already reinsured $315 million of the $500 million in reserves transferred to AIG, meaning that there was virtually no chance of AIG suffering a loss.

Mr. Vinegrad asked Mr. Houldsworth Thursday if he had ever told Mr. Graham that the business was already reinsured, or if he identified the ceding companies involved in the underlying business.

Mr. Houldsworth said he did not.

Mr. Graham’s lawyer also questioned Mr. Houldsworth’s memory of a late-night phone call he said he had with Mr. Graham to discuss the contract. The call, which Mr. Houldsworth said he may have made on his cell phone, was not recorded by Cologne Re Dublin’s taping system; Mr. Vinegrad suggested that Mr. Houldsworth might have confused it with another call conversation he had with Gen Re Senior Vp Richard Napier about the same time.

Mr. Vinegrad also noted that in early 2001, Mr. Houldsworth twice contacted another Gen Re lawyer about the deal, apparently forgetting that he had dealt with Mr. Graham. Noting that Mr. Houldsworth observed in one recorded conversation that his memory is good for about a week, Mr. Vinegrad asked, “It’s actually worse than that, isn’t it?”

“I would hope not about important things,” Mr. Houldsworth replied.

The government is expected to rest its case next week after testimony from three more witnesses, including Jay Cohen, an analyst with Merrill Lynch & Co. Inc.; and a U.S. Postal Service inspector who helped investigate the transaction.

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By Douglas McLeod

Copyright © 2008 Crain Communications, Inc.

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