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Veteran Federal prosecutor, David Maguire told his colleagues he'd uncovered the biggest case of his career after a two year probe into executives of a Virginia insurance firm Reciprocal of America and the executives of General Reinsurance, a subsidiary of Warren Buffet's investment firm, Berkshire Hathaway.  He claimed the crimes were "far worse" than those of Arthur Anderson, the megalithic accounting firm that collapsed when the Enron scandal was exposed.

In May 2006, he felt strongly enough about his case that he prepared a draft indictment accusing executives from a Virginia insurer, Reciprocal of America, of concocting a series of secret deals to hide its losses from regulators. Although he didn't name anyone from Berkshire Hathaway's subsidiary, he described the company as a participant in the scheme.  McClatchy Washington Bureau

But Maguire never brought those charges because withing months of preparing his indictment he was removed and replaced as the lead prosecutor and reassigned.  His replacement hadn't worked on the case and by April of 2007 the case, which had consumed $2M in investigation costs, seen dozens of witnesses interviewed, and compiled 7,000 boxes of evidentiary doucments, dropped off the map.

In pursuing suspects, regulators and FBI agents sifted through thousands of e-mails and memos. The trail led straight to Reciprocal President Kenneth Patterson and his executive vice president, Carolyn Hudgins.

Investigators found evidence that the pair had manipulated the company's accounting records to conceal losses, and urged the pair to admit their guilt.

In February 2005, Patterson and Hudgins pleaded guilty to felony fraud charges. They agreed to cooperate with investigators. But agents soon became frustrated with the pair because they didn't appear to be divulging much detail.

Why?  Depends on who you talk to.  Within the Justice Department, whispers are that Maguire overreached and the axe fell.  Others say that resources were needed for terrorism investigations.  [Apparently his replacement was of no value in those investigations and only Maguire would do.]  Lawyers for the Richmond-based insurance company want you to believe that Maguire just didn't have enough evidence of a crime.  Not so says Tom Gober, a certified fraud examiner and government-contracted investigator working on the case.  Investigators had plenty of evidence.  Gober says that the Justice Department leaned on Maguire -- its own prosecutor -- to drop the case because it was being pressured by defense lawyers.

Shortly before Maguire was removed, his supervisors were urging him to drop the case against General Reinsurance, Gober said.

Gober's suspicions were fanned by allegations of politicization in the Justice Department after nine U.S. attorneys were fired.

He took his complaints to the Office of Professional Responsibility, which investigates Justice Department misconduct.

"It just stinks," he said. "You don't come in out of nowhere and in no time kill three years of sophisticated effort."

Now nobody in the Justice Department is talking.  Not Maguire, not JD spokesman Bryan Sierra.  Neither are Patterson (doing 12 years) and Hodgins (doing 5 years) saying anything from their jail cells.

However, Internal documents that McClatchy Newspapers obtained show that Justice Department lawyers in Washington had become locked in an intense debate with Maguire over the case until he was removed from it.

What's on the table that's making the Justice Department nervous about poking around?  Insurance for America's health providers and law enforcement personnel.

More than 80,000 lawyers, doctors and hospitals in 30 states lost their malpractice coverage. As they couldn't expect new insurers to cover them for past cases, some who were sued have claimed losses of hundreds of millions of dollars.

Even the court system seems to be discouraging the prosecution of major fraud cases in the wake of Enron's demise when, in 2005 the Supreme Court threw out

. . the Justice Department's conviction of Arthur Andersen for shredding documents in connection with the Enron scandal.. . .federal courts made it clear that the department had overstepped its authority in several high-profile cases. The pendulum appeared to be swinging back in favor of corporations.

For background on how the case against Reciprocal of America began back in 2003, McClatchy News provides a good summary at the end of the article.  In sum,  

Insurance companies are supposed to avoid insolvency by socking away vast surpluses collected from policyholders' premiums and passing risk to giant reinsurance counterparts such as General Reinsurance.

The more risk the reinsurer carried, the higher the premium it would collect. When the arrangement worked, both companies prospered.

But Reciprocal hadn't accumulated the surplus required by law. Even worse, it was more than $450 million in the hole, according to regulators.

Year after year, millions of dollars in losses somehow had been concealed from regulators.

No wonder Republicans and the Bush administration work so hard to influence state legislatures to pass laws establishing ceilings on individual malpractice claims.  Reciprocal's troubles began in the late 90s when malpractice claims skyrocketed and they got General Reinsurance (the Berkshire subsidiary) to assume millions more in risk.  

General Reinsurance, known as "Gen Re," treated the unusual transactions as "side" or "unenforceable" deals. Its executives referred to one deal as an "off balance sheet loan," according to internal documents.

But that's not the only wrong-doing by the insurance industry's bad-boy, "Gen Re."  In a related case:

Authorities had launched a separate investigation of General Reinsurance's relationship with American International Group, the largest U.S. insurer. The probe resulted in the ouster of Maurice "Hank" Greenberg, the chief executive officer and president of American International Group.


Under pressure by the New York attorney general, the Justice Department and the Securities and Exchange Commission, Buffett agreed to talk to regulators, although investigators said he wasn't a target.

In February 2006, three former General Reinsurance executives and a former American International Group executive were indicted on charges of manipulating financial statements.

As Maguire's former case stands, Reciprocal and "Gen Re" are pointing the finger at each other:  "handshake deals are business as usual" and "we didn't know -- we're a victim of Reciprocal's fraud too."  Reciprocal general counsel and co-founder, John William Crews, appears to have escaped the long arm of the law as well.  Maguire's replacement, Assistant U.S. Attorney Michael Gill, after assuring "Gen Re's" lawyers that no case would be brought against them, decided not to indict Crews, either.

I leave it to the reader to decide just how powerful Big Insurance is in America and who the villains are when it comes to citizens receiving good health care, having rights of redress in the nation's courts, and depending on the justice system to enforce the laws of the land under this Big Business Friendly administration.  There's even reason for readers to speculate about additional motivations, other than political philosophy and DoJ "packing," being behind Attorney Gate.

Originally posted to Limelite on Mon Jul 23, 2007 at 12:32 PM PDT.

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Comment Preferences

  •  Heh..."playing politics" with business... (2+ / 0-)
    Recommended by:
    PBnJ, goon 01

    follow the money...

    Dudehisattva... <div style="color: #0000a0;">"Generosity, Ethics, Patience, Effort, Concentration, and Wisdom"&l

    by Dood Abides on Mon Jul 23, 2007 at 12:39:43 PM PDT

  •  Even *Berkshire* thought General Re was crooked (4+ / 0-)
    Recommended by:
    Limelite, MajorFlaw, goon 01, Lujane

    After buying the company, they ended up firing a lot of the executives and shutting down a large part of the business.

    It's disgusting that the prosecution of General Re execs was suppressed; by all accounts Berkshire would have cooperated fully.

    -5.63, -8.10 | Impeach, Convict, Remove & Bar from Office, Arrest, Indict, Convict, Imprison!

    by neroden on Mon Jul 23, 2007 at 12:39:59 PM PDT

  •  Berkshire Hathaway is a holding company (3+ / 0-)
    Recommended by:
    Limelite, goon 01, Lujane

    not an "investment firm."  I'd be extemely surprised if either Buffett or Munger were involved in any financial shenanigans as they don't operate that way. (link opens to a PDF of Buffett's "Owner's Manual)  Other than putting Uncle Bill Gates on their board they are disgustingly clean.  neroden's comment below is spot on.

    •  If BH has a material interest in a company, (0+ / 0-)

      they'd better know what that company is doing with its financials.  Where are BH's auditors on this?

      My Karma just ran over your Dogma

      by FoundingFatherDAR on Mon Jul 23, 2007 at 01:08:37 PM PDT

      [ Parent ]

      •  BH wouldn't take a "material interest" in a (1+ / 0-)
        Recommended by:

        company without being fully familiar with its financials.  Buffett was offered an opportunity to pick clean both Enron and Long Term Capital Management and he demurred because he could see the games they were playing with their books.  General Re had real earnings which were available at an attractive price.  Read the "Owner's Manual" linked above.  Financial and accounting transparency is a Buffett trademark.  He only deals with real numbers.  Pass it on.

        •  As a CPA, I've seen some companies (2+ / 0-)
          Recommended by:
          onemadson, Limelite

          with "real" numbers that weren't so clean.  Lots of ways to hide things if the right people are in collusion.
          If Mr. Buffett is in to clean accounting, perhaps he would be willing to give me a job.  I got fed up with working for companies that punished me in one way or another because I was considered to be too honest and ethical, and wouldn't go along with the games they wanted to play with their accounting.  And I've had a hard time finding companies that want to hire anything less than CPAs willing to take "aggressive" positions on accounting/tax issues.

          My Karma just ran over your Dogma

          by FoundingFatherDAR on Mon Jul 23, 2007 at 01:44:03 PM PDT

          [ Parent ]

      •  They Performed "Chesapeake Audits" (0+ / 0-)

        as the fraudsters called their meetings on board a luxury yacht (owned by a Reciprocal executive) named the "Scottish Lass" to discuss their "handshake deal."

        They burn our children in their wars and grow rich beyond the dreams of avarice.

        by Limelite on Mon Jul 23, 2007 at 01:50:02 PM PDT

        [ Parent ]

  •  See Land of Enchantment's earlier diary (1+ / 0-)
    Recommended by:

    My Karma just ran over your Dogma

    by FoundingFatherDAR on Mon Jul 23, 2007 at 01:05:15 PM PDT

  •  oracle of omaha (0+ / 0-)

    hmmmm.   either buffet and his people aren't as rigorous with their financial analysis as we are led to believe or something seems a bit odd.

    However, all these people must be innocent.  Just like the kids at KPMG that the feds just let off the hook on a technicality.   Imagine the feds not understanding the basics of the law and making that kind of mistake.  What are the odds?

    Did kenny boy have an open casket funeral?  

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