Opinion ID: 1732178
Heading Depth: 3
Heading Rank: 1

Heading: Financial-reporting fraud

Text: The alleged financial-reporting fraud principally consists of 13 or 14 interrelated but distinct schemes, which AHAT identifies in its brief by the selective grouping of paragraphs from its complaint. Only a few such schemes, however, are specifically alleged to be applicable to the petitioners. For example, AHAT alleges that the petitioners conspired with codefendants Kenneth R. Patterson, Carolyn B. Hudgins, and John William Crews, executive officers of ROA, to enter into a number of agreements involving Gen Re, ROA, and First Virginia Reinsurance, Ltd. (FVR). FVR, a Bermuda corporation, was allegedly created to serve as a reinsurer of all of ROA's retained share of risk on [its] physician and lawyer business. [7] Amended and Restated Complaint, at ¶ 116. AHAT alleges that these agreements included sham risk-transfer arrangements, variously referred to as `aggregate stop loss/funding cover,' . . . `noncontractual understandings,' and `finite contracts,'. . . . masquerad[ing] as legitimate business arrangements while serving [the] improper purposes of manipulating the reported financial condition of ROA . . . and underreporting [ROA's] liabilities,  which transactions were actually loans from Gen Re to FVR . . ., guaranteed by ROA. Amended and Restated Complaint, ¶ 156 (emphasis added). Another such scheme allegedly involved a plan that allowed Gen Re to pass ROA business, that is, FVR-reinsured risk, through Gen Re to FVR pursuant to retrocession agreements between Gen Re and FVR ['the retrocession agreements']. FVR's performance under the retrocession agreements was secured by assets held in Bermuda financial institutions under trust agreements to which FVR and Gen Re were allegedly parties (the Bermuda trusts). AHAT alleges that the petitioners, along with Patterson and Hudgins, conspired to make a disguised transfer of $10 million from ROA to the Bermuda trusts, which had become underfunded. ¶ 204. According to AHAT, the transfer was  fraudulently accounted for as a prepayment of reinsurance premiums to Gen Re, . . . thereby inflating ROA's surplus to policyholders by $10 million. ¶ 205 (emphasis added). Yet another scheme allegedly involved Patterson, Hudgins, and the petitioners in the formulation of an unreported side agreement in the year 2000 between Gen Re and ROA, which was designed to limit or eliminate Gen Re's reinsurance risk of loss, while maintaining the illusion that Gen Re continued to bear a substantial insurance risk of net loss under the Gen Re/ROA reinsurance treaties. ¶ 183. The agreement allegedly contemplated a cap in the amount of $140 million on Gen Re's aggregate liability to ROA. ¶ 186. According to AHAT, this agreement was not disclosed to insurance regulators in ROA's annual statement for the year 2000, ¶ 199, and was intended to  arrest and improve ROA's deteriorating financial condition while evading the enhanced regulatory monitoring[ [8] ] that would be triggered if ROA's RBC [risk-based capital] were to fall below 200% of ACL [authorized control level], or Company Action Level RBC. ¶ 185 (emphasis added). The essence of all the schemes forming the basis of the financial-reporting-fraud allegations against the petitioners is that the petitioners conspired with other defendants, particularly officers of ROA, to conceal and misrepresent the progressively precarious financial status of ROA. Among the alleged objects of this fraud were various state departments of insurance, including those of Tennessee, Virginia, and Alabama, which allegedly would have initiated regulatory measures had they been given accurate information. Another alleged object of the fraud was the insurance-rating company, A.M. Best Company, Inc. (Best). [9] According to AHAT, ROA was rated A by Best in January 2001, and certain defendants used this rating as an incentive for AHAT and BHS to invest in ROA. More specifically, AHAT alleges that if ROA's and its affiliates' difficulties and problems and true condition had been timely disclosed to Best, among others, such ratings would not have been issued at the levels they were issued, and the Plaintiffs would not have entered into the transactions with the Defendants described in [the] complaint.  ¶ 28 (emphasis added). In other words, the schemes constituting the financial-reporting fraud set the stage for the alleged investment-fraud conspiracy.