The U.S. Securities and Exchange Commission has filed an enforcement action against five former senior executives of General Re Corporation and American International Group Inc. for helping AIG mislead investors through the use of fraudulent reinsurance transactions.

Four of the former executives were with Gen Re, while the fifth was with AIG. The complaint, filed today in federal court in Manhattan, alleges that the defendants and others aided and abetted AIG’s alleged violations of the antifraud and other provisions of the federal securities laws by helping AIG structure two sham reinsurance transactions that falsely increased AIG’s loss reserves in the fourth quarter of 2000 and first quarter of 2001 by a total of US$500 million.

The SEC says that the transactions were initiated by AIG to quell criticism by analysts concerning a reduction in the company’s loss reserves in the third quarter of 2000. None of the allegations have been proven.

In its complaint the commission alleges that executives of the two firms worked together to fashion two sham reinsurance contracts between Cologne Re Dublin, a Gen Re subsidiary in Dublin, Ireland, and an AIG subsidiary.

The SEC says its complaint details recorded conversations among the defendants and other evidence reflecting the planning and implementation of the sham transaction. On the basis of this evidence, the complaint charges that the defendants understood from the beginning that they were structuring a sham transaction involving the creation of phony documents for the purpose of providing apparent support for false accounting entries AIG made on its books.

“As the defendants and others at Gen Re and AIG knew, AIG accounted for the sham transactions as if they were real reinsurance contracts that transferred risk from Gen Re to AIG, when all parties involved knew that was not true,” the SEC says. “As a result of AIG’s accounting treatment for these transactions, the company’s financial results showed false increases in reserves that AIG touted in the company’s quarterly earnings releases for the fourth quarter of 2000 and the first quarter of 2001. Without the phony loss reserves, AIG’s financial results in both quarters would have shown further declines in its loss reserves.”

The SEC notes that in a press release dated March 30, 2005, AIG admitted that the accounting for these transactions was improper and would be corrected. AIG restated its financial statements to recharacterize the transactions as deposits rather than as reinsurance.

The complaint seeks permanent injunctive relief, disgorgement of ill-gotten gains, if any, plus prejudgment interest, civil money penalties, and orders barring each defendant from acting as an officer or director of any public company.

“It is particularly troubling when senior executives knowingly and substantially participate in securities fraud. Today’s action by the commission is yet another step in the pursuit of those responsible for helping AIG to deceive investors by materially misstating the company’s financial results,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement.

In connection with the same conduct alleged in the commission’s complaint, the U.S. Department of Justice has filed federal criminal charges against four of the executives, the SEC notes. The commission’s investigation is continuing.