Ex-Director Sentenced in Insurer's Collapse By BLOOMBERG NEWS
Published: April 14, 2005
y Bloomberg News
Rodney Adler, a former director of HIH Insurance, became the first person imprisoned over the insurer's collapse, Australia's biggest corporate failure. He was sentenced to four and a half years in jail.
Mr. Adler, 45, pleaded guilty to four charges, including two of making false statements intended to induce others to buy shares in HIH, a property and casualty insurer.
"The offenses are serious and display an appalling lack of commercial morality," Judge John Dunford said in sentencing Mr. Adler today in New South Wales state Supreme Court in Sydney. Mr. Adler must serve at least two and a half years in jail before being eligible for parole.
Three former executives of FAI Insurance, a company led by Mr. Adler until he sold it to HIH in 1998, will face trial this year on charges linked to reinsurance contracts with General Re, a unit of Berkshire Hathaway, which is controlled by the financier Warren E. Buffett.
The liquidator of HIH, which is based in Sydney, told Berkshire Hathaway last month that he planned to claim that General Re contributed to HIH's collapse. The liquidator may allege that in 1998 General Re helped FAI deceptively account for transactions as reinsurance, Berkshire said March 5 in its annual report.
HIH, which collapsed in 2001, had one million policyholders. Its failure left thousands of builders, lawyers, doctors and homeowners uninsured.
Robert A. Puccinelli has been a director of InsWeb since May 1998. From October 1985 to May 1995, Mr. Puccinelli was chairman and chief executive officer of "Industrial Indemnity", a nationwide property and casualty insurance company.
Some questions arises as to who replaced Mr. Puccinelli in 1995 as CEO and what happened to the at least 10,000 other injured workers who were defrauded by this company?
How was Fremont General who in the span of five short years was able to convert from a holding company where 75% of their revinue and 85% of their profits were derived from their insurance business to a sub-prime morgage lending company while leaving the employers, employees and taxpayers with at least $1 Billion dollars worth of accepted, but unpaid claims?
Does finite reinsurance with side letter in which executives at the two insurers agreed they wouldn't make any claims under the contracts pass the smell test?
The Royal Commission concluded that there was no risk transferred by the transactions because they stated that FAI would have to pay General Re more in premiums than it could have recouped in claims.
Earlier versions of the agreements included a so-called side letter in which executives at the two insurers agreed that FAI wouldn't make a claim under the contracts. That also nullified risk transfer.
This means the transactions should have been accounted for as a loan, rather than reinsurance.
By accounting for the deals as reinsurance, FAI overstated its earnings in the year ending June 30, 1998 by about $30 million.
The Violent Crime Control and Law Enforcement Act (1994) makes insurance fraud a federal crime when it affects interstate commerce. One of the law's provisions specifies that people engaged in insurance on an interstate basis who knowingly make false statements or intentionally overvalue any aspect of their business with the intent to deceive can be fined or imprisoned for up to 15 years. Insurance company employees, including agents, who embezzle or misappropriate any company funds, can be punished similarly if their actions adversely affect the solvency of any insurance company. Other provisions make it a crime for insurance employees to make false entries of facts in order to deceive anyone about the financial condition of the company; bar those convicted of these crimes or others involving similar crimes from working in the insurance business, in addition to paying fines; and make it a crime to impede or obstruct the administration of insurance regulations. In addition, the law extends the charge of federal mail fraud to cover any illegal actions that use private overnight delivery services (such as Federal Express) that have been used in an attempt to circumvent the federal mail fraud statutes.
Other laws that help combat insurance fraud are the federal mail fraud statute, which prohibits the use of the U.S. Postal Service to defraud or obtain money or property by means of false or fraudulent pretenses, representation or promises; the federal Racketeer Influenced and Corrupt Organizations (RICO) statute and state laws patterned on the federal statute. RICO statutes are regularly used to prosecute insurance fraud cases, particularly those involving mail fraud. In addition to criminal penalties, RICO statutes may provide for civil actions (with triple damages) against those involved directly or indirectly in a "pattern" of criminal activity. Before the federal statute was enacted in 1970, the principals of organized crime operations could often escape prosecution by removing themselves from direct participation in criminal activities.