The Securities and Exchange Commission and a former senior executive of a RenaissanceRe Holdings subsidiary have settled accounting fraud charges against the executive that stemmed from the finite insurance scandal.
Without admitting or denying the commission’s charges, Michael Cash, the former senior vice president of specialty reinsurance of RenRe’s wholly-owned subsidiary, Renaissance Reinsurance Ltd., agreed to pay a civil penalty of $130,000 and be barred from serving as an officer or director of a public company for five years.
In September 2006, the SEC had filed civil fraud charges against Cash; James Stanard, the former CEO of RenaissanceRe Holdings; and Martin Merritt, the former senior vice president and controller of the parent company. The commission alleged that the officials has executed a sham transaction that had no economic substance and no purpose other than to smooth and defer over $26 million of RenRe’s earnings from 2001 through 2003.
The transaction created a “cookie jar” that enabled the reinsurance company to store excess revenue in a good year so it could be withdrawn to boost income in a future year, according to the commission’s initial complaint. The commission’s alleged that Cash and the other defendants used two seemingly separate, unrelated contracts that were, in fact, intertwined. Together, the contracts created a round-trip of funds, according to the SEC.
In the first contract, RenRe allegedly tried to assign $50 million of receivables at a discount to Inter-Ocean Reinsurance in exchange for $30 million in cash, for a net transfer to Inter-Ocean of $20 million. RenRe recorded income of $30 million and put the remaining $20 million of the $50 million assignment into its “cookie jar,” to be used to bolster income in a later period, according to the commission.
RenRe allegedly tried to make the second contract seem to be a reinsurance agreement. In fact, the SEC charged, the contract was a vehicle to refund to RenRe the $20 million transferred under the assignment agreement along with a supposed insurance premium paid under the reinsurance agreement, according to the commission. In short, asserted the SEC, “this reinsurance agreement was also a sham.”
After the fraud charges were filed in 2006, Merritt, without admitting or denying them, consented to a partial final consent judgment that, among other things, deferred the determination of civil penalties and disgorgement to a later date. The commission’s case against Stanard remains pending.
In February 2007, RenaissanceRe Holdings agreed to pay $15 million to settle related civil securities fraud charges stemming from the sham reinsurance transaction. The reinsurer neither admitted nor denied responsibility for the misdeed.