Committee Wants to Know Why Criminal Probe of Gen Re Was Dropped

posted on:
October 3, 2007

author:
Staff

category:
Fraud

The House Judiciary Committee wants to know why the Justice Department abruptly dropped a federal criminal probe into allegations of insurance fraud at Berkshire Hathaway's General Reinsurance (Gen Re) unit. 

In a letter sent to Paul J. McNulty dated July 9, 2007, the Judiciary Committee asks detailed questions about the aborted investigation.

McNulty was the U.S. Attorney in Alexandria, Virginia at the time. In March 2006, McNulty went on to become the Deputy Attorney General. He is currently a partner at Baker & McKenzie in Washington, D.C.

McNulty has yet to respond to the Judiciary Committee's questions. He did not return a call seeking comment for this article.

The Committee wants to know whether anyone pressured McNulty or his successor, Chuck Rosenberg, the current U.S. Attorney, to close down the investigation.

"Did you, or to your knowledge, did any other Department of Justice employee, discuss these cases with any individuals associated with or speaking for General Reinsurance, Berkshire Hathaway, or (Berkshire CEO) Mr. Warren Buffett?" the letter asks McNulty.

The case was also looked at by the Justice Department's Inspector General, Glenn Fine.

Fine was dragged in after evidence was presented to his office that federal officials may have incinerated more than 100 boxes of grand jury information in April 2007, just days after the Virginia Lawyer's Weekly published an article titled "Further Federal Indictments In Reciprocal Case Unlikely."

The driving forces behind the criminal investigation of Gen Re were Thomas Gober, a certified fraud examiner based in Glen Allen, Virginia – and David Maguire, the Assistant U.S. Attorney in Alexandria charged by McNulty with shepherding the case.

For twelve years of his eighteen-year career, Gober has worked with federal investigators and prosecutors, ferreting out significant insurance and reinsurance fraud schemes.

Most recently, he worked closely with Maguire on the criminal prosecution of the top executives at Reciprocal of America (ROA), a major Virginia insurance company that went belly up in January 2003.

The collapse of ROA resulted in unpaid liabilities totaling $500 million.

The work of Maguire, Gober and a handful of FBI agents led to the February 2003 guilty pleas of former ROA president Kenneth Patterson and former ROA CFO Carolyn Hudgins.

In Richmond, Virginia, Judge James Spencer sentenced Patterson to 12 years in prison and Hudgins to five years in prison.

Patterson and Hudgins are both currently serving their sentences in federal prisons in Texas.

But also caught up in the ROA case was the giant Gen Re company – a unit of the Omaha, Nebraska-based Berkshire Hathaway.

Between 2004 and 2007, McNulty, Maguire and their team of a half dozen FBI agents, AUSAs, and forensic auditors began to build their case against Gen Re.

At the same time, lawyers for the giant reinsurer were pressuring the government to drop the case or settle it as part of an overall global settlement with other matters the government was looking at involving Gen Re.

Gober said that McNulty "repeatedly championed the ROA case and all of our diligent work" – until McNulty left in March 2006 to become the Deputy Attorney General at Main Justice.

The prosecution team believed that the evidence against Gen Re was overwhelming.

Maguire, Gober, and FBI agent David Hulser drafted a more than 60 page indictment against top Gen Re executives. But when McNulty left to Main Justice in March 2006, he was replaced by Chuck Rosenberg. And soon thereafter, the case was derailed.

In March 2007, in an effort to salvage years of work on the case, Gober wrote a seven-page letter to Judge Spencer – the judge who had sentenced ROA executives Patterson and Hudgins to long jail terms – chronologically laying out the derailment and pleading for advice.

"First, David Maguire was totally removed from working the case," Gober wrote. "Dave called me into his office and apologized about leaving the case, telling me that Main Justice had told him he was being removed due to ‘health concerns,'" Gober wrote. "Dave had lost about ten pounds while working on the ROA matter. . .something I did not consider very troubling (or even unusual) because this has been a very large and very complex case. Dave is a brilliant prosecutor and he knows all of the facts of the ROA case; indeed, he can literally recite them from memory."

Maguire was replaced by Assistant U.S. Attorney Mike Gill – another Texas import.

In his letter to Judge Spencer, Gober says that in the very first "team meeting" after Maguire's removal, Gill announced to the team of FBI agents and prosecutors that he was "glad we are all in agreement that this case is all about (name redacted) and that Gen Re is no longer a target."

"To say the least, the team was a bit shocked about this ‘announcement' concerning ‘how we all felt.'" Gober wrote.

Gill said he wanted to focus on an in-house ROA lawyer "who essentially had made many of the day-to-day reinsurance decisions that had impacted ROA and resulted in its eventual collapse."

But the "team" wanted to also focus on Gen Re and top Gen Re executives because they believed, as Gober put it, that "the Gen Re issues were significant and far-reaching."

"We discovered a fraud scheme which included, but was not limited to, the execution of ‘side letter agreements' between the reinsurer and ROA which resulted in a misleading balance sheet impression for the insurance regulators," Gober wrote. "In effect, we found that Gen Re was permitting the insurer to ‘rent' reinsurance certification but there was no true shifting back of risk."

"Because Gen Re is owned by the parent company of Berkshire Hathaway, and the two richest men in the world (Warren Buffett and Bill Gates) serve on the Berkshire Hathaway Board of Directors, I became quite concerned when the case against Gen Re was allowed to ‘go away,'" Gober wrote. "Why, I wondered, was this happening when the entire team – prior to Mr. McNulty's elevation at the Justice Department – had been so absolutely sure we had a ‘slam dunk' case? Nevertheless, I decided to make the best of a bad situation. If Gen Re was going to be let go, that was a decision over my head. At least, I thought, the case was going to be forcefully and professionally pursued" against the ROA lawyer.

Because the prosecutorial team felt that the case against the ROA lawyer was so strong, they prepared a prosecution memo outlining their case. That memo was submitted to Gill in February 2007. But the team heard nothing from Gill.

All Gill would say to Gober was that he just "felt" there was not a strong enough case against the lawyer.

Gober was so upset with the decision not to proceed against Gen Re and the ROA lawyer that he wrote a letter to McNulty outlining his concerns.

McNulty never responded to the letter.

"What has happened to this case?" Gober rhetorically asked Judge Spencer. "The facts are the same (or better) as they were when Paul McNulty left to become the #2 man in the Justice Department. The only thing that is ‘different' is that two fellows from Texas have been brought in and they do not seem to want to do anything with this matter but let it die. I am very troubled that everyone on our team, and we are talking about seasoned professionals, concluded this was (and remains) a very important case that needs to go forward. Yet, somehow, the U.S. Attorney goes to D.C. and the new guy comes in and the case is over, for all intents and purposes. Something is just wrong about all of this."

Gober is concerned not just because a criminal prosecution of a powerful American corporation has b
een derailed.

He's concerned not just because the case involved the largest single insurance collapse in the history of Virginia that cost $500 million and has left more than 80,000 policyholders with an insolvent and liquidated insurer.

Gober is concerned also because the case "has exposed a serious problem in the reinsurance industry which is going to have to be addressed and corrected," he wrote to Judge Spencer.

"Hundreds of millions of dollars are at stake, and very powerful people are interested in this matter simply dying," he wrote. "I am not one of them. Nothing would be worse than to see a case like this one pushed ‘under the radar' by greedy people who simply want more and more money through fraud. Based on what has been going on lately at the Justice Department, I am very worried about how all of this has happened and what should be done to correct it."

"I consider myself neither a Republican or Democrat – I am simply a Certified Fraud Examiner who is trying to do the job he was hired to do on behalf of the American taxpayers," Gober pleaded.

To no avail.

Judge Spencer, through his clerk, suggested that Gober directly and personally approach Glenn Fine, the Inspector General.

On April 2, 2007, the Virginia Lawyer's Weekly wrote the first article outlining Gober's account. (A few months later, in July 2007, the McClatchy Newspapers ran a more detailed article titled "Justice Department Drops Massive Fraud Case," by Marisa Taylor.)

On April 3, the day after the Virginia Lawyer's Weekly article hit the stands, Gober wrote a frantic e-mail to Fine's office warning that the FBI was planning on incinerating crucial evidence in the case.

"I know from working past FBI cases that documents are stored for years," Gober wrote to OIG's Keith Bonanno. "The agents must not know of your inquiry."

On April 5, Gober wrote again to Bonanno.

"Yesterday, all documents were hauled off from our site office to the FBI incinerator," Gober wrote. "My hard drive which held all of the case data was taken as well. It is my hard drive and it was to be ‘wiped clean' before its return to me. I pushed for them to back it up before wiping clean or all case data would be gone. Please request that the data be copied before my drive is re-formatted. Otherwise, the investigation may be for naught. Two independent sources told me that the agents were going to incinerate them to ‘get ahead of the ball' and ‘not let this drag on forever.'"

"This seems to be a strange protocol in light of the recent attention to this matter, huh?" Gober wrote. "When I went to the off-site today, it was empty of all documents and my hard drive was gone. They did not even take the power cord, the data cable or the stand on which it stood. The agents must have been given strong orders. Nothing happens that quickly in the FBI – especially document storage matters. The few remaining ROA employees were dumbfounded and practically in tears. They asked me – how could 3 ½ years of investigation end in this?"

OIG's Bonanno responded later that day.

"Our office contacted the USAO in Richmond and instructed that they (and/or the FBI) cease destruction of documents related to the case since there is a pending OIG/OPR review," Bonanno wrote.

Before the whip came down, the government was in pretty serious negotiations with Gen Re to settle the ROA case amicably.

Joshua Hochberg was at the time head of the Fraud Section. Hochberg is currently a partner at McKenna Long & Aldridge in Washington, D.C. Hochberg did not return a call seeking comment for this article. In May 2005, Hochberg wrote to Maguire about the settlement of the Gen Re case.

"The bottom line has always been – what do we want to do with Gen Re." Hochberg wrote. "The options range from indicting the company, to a plea by a subsidiary to a deferred prosecution or a non-pros agreement with lots of favorable terms for the government, including large $, monitors, cooperation. . .Indicting the company would have enormous collateral consequences. As you know, when we met with Gen Re's counsel, we made no promises about any final resolution."

Thomas Hanusik was at the time assistant chief of the Fraud Section. He's now a partner at Crowell & Moring. Hanusik said he would have no comment on this story.

On July 20, 2005, Hanusik wrote to Maguire to detail negotiations he had with Ron Olson, a partner at Munger Tolles & Olson in Los Angeles.

Olson is an attorney for Gen Re and a member of the Berkshire Hathaway board of directors.

Olson could not be reached for comment. But he told McClatchy's Marisa Taylor that "there was no knowledge at Gen Re that people at Reciprocal of America were hiding information from regulators or auditors."

At the time, Gen Re was in settlement negotiations with federal prosecutors over a separate matter.

"He (Olson) mentioned that he also wanted to address ROA, but he is clearly more interested in talking us out of making them take responsibility for ROA than folding ROA into any settlement," Hanusik wrote Maguire. "I told him that we are always available for discussion but that we needed them to supply/do what they already promised, that we needed to complete our own evaluation of the deals that they have made the presentations about and that I needed to confer with the ROA folks to see where things stood on that front."

Maguire wrote back the next day that "I think we need a strong united front on Gen Re's culpability on ROA in order to get them to fess up and pay a share of the $450 million ROA loss commensurate with their conduct."

"From the mid 1980s until approximately 2001, ROA grew from a small marginally capitalized Virginia reciprocal insurer of approximately 100 hospitals and a few hundred doctors and lawyers into four commonly managed reciprocal insurers of more than 80,000 insureds in many different states across the country," Maguire wrote. "This phenomenal growth, however, could not have happened without the world believing that ROA was fully and truly reinsured by Gen Re and the receipt of consistently high ratings from A.M. Best (A Ratings from 1983 to 2001), a national respected ratings service of insurance companies, which also believed ROA was truly backed by Gen Re."

"Unfortunately, for more than eighteen years, material facts about the true nature of ROA's reinsurance relationship with Gen Re were falsely represented and concealed from Best, the insurance commissioners, state legal and medical societies and hospital associations that endorsed ROA to its members, and the insureds themselves. Indeed, the losses that drove ROA into insolvency were the very losses that were supposedly covered by reinsurance contracts with Gen Re," Maguire wrote.

"The dark little secret we have uncovered is that when Gen Re has to pay larger that (sic) expected losses, it uses it (sic) might to dump the losses back on the reinsured. So keep the faith. Dave."

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