-Caveat Lector-
Begin forwarded message:
From: [EMAIL PROTECTED]
Date: July 23, 2007 3:58:08 PM PDT
To: [EMAIL PROTECTED]
Cc: [EMAIL PROTECTED], [EMAIL PROTECTED]
Subject: Justice Dept removed federal prosecutor who uncovered
Warren Buffett's "Enron"
U.S. dropped Enron-like fraud probe
Prosecutor who built case against Virginia insurer was replaced.
By Marisa Taylor - Mcclatchy Washington Bureau
Published 12:00 am PDT Monday, July 23, 2007
Two years into a fraud investigation, veteran David Maguire told
colleagues he'd uncovered one of the biggest cases of his career.
Maguire described crimes "far worse" than those of Arthur Andersen,
the accounting giant that collapsed in the wake of the Enron
scandal. Among those in his sights: executives from a subsidiary of
Berkshire Hathaway, the investment empire overseen by billionaire
Warren Buffett.
In May 2006, he felt strongly enough about his case that he
prepared a draft indictment accusing executives from a Virginia
insurer, Reciprocal of America, of concocting a series of secret
deals to hide its losses from regulators. Although he didn't name
anyone from Berkshire Hathaway's subsidiary, he described the
company as a participant in the scheme.
But Maguire never brought those charges.
Months after preparing the draft, he was removed as the lead
prosecutor on the case and reassigned.
His replacement, a prosecutor who hadn't been involved in the case
until then, soon announced that the Berkshire Hathaway subsidiary,
General Reinsurance, would not be indicted. By April of this year,
the entire investigation, which the Justice Department once hailed
as one of the largest insurance-fraud cases in Virginia history,
had fizzled.
Former employees and policyholders of the Richmond-based insurer
were astounded. Why had the Justice Department spent upward of $2
million to investigate the case only to decline to prosecute?
Maguire and his team of investigators had secured two related
guilty pleas, interviewed dozens of witnesses and gathered 7,000
boxes of documents.
At the Justice Department, some whispered that Maguire and his team
had overreached and had been knocked down. Others heard that the
government needed resources for terrorism investigations.
Lawyers for the two companies had another explanation: Prosecutors
realized they didn't have evidence of a crime.
"It was a black and white decision," said Stanley Twardy Jr., one
of General Reinsurance's attorneys and a former U.S. attorney.
"They just called it like they saw it."
But Tom Gober, a certified fraud examiner who worked on the case,
thought investigators had gathered plenty of evidence.
Gober, a government-contracted investigator, concluded that the
Justice Department had buckled under pressure from defense lawyers.
Shortly before Maguire was removed, his supervisors were urging him
to drop the case against General Reinsurance, Gober said.
Gober's suspicions were fanned by allegations of politicization in
the Justice Department after nine U.S. attorneys were fired. He
took his complaints to the Office of Professional Responsibility,
which investigates Justice Department misconduct. That
investigation is under way.
"It just stinks," he said. "You don't come in out of nowhere and in
no time kill three years of sophisticated effort."
Maguire and officials with the U.S. attorney's office and the FBI
in Virginia declined to respond to questions about the decision.
Justice Department spokesman Bryan Sierra said he wouldn't comment,
either.
Internal documents obtained by McClatchy Newspapers show that
Justice Department lawyers in Washington had become locked in an
intense debate with Maguire over the case until he was removed from
it.
Five years after Enron collapsed and tough measures aimed at white-
collar crime were enacted, federal officials struggled with
questions of corporate accountability: Who should be held
responsible when fraud leads to a company's demise? How far should
federal prosecutors go in pursuing corporate suspects? In the
Reciprocal of America case, the fallout was clear.
More than 80,000 lawyers, doctors and hospitals in 30 states lost
their malpractice coverage. As they couldn't expect new insurers to
cover them for past cases, some who were sued have claimed losses
of hundreds of millions of dollars.
A company under siege
A team of state insurance auditors arrived at Reciprocal of
America's headquarters in January 2003 to launch their
investigation. They shepherded the company's 300 employees into a
conference room and locked the doors.
Suspicious accounting activity had been detected. The company and
its subsidiaries were being shut down for the duration of the
investigation.
Federal agents soon expressed interest in joining the case.
The auditors had found troubling numbers.
Insurance companies are supposed to avoid insolvency by socking
away vast surpluses collected from policyholders' premiums and
passing risk to giant reinsurance counterparts such as General
Reinsurance.
Reciprocal's surplus began to erode in the late 1990s, when medical
malpractice awards shot up. Desperate to pump up the surplus, the
company's executives asked General Reinsurance to assume millions
more in risk.
The Berkshire subsidiary agreed, according to documents from both
companies. General Reinsurance, known as "Gen Re," treated the
unusual transactions as "side" or "unenforceable" or "handshake"
deals. Executives referred to one deal as an "off balance sheet
loan," according to internal documents.
Maguire included details of the deals in his draft indictment as
part of the alleged accounting-fraud scheme designed to help
Reciprocal inflate its surplus and hide its losses from regulators.
Regulators and FBI agents sifted through thousands of e-mails and
memos. The trail led straight to Reciprocal President Kenneth
Patterson and his executive vice president, Carolyn Hudgins.
Investigators found evidence that the pair had manipulated the
company's accounting records to conceal losses and urged the pair
to admit their guilt.
In February 2005, Patterson and Hudgins pleaded guilty to felony
fraud charges. They agreed to cooperate with investigators. But
agents soon became frustrated with the pair because they didn't
appear to be divulging much detail. Corporate fraud cases are hard
enough to prosecute because of their complexity. Without testimony
from convincing cooperators, the case could be difficult to sell to
a jury.
A federal judge sentenced Patterson to 12 years in prison and
Hudgins to five years. Both declined requests for interviews.
That spring, Justice Department lawyers in Washington began to
voice skepticism about proceeding against General Reinsurance. They
pointed out that some of the evidence, which dated to the late
1990s, might be too old. They also warned that an indictment could
hurt a major corporation unnecessarily.
"The bottom line has always been what do we want to do with Gen
Re," Joshua Hochberg, the Justice Department's then chief of the
fraud section, wrote to Maguire. "Indicting the company would have
enormous collateral consequences."
Hochberg, who's no longer with the Justice Department, declined to
comment.
Maguire pushed back, arguing that his team had plenty of evidence
showing a pattern of fraud over more than 15 years.
"Gen Re has been a public menace for a long time," he wrote
colleagues. "Their 'I'm not my brother's keeper' attitude has
enabled them to make millions by 'aiding and abetting' bad guys."
At the very least, Maguire argued, the department should impose a
fine of up to $600 million. "If they balk, they should know that we
are more than ready to indict Gen Re," he wrote.
Some setbacks
While General Reinsurance attorneys acknowledged their clients
might have entered into "handshake deals" with Reciprocal, they
described them as harmless and the industry norm.
Ronald Olson, an attorney for General Reinsurance and a director on
Berkshire Hathaway's board, argued that his client was a victim of
Reciprocal's fraud. After Reciprocal collapsed, General Reinsurance
lost millions, he said. It later banned "side" deals as a bad
business practice.
"There was no knowledge at Gen Re that people at Reciprocal of
America were hiding information from regulators or auditors," Olson
said.
FBI agents urged Maguire in May 2005 to proceed at least with an
indictment against John William Crews, Reciprocal's general
counsel, who'd co-founded the company in 1977, according to
internal documents.
Maguire and the agents believed that Crews had participated in many
of the meetings with General Reinsurance and had received memos and
e-mails about the firms' relationship.
Crews and his law firm also had collected more than $63 million in
legal fees from Reciprocal of America and its subsidiaries,
documents show.
Within months, Maguire was removed from the Reciprocal of America
case.
His replacement, Assistant U.S. Attorney Michael Gill, quickly set
a new tone. In his first meeting with the team last fall, he called
General Reinsurance's lawyers to tell them that no case would be
brought against their clients in regard to Reciprocal.
Gill decided this spring not to indict Crews, either.
Crews' lawyer, J. Jonathan Schraub, said his client wasn't indicted
because he didn't do anything illegal. "There are many reams of
allegations," Schraub said. "None of them are valid."
http://www.sacbee.com/101/story/286713.html
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