"Defendant, an attorney, appeals from convictions of the crimes of concealing assets from a trustee in bankruptcy, 18 USC 152, and conspiring to transfer the assets of one corporation to another in contemplation of bankruptcy and with intent to defeat the National Bankruptcy Act, 18 USC 371 and 18 USC 152. ... There was evidence before the jury that Switzer's client, a corporation called Berkeley Jewelers, Inc., borrowed substantial sums from money lenders who also were represented by Switzer", my emphasis, US v. Switzer, 252 F2d 139, 141 (2nd. Cir., 1958). "In December 1949, Switzer, who was well aware of the corporation's financial deterioration, proposed a plan whereby the bulk of its inventory would be transferred to a new corporation to be managed for the benefit of those creditors who were also Switzer's clients. The new corporation was then to continue the profitable portion of the old corporation's business", my emphasis, 141-2. "The valuable inventory previously removed was then sold for the benefit of the favored creditors and Switzer; and the property purchased at the sale went to the newly organized corporation, which continued to pay the old corporation's debt to one of the creditors with whom Switzer was associated. ... These decisions reveal that the intent of Congress was to prevent the defeat of the bankruptcy statute and that this intent is best applied by adopting a literal reading of the statute", my emphasis, 142. "It is clear that the latter interpretation should be followed because the actual intent of Congress is best served by prohibiting either transfer or concealment for either one may defeat the purpose of the Act", my emphasis, 142-3. AIG looks like a reverse Switzer, in that Switzer created a new company to effect an inequitable distribution of the bankrupt's assets. AIG, in effect, is combining itself with its seperately incorporated insurance subsidiaries to effect an inequitable distribution of the insurance subsidiaries assets.
"The owner of a defunct Wayne-based health benefits management company pleaded guilty today to mail fraud and tax evasion, admitting he misled subscribing participants and employers about the management of premium payments, embezzled from commingled accounts and ran the business into bankruptcy, U.S. Attorney Christopher J. Christie announced. Donald Ruth, 64, formerly of Hackensack and now of Hudson, Fla., admitted that, with the diverted and commingled funds of Wayne, NJ-based Meredian Benefit, Inc., he purchased a Florida home, a boat and paid for travel and other personal expenses--in addition to receiving more than $1.5 million in income between 1999 and mid-2003, when Meridian collapsed and filed for bankruptcy, leaving approximately $15 million in unpaid insurance claims. ... Meridian was established by Ruth as a third-party administrator of health benefit plans such as those established by employers for their employees. ... The company collected close to $40 million from the participant groups. Ruth and Meridian promised and represented that funds collected from participant groups would be segregated and held in trust accounts. ... Throughout the concealment, Ruth admitted, he induced continued payments from current participants while aggessively soliciting others to further the scheme. To prevent detection, Ruth admitted that he with others did mass mailings to participants with false assurances of future payments and disseminated a roster of false explanations to customer service personnel to explain and delay claim payments", my emphasis, Department of Justice Press Release, 22 September 2005, link: http://www.dol.gov/ebsa/pdf/ruth2.pdf.
"The $50 billion privatization of Bell Canada, Canada's largest telecomminications company, was in jeopardy Wednesday after accountants said they were unable to conclude if the leveraged buyout would leave the company solvent. Bell Canada, which trades under the corporate name BCE, is among Canada's most widely held and prominent corporations. Unless the accountants change their minds, 'the transaction is unlikely to proceed,' the company said Wednesday. ... But its failure would be openly welcomed by current Bell debt holders, who say they believe their bonds will be degraded, and would provide relief at the banks that agreed to finance the takeover in a much different market climate in June 2007. ... In a brief statement, [BCE] said that the accounting firm KPMG found in a preliminary analaysis that 'the amount of indebtedness' involved in financing the deal,about $30 billion, left it unable to conclude whether the privatized company would be solvent. ... [BCE's] chief financial officer, Siim A. Vanaselja, said in that company's statement, 'The company disagees that the addition of the LBO debt would result in BCE not meeting the technical solvency definition.' ... The debt holders, however, challenged the transaction in court, saying it unfairly favored equity holders at their expense. While they were successful at a Quebec court, that ruling was overturned by the Supreme Court of Canada after an unusally swift hearing in June", my emphasis, Ian Austen, 27 November 2008 at http://www.nytimes.com/.
Francine McKenna mentions KPMG's solvency opinion at her re The Auditors, 28 November 2008, link: http://www.retheauditors.com/2008/11/kpmg-in-news-not-good-kind.html.
"It is unusual for a merger pact to require a solvency certificate as a condition of closing. banks typically require such certificates to finance a transaction, but BCE had put this condition is place because it wanted to protect itself from complaints by existing BCE bondholders about the company's new, debt-heavy capital structure. A collapse would likely benefit the financing banks, led by Citigroup Inc., Deutsche Bank, the Royal Bank of Scotland and Toronto Dominion", my emphasis, Peter Layttman at the WSJ, 28 November 2008.
"BCE, the parent of Bell Canada, recently was hit by a preliminary solvency opinion from valuation consultants KPMG warning that the telecom operator mightn't be solvent if its $55 billion buyout by a group led by Providence Equity Partners and Ontario Teachers' Pension Plan goes through. ... Typically, with solvency opinions, they're talking about the three tests that could constitute what's called a fraudlent transfer. If you couldn't have passed the three tests prior to and subsequent to the deal, you weren't deemed solvent. Two of them have to do with the company's balance sheet. The first test would be: Do assets exceed liabilities where the assets are valued as a going concern. The second is, is the company left with adequate capital after the transaction closes, so that it there's a market hiccup after the deal happens, will it be pushed over the line, or close to it? The third is the cash-flow test, which tells whether the company can pay its debt when it comes due", Heidi Moore Interview of Rick Braun (RB) at the WSJ, 3 December 2008.
"[AIG] owes Wall Street's biggest firms about $10 billion for speculative trades that have soured, according to people familiar with the matter, underscoring the challenges the insurer faces as it seeks to recover under a U.S. government rescue plan. ... The speculative trades, engineered by the insurer's financial-products unit, represent the first sign that AIG may have been gambing with its own capital. ... An AIG spokesman characterized the trades not as speculative bets but as 'credit protection instruments.' He said that exposure has been fully disclosed and amounts to less than $10 billion of AIG's $71.6 billion exposure to derivative contracts on debt pools known as collateralized debt obligations as of Sept. 30. ... The fresh $10 billion bill is particularly challenging because the terms of the current $150 billion rescue package for AIG don't cover those debts. ... The outstanding $10 billion bill is in addition to the tens of billions of taxpayer money that AIG has paid out over the past 16 months in collateral to Goldman Sachs Group Inc. [GSG] and other trading partners on trades called credit-default swaps. ... AIG's problem: The rescue plan calls for a company funded by the [Fed] to buy about $65 billion in troubled CDO securities underlying the credit-default swaps that AIG has written, so as to free AIG from its obligations under those contracts. But there are no actual securities backing the speculative positions that the insurer is losing money on. Instead, these bets were made on the performance of pools of mortgage assets and corporate debt, and AIG now finds itself in a position of having to pay off its partners because those assets have fallen significantly in value. The Fed first stepped in to rescue AIG in mid-September with an $85 billion loan when the collateral demands from banks and losses from other investments threatened to send the firm into bankruptcy court. ... Some of AIG's speculative bets were tied to a group of [CDOs] named 'Abacus,' created by [GSG]. ... In what amounted to a side bet on the value of these holdings, AIG agreed to pay [GSG] if the mortgage debt declined in value and would receive money is it rose. ... The plan has resulted in banks in North America and Europe emerging as winners: They have kept the collateral they previously received from AIG and received the rest of the securities' value in the form of cash from Maiden Lane III. ... It also has been a double boon to banks and financial institutions that specifically bought protection on now shaky mortgage securities and are effectively being made whole on those positions by AIG and the [Fed]", my emphasis, Serena Ng, Carrick Mollenkamp & Michael Siconolfi at the WSJ, 10 December 2008.
"The fate of the C$51.7 billion ($41.3 billion) takeover of BCE Inc. took another turn after the telephone company got a positive solvency opinion from its new auditing firm, in a twist that could put the deal back on track. The Montreal-based telecom company retained PricewaterhouseCoopers LLP, which determined that the company will be solvent after the buyout, said a person familiar with the situation", Shasha Dai, at the WSJ, 9 December 2008.
"The BCE Inc. buyout is officially busted. A year and a half after it was struck, then the largest private-equity deal in history, the $41 billion leveraged buyout of the Canadian telephone company collapsed Wednesday when a valuation expert at auditing firm KPMG LLC issued a final opinion that the transaction would create an insolvent entity. ... BCE is expected to take issue with that view and sue the private-equity group over the breakup fee. ... While BCE and the private-equity firms will likely head to court, four financing banks are in a position to walk away with an early Christmas present. Citigroup Inc., Deutsche Bank AG, Royal Bank of Scotland Group PLC and Toronto Dominion Bank won't have to provide $34 billion in debt to fund the deal. Had the buyout deal closed, the banks would have absorbed as much as $12 billion in losses from selling the debt package at steep markdowns or by holding the debt on their books", Peter Lattman at the WSJ, 11 December 2008.
Here's an explanation of various bankruptcy scams, including bust-outs and bleed-outs: http://www.crfonline.org/orc/pdf/ref11.pdf. Strictly speaking, amongst us bankruptcy fraud cognoscenti, AIG appears to be a "bleed-out" as opposed to a "bust-out". Either one can be prosecuted under 18 USC 152.
First AIG question: is GSG an insider or an outsider? Since GSG apparently had ED authorize AIG's insurance subsidiaries to "upstream" $20 billion to AIG's parent, GSG looks like an insider to me. I think GSG should be held to be a "control person" of AIG and this should be disclosed in both companies SEC filings. Chris Cox, are you listening? What do you do anyway?
The Ruth case is a recent insurance company bust-out. These things get prosecuted from time-to-time.
Existing bondholders usually are injured by LBOs.
RB, a managing director of FTI Consulting correctly describes the three solvency tests. It is clear AIG would fail the third and possibly the second test. To be insolvent, one need fail any of the three tests.
AIG is like BCE in that creditors' relative positions are being shuffled around to benefit say, GSG, and injure AIG insurance subsidiary policy holders.
Doesn't this give to great confidence in the Big 87654's work?
I handn't thought about this before, but KPMG audits Citigroup. It should never have accepted this valuation assignment.
Step right up ladies and gentlemen, in this corner, the largest bankruptcy fraud in history. Frank Easterbrook must be laughing at this. Over 16 months. Hmm. Just get over that 12 month period for the last payment and we're home free! AIG should have filed bankruptcy in September.