James N. Stanard and Martin J. Merritt, the former CEO and former controller, respectively, of RenaissanceRe Holdings Ltd. (RenRe) and Michael W. Cash, a former senior executive of RenRe's wholly-owned subsidiary, Renaissance Reinsurance Ltd., were charged in the complaint filed Wednesday in a federal court in Manhattan.
Stanard, 57, served as Ren Re's chairman and chief executive officer from 1993 until he resigned in November 2005. Merritt, 43, held various positions, including that of controller, at both the holding company and the subsidiary. And Cash, 38, was a senior vice president of the subsidiary until he resigned in July 2005.
The complaint alleges that the three former executives structured and executed a sham transaction that had no economic substance and no purpose other than to smooth and defer more than $26 million of RenRe's earnings from 2001 - 2003. It charges Stanard, Merritt and Cash with securities fraud; with violating the reporting, books-and-records and internal control provisions; and with aiding and abetting RenRe's violations of Exchange Act Sections 10(b), 13(a) and 13(b)(2) and Exchange Act Rules 10b-5(a), (b) and (c), 12b-20, 13a-1 and 13a-13.
In addition, the complaint charges Stanard and Merritt for making materially false statements to RenRe's auditors and charges Stanard for certifying financial statements filed with the SEC that he knew contained materially false and misleading information. The complaint seeks permanent injunctive relief, disgorgement of ill-gotten gains, if any, plus prejudgment interest, civil money penalties, and orders barring each defendant from acting as an officer or director of any public company.
The complaint concerns two seemingly separate, unrelated contracts that were, in fact, intertwined. Together, the contracts created a round trip of cash. In the first contract, RenRe purported to assign at a discount $50 million of recoverables due to RenRe under certain industry loss warranty contracts to Inter-Ocean Reinsurance Company Ltd. in exchange for $30 million in cash, for a net transfer to Inter-Ocean of $20 million. RenRe recorded income of $30 million upon executing the assignment agreement. The remaining $20 million of its $50 million assignment became part of a "bank" or "cookie jar" that RenRe used in later periods to bolster income.
The second contract was a purported reinsurance agreement with Inter-Ocean that was, in fact, a vehicle to refund to RenRe the $20 million transferred under the assignment agreement plus the purported insurance premium paid under the reinsurance agreement. This reinsurance agreement was a complete sham, according to the SEC. Not only was RenRe certain to meet the conditions for coverage; it also would receive back all of the money paid to Inter-Ocean under the agreements plus investment income earned on the money in the interim, less transactional fees and costs.
RenRe accounted for the sham transaction as if it involved a real reinsurance contract that transferred risk from RenRe to Inter-Ocean when in fact, the complaint alleges, each of these individuals knew that this was not true. Merritt and Stanard also misrepresented or omitted certain key facts about the transaction to RenRe's auditors. As a result of RenRe's accounting treatment for this transaction, RenRe materially understated income in 2001 and materially overstated income in 2002, at which time it made a "claim" under the "reinsurance" agreement. It then received as apparent reinsurance proceeds the funds it had paid to Inter-Ocean and that Inter-Ocean held in a trust for RenRe's benefit.
On Feb. 22, 2005, RenRe issued a press release announcing that i