The US Government has charged four former reinsurance executives with fraud for their alleged involvement in a 2000 loss-portfolio transaction with AIG.

Three executives from General Re have been charged as well as a former AIG executive.

The executives put together a sham insurance transaction, allowing AIG to fraudulently report $US500 million ($669.9 million) in loss reserves.

Prosecutors in the case say the alleged conspiracy – using phony contracts and a secret side deal – was designed to make it appear AIG’s loss reserves were growing so that its stock continued to rise in value. The alleged deal bears a striking similarity to arrangements involving FAI and General Re that were detailed in the HIH Royal Commission.

General Re is owned by the Berkshire Hathaway group, whose billionaire Chairman Warren Buffett has been questioned by investigators. They have said they are satisfied he had no knowledge of any illegal dealings.

Assistant US Attorney-General Alice Fisher says the former executives conspired to make AIG’s finances appear better than they were to meet Wall Street analysts’ expectations. “These four executives arranged a complex scheme to cook the books at AIG.”

At issue are two sham reinsurance transactions between subsidiaries of AIG and General Re that were initiated by an AIG senior executive to quell criticism by analysts of a $US59 million ($79 million) reduction in AIG’s loss reserves in the third quarter of 2000.

The false transactions made it appear as though AIG had increased its loss reserves by $US250 million ($335 million) in the fourth quarter of 2000 and by an additional $US250 million in the first quarter of 2001.

Without the fake loss reserves added to AIG’s balance sheet, AIG’s earnings release would have shown greater reductions in loss reserves for both quarters, instead of the increased loss reserves touted by AIG in its earnings releases.

Meanwhile, the New York Times reported yesterday that AIG is close to completing negotiations to settle all official actions against it. The Times said AIG will pay about $US1.6 billion ($2.2 billion) – the largest regulatory settlement with a single company in US history.