Berkshire Hathaway’s reinsurance unit, General Re, has entered into a deal with the U.S. Justice Department and the U.S. Securities and Exchange Commission to settle allegations it entered into sham reinsurance deals with both American International Group and Prudential Financial.

In its deal with the Justice Department, General Re agreed to pay $19.5 million to the U.S. Postal Inspection Service Consumer Fraud Fund, in addition to the $5 million it has already paid as forfeiture of the illicit accommodation fee of the same amount it received from AIG. The reinsurer also agreed to pay $60.5 million through a civil class-action settlement to injured AIG shareholders.

To settle charges levied by the SEC, General Re has agreed to pay $12.2 million.

The SEC accused General Re of entering into a series of sham reinsurance contracts with Prudential’s property-casualty unit from 1997 to 2002. Those contracts, the SEC said, allowed Prudential to improperly recognize more than $200 million in revenues between 2000 and 2002, with the reinsurer receiving fees of $8.1 million for structuring and executing the scheme, according to officials.

In its agreement with the Justice Department, General Re admitted that its most senior management engaged in a scheme to falsely inflate AIG’s reported loss reserves, an indicator of financial health to insurance industry analysts and investors.

Citing a statement of facts in the case, the federal government said the fraud was carried out through the use of two sham reinsurance transactions between subsidiaries of AIG and General Re in response to analysts’ criticism of a $59 million decrease in AIG loss reserves in the third quarter of 2000.

Those sham transactions increased AIG’s loss reserves by $250 million in both the fourth quarter of 2000 and the first quarter of 2001, hiding a declining trend in loss reserves as premiums grew. AIG restated the transactions in filings with the SEC in May 2005.

Federal trial unveiled details

In February, a federal grand jury found Elizabeth A. Monrad, General Re’s former chief financial officer; Ronald E. Ferguson, the company’s chief executive officer; former executive officers Robert D. Graham and Christopher P. Garand; and Christian M. Milton, a former senior AIG executive officer, guilty of conspiracy, securities fraud, false statements to the U.S. Securities and Exchange Commission and mail fraud.

The Justice Department said that evidence presented at trial for the four defendants established that when the investigation was disclosed to investors by AIG and through various media outlets between Feb. 14 and March 14, 2005, shares of AIG stock dropped from $73.12 to $61.92. On Oct. 31, 2008, the U.S. District Court presiding over the trial found that AIG’s shareholders lost between $544 million and $597 million as a consequence of the fraudulent scheme.

General Re admitted to federal officials that the involved senior management knew that the purpose of the transactions was to permit AIG to falsely report increasing loss reserves in its statements to analysts, investors and in its SEC filings. Additionally, General Re entered into a secret side deal whereby AIG would never have to pay any losses under the contracts; AIG would return to General Re’s subsidiary the $10 million in premiums General Re’s subsidiary paid to AIG, and AIG paid General Re an illicit accommodation $5 million fee for entering into the transaction, according to the Justice Department.

Among the terms of the agreement with the Justice Department are stipulations that for a three-year period General Re must maintain significant internal corporate remediation provisions it has already implemented, including the appointment of an independent member to its board of directors and the establishment of a risk committee to examine risk exposure in underwriting transactions.

Those same reform measures also led the SEC to accept General Re’s settlement offer, according to the agency. The SEC’s settlement is subject to court approval.