SEC NEWS DIGEST Issue 2005-107 June 6, 2005 COMMISSION ANNOUNCEMENTS LORI RICHARDS TO TESTIFY Lori A. Richards, Director of the Commission’s Office of Compliance Inspections and Examinations, will testify before the House Subcommittee on Commercial and Administrative Law on Tuesday, June 7, concerning the SEC’s Mutual Fund Oversight. The hearing where this testimony will be presented will be held in Room 2141 of the Rayburn House Office Building and will begin at 4:00 p.m.. ENFORCEMENT PROCEEDINGS SEC CHARGES GEN RE EXECUTIVE FOR AIDING IN AIG SECURITIES FRAUD The Securities and Exchange Commission today announced that it filed an enforcement action against John Houldsworth, a former senior executive of General Re Corporation, for his role in aiding and abetting American International Group, Inc. in committing securities fraud. In its complaint filed today in federal court in Manhattan, the Commission alleged that Houldsworth and others helped AIG structure two sham reinsurance transactions that had as their only purpose to allow AIG to add a total of $500 million in phony loss reserves to its balance sheet in the fourth quarter of 2000 and the first quarter of 2001. The transactions were initiated by AIG to quell criticism by analysts concerning a reduction in the company’s loss reserves in the third quarter of 2000. In partial settlement of the Commission’s claims, without admitting or denying the SEC’s allegations, Houldsworth consented to the entry of a partial final judgment which resolves all issues of liability against him but defers the determination of disgorgement and penalties until a later date. As part of his settlement, Houldsworth has agreed to cooperate fully with the Commission in its continuing investigation of this matter. Linda Chatman Thomsen, Director of the Commission’s Division of Enforcement, said: “AIG’s fraud did not occur in isolation. With this case, we are holding accountable an individual who, even though outside AIG, knowingly assisted the company to manipulate its financial results.” Mark K. Schonfeld, Director of the Commission’s Northeast Regional Office, said: “This is another step in our ongoing investigation of the abuse of insurance and reinsurance to falsify a company’s financial results. Here the defendant helped to structure a sham transaction designed solely to enable AIG to achieve a specific, and false, accounting result.” In its complaint against Houldsworth, the Commission alleges that Houldsworth and others at Gen Re worked with their counterparts at AIG to fashion two sham reinsurance contracts between Cologne Re Dublin, a Gen Re subsidiary in Dublin, Ireland of which Houldsworth was the Chief Executive Officer, and an AIG subsidiary. The complaint details the conversations of participants in the planning meeting and other conversations that led to AIG’s filing of fraudulent financial statements. On the basis of these conversations and other facts alleged, the complaint charges that all parties understood from the beginning that they were engaged in an undertaking to create sham transaction documents for the sole purpose of allowing AIG to make false accounting entries on its books. As Houldsworth and others at Gen Re knew, AIG accounted for the sham transactions as if they were real reinsurance contracts that transferred risk from Gen Re to AIG, when all parties involved knew that was not true. As a result of AIG’s accounting treatment for these transactions, the company’s financial results showed false increases in reserves that AIG touted in the company’s quarterly earnings releases for the fourth quarter of 2000 and the first quarter of 2001. Without the phony loss reserves, AIG’s financial results in both quarters would have shown further declines in its loss reserves. In a press release dated March 30, 2005, AIG admitted that the accounting for these transactions was improper and would be corrected. In its 2004 Form 10-K filed with the Commission on May 31, 2005, AIG restated its financial statements to recharacterize the transactions as deposits rather than as reinsurance. The Commission’s complaint charges Houldsworth with aiding and abetting the violations by AIG and others of Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 of the Securities Exchange Act of 1934. Houldsworth, in addition to undertaking to cooperate fully with the Commission, consented to the entry of a partial final judgment permanently enjoining him from future violations of these provisions, barring him from serving as an officer or director of a public company and deferring the determination of civil penalties and disgorgement to a later date. In addition, Houldsworth has agreed to a Commission administrative order, based on the injunction, barring him from appearing or practicing before the Commission as an accountant, under Rule 102(e) of the Commission’s Rules of Practice. Houldsworth is licensed as a Chartered Accountant in England. The Commission’s investigation is continuing. The Commission acknowledges the assistance and cooperation by the U.S. Department of Justice Criminal Fraud Division and the U.S. Postal Inspection Service in this matter. [SEC v. John Houldsworth, S.D.N.Y. Civ. 05 CV 5325, LP] (AAER-2253; LR-19248) PHILIP YODER ORDERED TO PAY DISGORGEMENT OF ILL-GOTTEN GAINS AND CIVIL PENALTIES TOTALING $504,991.70 FOR DEFRAUDING 85 INVESTORS The Securities and Exchange Commission announced that on May 12, Judge Sharp of the United States District Court for the Northern District of Indiana entered final judgment against Philip J. Yoder, permanently enjoining him from future violations of the registration and antifraud provisions of the federal securities laws, ordering disgorgement and pre- judgment interest of $394,991.70, and ordering a civil penalty of $110,000. The judgment arises out of Yoder’s operation of two investment schemes that defrauded 85 investors out of more than $1.6 million. Yoder, age 27, currently resides in Sarasota, Florida, but lived in Goshen, Indiana during the time he engaged in his fraudulent conduct. From December 2000 to February 2001, Yoder raised approximately $637,603 from investors in All the Way to the Top, a so-called loan program in which Yoder promised guaranteed returns of 40 to 50 percent per month. Yoder made various misrepresentations about the use of investor funds and told investors that their investment was safe and risk-free. Yoder used the money inconsistently with his representations to shareholders, and used a significant portion of the funds he raised for personal expenses, including an SUV, a sports car, and a motorcycle. Yoder also used the funds to pay for trips to Switzerland and the Bahamas. The investors received neither the interest that was promised them, nor were they able to recover their principal investment. In January 2001, Yoder also raised over $1 million for a “prime bank” trading program. Yoder told investors that the program was safe and risk-free, and that they would earn 100% return per week for eleven months through the trading of “medium term” notes. In reality, such trading programs do not exist. The investors never received any returns, and most investors lost their principal. Yoder was enjoined from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Additional information regarding the Commission’s lawsuit can be found at Litigation Release No. 18184, June 10, 2003. The Commission wishes to thank the Portland, Oregon Field Office of the Federal Bureau of Investigation, the British Columbia Securities Commission, the Royal Canadian Mounted Police, and the Hong Kong Police Department for their assistance in this matter. [SEC v. Philip J. Yoder Individually and d/b/a All The Way to the Top, No. 3:03-CV-0418AF, N.D. Ind., Hon. Allen Sharp] (LR-19249) For tips on how to avoid prime bank fraud, visit http://www.sec.gov/divisions/enforce/primebank.shtml. For more information on Internet fraud, visit http://www.sec.gov/divisions/enforce/internetenforce.htm. To report suspicious activity involving possible Internet fraud, visit http://www.sec.gov/complaint.shtml.