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Securities and Exchange Commission v. Stanard

January 27, 2009


The opinion of the court was delivered by: Gerard E. Lynch, District Judge



The Securities and Exchange Commission (the "SEC") brings this action against James N. Stanard, asserting claims for securities fraud under section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5; aiding and abetting securities fraud under Section 10(b) and Rule 10b-5; books and records violations under Section 13(b)(5) of the Exchange Act and Rule 13b2-1; aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13; making false or misleading statements to auditors under Rule 13b2-2; and providing false officer certifications in violation of Rule 13a-14. The case was tried before the Court without a jury from September 8 to September 22, 2008. This Opinion sets forth the Court's Findings of Fact and Conclusions of Law pursuant to Federal Rule of Civil Procedure 52(a). To the extent any Finding of Fact reflects a legal conclusion, it shall be to that extent deemed a Conclusion of Law, and vice versa.


I. Background

A. RenRe

1. RenaissanceRe Holdings, Ltd. ("RenRe") is a Bermuda corporation with its principal corporate office in Bermuda. RenRe specializes in writing property catastrophe reinsurance. (Ex. 126 at 3.)*fn1 RenRe was founded as a private company in 1993 by James N. Stanard. The company went public in 1995. (Ex. 253 at 7; Stipulations 2-3; Ex. 231.) By 2000, RenRe was one of the world's largest writers of excess of loss catastrophe reinsurance. (Ex. 159 at 4.)

B. James Stanard

2. James N. Stanard is the founder of RenRe. He served as the company's chief executive officer and chairman of its board of directors from the company's formation in 1993 until early 2005. (Ex. 253 at 6.)

3. Stanard is an actuary by training. He became certified in 1977 as a Fellow in the Casualty Actuarial Society, the highest designation that a member can obtain. He earned a Ph.D. in Finance from New York University in 1986. Stanard held a variety of positions in the insurance and reinsurance industries between his graduation from college in 1971 and 1993, when he left a senior executive position with USF&G Corporation to found RenRe. (Tr. 473-80, 792.)

4. As RenRe's CEO, Stanard was known for his financial conservatism and his focus on maintaining a strong balance sheet. (Ex. 159 at 12-13, 14-15.) By 2001, Stanard was one of the most successful business leaders in the reinsurance industry and had built RenRe into one of the world's leading reinsurance companies. (Ex. 253 at 3, 5-7.) Stanard's total compensation package for 2001 was over $3.6 million, and for 2002 was over $5 million. (Ex. 39 at 3.) As of July 2005, Stanard and his immediate family owned RenRe stock valued at over $199 million. (Tr. 486; Ex. 123.)

C. Martin Merritt

5. Martin Merritt worked at RenRe from 1996 through 2005. Merritt joined RenRe in 1996 after holding junior positions at two large accounting firms and a two-year stint as controller and treasurer of a small reinsurance company. He started at RenRe as assistant vice president and controller, then was promoted to controller of RenRe's holding company. (Tr. 9.) As controller, Merritt was RenRe's chief accounting officer and was responsible for reviewing all accounting matters concerning RenRe's books and records. (Tr. 9-10.)

6. When Merritt first joined RenRe, the company was outsourcing its accounting work to Johnson & Higgins, with Merritt managing the work performed externally. (Tr. 234-35.) Eventually, he brought the accounting work in-house. (Id.)

7. Merritt reported to John Lummis, the company's non-accountant chief financial officer, and was the principal contact with Ernst & Young, RenRe's external auditing firm. (Tr. 16-18, 234.)

8. Merritt was named as a defendant in this action. During the litigation, he entered into a settlement with the SEC under which he agreed to be permanently enjoined from future violations of the securities laws, and to pay a civil penalty of $50,000. The Merritt was also barred from serving as an officer or director of a public company in the United States, was permitted by the settlement to appeal this bar. (Ex. 69; Final Consent Judgment against Martin J. Merritt.) Merritt testified for the SEC at trial.

D. Michael Cash

9. Michael Cash was hired by RenRe in November 2000 to explore new market opportunities, particularly those in finite reinsurance -- an area involving highly-structured contracts with significantly less risk transfer than traditional reinsurance. (Riker Trial Aff. ¶ 6; Tr. 481.)

10. William Riker, who was RenRe's president and chief operating officer at the time, was primarily responsible for hiring Cash, but Stanard interviewed Cash and personally approved and supported his hiring. (Riker Trial Aff. ¶ 6; Tr. 497; Nichols Tr. 69-70.) Before joining RenRe, Cash worked for Centre Reinsurance Company and Stockton Reinsurance Company, and had a background in finite reinsurance. (Riker Trial Aff. ¶ 6.) According to Jay Nichols, RenRe's controller before Merritt assumed the job, Stanard believed that RenRe needed to add finite reinsurance to its "toolbox" and that Cash was someone who could help the company do that. (Nichols Tr. 70.) Stanard eventually placed Cash in charge of all specialty insurance. (Tr. 497-99; Nichols Tr. 68-69, 72.)

11. Cash was named as a defendant in this action. During the litigation, he entered into a settlement with the SEC under which he agreed to be barred from serving as an officer or director of a public company in the United States for five years; be permanently enjoined from future violations of the securities laws; and pay a civil penalty of $130,000. (Tr. 974-75.) Cash appeared for a deposition in this action after agreeing in principle to his settlement with the SEC but he refused to testify, invoking his Fifth Amendment privilege against self-incrimination. (See generally Cash Tr.)

II. Reinsurance Accounting

12. Reinsurance transactions can be accounted for either as reinsurance or as deposits. When a transaction qualifies for reinsurance accounting, a number of economic benefits can accrue to the ceding insurer, including the ability to reduce the volatility of the company's financial results and to increase its underwriting capacity. See National Ass'n of Insurance Commissioners, Accounting and Disclosure for Property and Casualty Reinsurance Contracts, available at (last visited Jan. 20, 2008). Earnings are affected because the premium paid is treated as an expense, reducing earnings during the relevant period, while any recovery on the reinsurance policy will be treated as income in a future year.

13. When a transaction does not qualify for reinsurance accounting, the premium paid is recorded as a deposit on the ceding company's balance sheet and the ceding company sees no benefit to its underwriting income or leverage ratios. See Guy Carpenter, Specialty Practice Briefing: United States Accounting and Regulatory Update, available at http://www.guycarp. com/portal/extranet/pdf/GCBriefings/US%20Accounting&Regulatory%20Update%20081505. pdf (last visited Jan. 20, 2008). Economically, such a transaction transfers insufficient risk to be treated as any different from a deposit in a bank account or other investment of earnings.*fn2

14. Accordingly, accounting for a transaction as reinsurance that should not be so accounted for because no risk is actually transferred, and the reinsured company will be able to make a claim with certainty and with no risk of loss to the reinsuring company permits the insured to "smooth" earnings by reducing its apparent profit in exceptionally good years in which earnings targets have been exceeded, and "parking" funds with a reinsurer to be reclaimed, and increase apparent profits, in a future year in which earnings targets have not been reached.

A. Financial Accounting Standard 113

15. Financial Accounting Standard 113 ("FAS 113"), which was promulgated in 1992, determines whether a transaction qualifies for reinsurance accounting. (Bridges Aff. ¶ 63.) For a transaction to so qualify, it must be "reasonably possible that the reinsurer may realize a significant loss from the transaction." FAS 113 ¶ 9(b).

16. Although neither "reasonably possible" nor "significant" are defined in FAS 113, industry practice holds as a rule of thumb that a transaction can be properly accounted for as reinsurance under FAS 113 if the reinsurer incurs at least a ten percent chance of sustaining a ten percent or greater present value loss. (Tr. 24.) If a transaction does not meet these requirements, it must instead be accounted for as a deposit. (Tr. 25.)

17. The plain language of FAS 113 is quite clear that relative risk to the reinsurer is the ultimate test for determining whether a particular reinsurance contract qualifies for reinsurance accounting under FAS 113. (Tr. 411-12; Bridges Aff. ¶¶ 65, 67; Johnson Decl. ¶¶ 2-3; Ex. 211 at 8.)

18. Auditors, however, typically also take into account the relative risk to the company purchasing the reinsurance. Auditors examine the relative risk to both parties to understand whether, and to what extent, the reinsured party actually has transferred risk to the reinsurer. (Johnson Decl. ¶¶ 2-3; Ex. 211 at 16-18; Tr. 412-14.)

19. The FAS 113 accounting guidelines reflect a policy of Generally Accepted Accounting Principles ("GAAP") that a reinsurance company may not create a "catastrophe reserve" -- i.e., it may not expense against earnings its anticipated reinsurance losses until a particular catastrophic loss event (such as a hurricane) actually has occurred. (Tr. 421-22, 637-41.)At least one effect of this rule is to prevent reinsurance companies from distorting their profits by artificially smoothing earnings.

20. Some insurance executives believe that this policy itself distorts the true economic condition of reinsurance companies, by concealing the fact that present profits do not reflect already-anticipated future casualty losses. Whether or not the GAAP approach is the right policy, it is the rule. Consumers of financial statements who think that GAAP principles are not the best way to assess the true financial health of insurance or reinsurance companies can apply their own standards for reassessing such companies' financial statements, but they are entitled to do so knowing that the financial statements have been prepared according to the consistent principles embodied in GAAP. (See Tr. 639-41, 933-34.)

III. The Inter-Ocean Transaction

A. The Two Inter-Ocean Contracts

21. In 2001, RenRe and a company called Inter-Ocean Ltd. ("Inter-Ocean") entered into a single transaction comprising two separate but related contracts. Inter-Ocean is a wholly-owned subsidiary of Inter-Ocean Holdings Inc., a joint venture formed by ten reinsurers. (Ex. 37 at 1; Ex. 211 at 4.) In 2001, RenRe owned an approximately ten percent joint venture interest in Inter-Ocean Holdings Inc. (Ex. 211 at 4.)

22. The first contract in the transaction was an Assignment Agreement (the "Assignment Agreement"). Under the Assignment Agreement, which the parties entered into on April 23, 2001, Inter-Ocean purchased $50 million of reinsurance recoverables from RenRe for $30 million in cash. (See Ex. 1.) RenRe participated in various contracts known as industry loss warranty contracts ("ILWs") and the recoverables arose from these ILWs.*fn3 (Ex. 211 at 10.)

23. The second contract was an Aggregate Excess of Loss Reinsurance Agreement (the "Reinsurance Agreement"). Under this contract, which the parties entered into on July 31, 2001, Inter-Ocean sold RenRe up to $45 million of reinsurance over a three-year period for premiums of $7.3 million per year. (See Ex. 2.)

24. The Reinsurance Agreement provided that RenRe would be indemnified for net incurred losses arising over a three-year period beginning January 1, 2001. (Ex. 37 at 3.) To trigger coverage, RenRe needed to sustain either a $250 million cumulative loss over a three- year period or a $60 million calendar quarter loss. (Id.) In addition, a one-in-ten loss event -- that is, a catastrophe likely to occur less than once every ten years in a given geographic region -- must have occurred. The one-in-ten event was to be defined solely by RenRe in accordance with its Renaissance Exposure Management System ("REMS"), a computer software system RenRe designed to enable the company to consistently assess risk regarding potential insurance contracts. (Id.)

25. A trust was established to secure Inter-Ocean's obligation to pay the limit. This trust was funded by $18.9 million from Inter-Ocean (equal to its profit on the Assignment Agreement, minus an agreed-upon margin), as well as premiums paid over time by RenRe. (Id.)

26. The Reinsurance Agreement's Limit of $45 million (which was later revised to $30 million) was subject to adjustment by calculating a Limit Adjustment Factor on each date that recovery was due. (Ex. 2 at RENRE 00019; Ex. 211 at 11.) The Limit Adjustment Factor equaled (a) the sum of (1) the balance in the trust account, and (2) the total amount of all future premiums payable by RenRe divided by (b) $45 million. (Ex. 211 at 11.)

B. The Treatment of the Inter-Ocean Transaction under FAS 113

27. Although the two agreements were always part of a single, linked transaction, RenRe accounted for the two agreements separately, treating the Assignment Agreement as a sale of assets, and the Reinsurance Agreement as reinsurance under FAS 113. (Ex. 37 at4.) However, when the two contracts were considered together, the entire transaction should actually have been accounted for as a deposit, since the sale of recoverables was designed to transfer to Inter-Ocean a sum of money which was in effect an additional premium, and the ultimate effect of the transactions was that insufficient risk transferred to Inter-Ocean, which was virtually guaranteed to have to return all -- but no more than all -- of the total premiums paid (minus a "margin" or fee for engaging in the transaction) to RenRe in due course. (Ex. 126 at 5.)

28. As a direct result of RenRe's having accounted for the Inter-Ocean Transaction improperly as reinsurance rather than as a mere deposit of RenRe's funds with Inter-Ocean, RenRe's original financial statements in its Forms 10-K and Form 10-Q falsely understated RenRe's total 2001 net income by 14.7%, overstated its total 2002 net income by 7%, and overstated its third quarter 2002 net income by 37.7%.*fn4 (Tr. 408-11, 651; Ex. 126 at 55; Ex. 211 at 20-21; Ex. 232 at 1-2, 7, 24-25, 27-28, 31, and 35.)

1. Insufficient Risk to Inter-Ocean

29. There was absolutely no "reasonable possibility" that Inter-Ocean would realize a "significant loss" -- or any loss for that matter -- from its transaction with RenRe. Inter-Ocean was fully protected against risk because the only money that RenRe was ever allowed to recover on the "reinsurance" policy was the money that RenRe paid in the form of premiums, and in the form of the disguised "premium" represented by the difference between what Inter-Ocean paid for RenRe's recoverables and their true value. (Tr. 593-96, 943, 959.)

30. The true value of those recoverables was never in doubt. First, the evidence indicates that RenRe knew from the start that these recoverables were almost certain to be collected. Merritt testified that he, Cash, Nichols, and Kevin O'Donnell, a RenRe senior officer who was responsible for ceded reinsurance, had a conversation about the fact that "we would collect, [that it] was likely that we would collect on [the recoverables]." (Tr. 88.)

31. More conclusively, by April 23, 2001, the date the Assignment Agreement was signed, RenRe had already received $42.1 million of the recoverables due. (Ex. 211 at 12.) In other words, on the date RenRe entered into the Assignment Agreement to sell Inter-Ocean $50 million worth of its recoverables in exchange for only $30 million, it had already received $42.1 million of the recoverables. (Id.) Moreover, the Assignment Agreement did not become fully effective until July 31, 2001, as both sides had the right to cancel the deal until that date. By that date, RenRe had recovered all $50 million. (Tr. 944-45; ex. 4.) Thus, as of July 31, 2001, RenRe transferred assets that were indisputably worth $50 million to Inter-Ocean for $30 million, in effect simply transferring $20 million to Inter-Ocean.

32. The Reinsurance Agreement likewise left Inter-Ocean with no risk. The contract's Limit Adjustment Factor was structured in such a way that it did not pass risk to the reinsurer because it limited the amount of losses ceded to Inter-Ocean to "the sum of (1) the balance in the Trust Account, and (2) the total amount of all future Reinsurance Premium payables by the Reinsured." (Ex. 211 at 14.) Inter-Ocean's obligation to pay on the "reinsurance" contract was thus funded entirely from the premiums that were to be paid under the contract, plus the additional $20 million transferred covertly by the purported sale of recoverables. In effect, there was thus a contractual guarantee that Inter-Ocean was not exposed to any risk at all.

2. Insufficient Risk to RenRe

33. The risk to RenRe in the Inter-Ocean transaction was also so minimal as to be nonexistent. RenRe was certain to make a claim under the Reinsurance Agreement. There were two necessary triggers for a claim -- the one-in-ten loss event, and the loss threshold ($250 million cumulative over three years or $60 million in a calendar quarter) -- and both were virtually locked in.

a. The One-in-Ten Loss Event

34. RenRe had control over what constituted a one-in-ten loss event and was able to manipulate the outcome from its own proprietary REM system to gain the desired result. Merritt testified that the one-in-ten event provision was "pretty one-sided . . . because . . . we were the ones that could control it. It was based solely on our REM system. We would solely determine what a one-in-ten event was." (Tr. 93.) Desmond Nash, the senior accountant at Inter-Ocean who reviewed the deal with Cash and Merritt, testified that he had "never [before] seen anything like . . . the concept of a one-in-ten loss event and the concept of it being defined by the reinsured." (Nash Tr. 47.) Stanard himself conceded that he had never before seen a one-in-ten provision in a reinsurance contract. (Tr. 573-77.)

35. In preparation for the trial, the SEC asked Ian Branagan, a former RenRe senior vice president who had helped develop the REM system, to conduct an analysis to determine whether, according to REMS, any one-in-ten loss events had occurred between 1995 and 2005. (Branagan Tr. 7-11.) Branagan's analysis looked at every natural catastrophe and terrorism event in the Sigma reports (the industry standard source of loss information), and then analyzed what REMS would estimate to be the probability of the return period of those loss sizes at a worldwide level for that peril and then at the appropriate sub-region level. (Branagan Tr. 32.) The result of Branagan's analysis was that, from 1995 to 2005, at least one one-in-ten loss event as defined by REMS occurred every year. (Ex. 137.)*fn5

b. The Loss Threshold

36. The $250 million cumulative or $60 million per quarter loss threshold was also certain to be met. Stanard maintains that the fact that seven quarters passed before RenRe was able to make a claim is evidence that the company was not certain to hit the loss threshold. However, RenRe had twelve quarters in which to make a claim, and the company was able to file a claim by the seventh of these, despite the fact that 2001 and 2002 were exceptionally good years with lower-than-average casualty losses industry-wide. (Tr. 1044-45.) The Court thus finds that reasonable insurance executives would have understood at the time the Reinsurance Agreement was created that RenRe was effectively certain to meet the loss threshold at some time within the contract period.

37. In April 2001, Stanard called Ed Noonan, the CEO of AmRe (the company which stood behind Inter-Ocean in the transaction as its retrocessionaire), to make sure Noonan understood that Inter-Ocean would end up paying the full claim and would not feel deceived when it only made its agreed margin or fee on the transaction. (Tr. 147-48, 678-79, 945; Ex. 218 at 11; Meadows Decl. ¶¶ 4-7, 9.)

38. Desmond Nash, Inter-Ocean's most senior accountant in 2001, testified that RenRe's claim notice for payment under the Reinsurance Agreement, which he received in September 2002, stated neither the amount of RenRe's losses nor the payment amount that RenRe was seeking under the reinsurance agreement. (Nash Tr. 97-98.) Of the approximately twenty claim notices that Nash had previously reviewed at Inter-Ocean, RenRe's was the only one that did not include such information. (Id. 94-98.) Nash did not ask RenRe for such information before paying it the full amount in the trust because Nash understood that all of the trust account funds were to be paid back to RenRe and that such routine claims processing information was therefore irrelevant. (Id. 98-100, 126-27.)

IV. Merritt's and Cash's Roles in the Inter-Ocean Fraud

39. It is undisputed, and at any rate it is conclusively demonstrated by the above analysis, that the accounting treatment of the Inter-Ocean transaction was not correct; indeed, so much is conceded by RenRe's eventual determination to correct the accounting restate its earnings for the relevant periods. Nor is it disputed, and at any rate it is demonstrated by overwhelming evidence, that Cash and Merritt committed fraud, that they deliberately set out to create a sham transaction that did not actually transfer any risk and to account for it inaccurately as a reinsurance transaction, and that they worked intentionally to "fool the auditors." (Tr.72.)

A. Martin Merritt

40. Merritt testified that he knew at the time the Inter-Ocean transaction was being put together that the accounting treatment of the deal was not proper under GAAP. (Tr. 36.) Merritt had accounting concerns from the moment that he read a January 2001 e-mail from Stanard -- the e-mail that was to precipitate the Inter-Ocean transaction -- which suggested "put[ting] away" $25 million. (Tr. 47-48; Ex. 13.) These concerns only grew throughout the course of his work on the Inter-Ocean contracts. (Tr. 47-48.)

41. Merritt understood in 2001 that, in order to realize Stanard's objective of "putting away" money, Cash was trying to structure a transaction involving back-to-back contracts. (Tr. 49.) The "back end" of the contract would be a traditional reinsurance contract, under which RenRe would make a claim to "bring the money back." (Tr. 49.) Cash's challenge was to try to figure out the "front end" of the contract -- i.e., to figure out a way to get additional money to the reinsurer which could later be pulled back.

42. Merritt knew that the Inter-Ocean transaction needed to comprise two separate contracts so that the reinsurance contract would appearto an auditor to have risk in it. (Tr. 49-50.) Merritt understood that this two-contract structure was just about "swapping cash from one pocket to another" -- that is, he knew that RenRe would lose money on the Assignment contract but would gain it all back (minus Inter-Ocean's fee for participating in the transaction) on the Reinsurance Contract -- and that there was no legitimate business reason to have more than one contract in the transaction he and Cash were discussing. (Tr. 57-58, 77.) Together, Merritt and Cash looked for triggers that were high enough to appear to auditors that there was sufficient risk in the transaction, but not high enough that RenRe might not actually reach them. (Tr. 91.)

43. As part of their plan to "fool the auditors" -- a phrase which, according to Merritt, Cash used brazenly -- Merritt lied to Jonathan Reiss, RenRe's auditor at Ernst & Young, about the purpose of the Recoverables Agreement and the likelihood that RenRe would collect the recoverables. (Tr. 75, 76, 118, 279.) Despite the unease Merritt claims that he felt about the transaction from the beginning, Merritt went along with the fraud because Cash told him that this was something Stanard wanted and because Merritt therefore saw the Inter-Ocean transaction as chance to "be seen as a key player . . . and to show a different skill set" and to possibly get a promotion or a raise. (Tr. 49-50, 311, 330-32.)

44. Having carefully observed Merritt's testimony under vigorous cross-examination, and taking into account his demeanor, as well as the various impeaching evidence, including his settlement agreement with the SEC, the Court finds Merritt's testimony truthful and generally accurate.

B. Michael Cash

45. Although Cash exercised his Fifth Amendment right and refused to testify, his 2001 e-mails speak for themselves and leave no doubt that he, like Merritt, knew that he was committing fraud.

46. On January 29, 2001, for example, Cash wrote an internal memo outlining different ways a contract could be structured to defer income. (Tr. 56.) One structure that he proposed was "back to back reinsurance contracts, one losing money, the other making money." (Ex. 14 at RENRE 000559.) The memo proceeded to caution that a disadvantage to this approach would be that RenRe would need to figure out a way to "muddy the waters" and that, "[t]o assist in muddying the water, we could write one contract direct, and the other through Chubb Re, though this will result in additional costs." (Ex. 14 at RENRE 000559.) Merritt testified that he understood from this memo that Cash was "trying to make it difficult for the auditors to understand the accounting for these [contracts] by putting it in more transactions." (Tr. 57.)

47. On March 6, 2001, Cash sent an e-mail to Merritt and Nichols. The body of the e-mail contained a request evidencing Cash's state of mind: "Please read (but don't save or print) the attached . . . . When you're done please delete this." (Ex. 19 at RENRE 000562.) The email's attachment, which began with yet another admonition not to save or print it, discussed the structure of the contracts Cash was developing to "smooth" RenRe's income. (Ex. 19 at RENRE 000563.) In the memo's first section, Cash explained that RenRe could buy a multi year cumulative loss cover from the Protected Cell which will act as the mechanism for enabling RenRe to recoup the profit when a big loss occurs. It will be structured in a way that we can always be certain that we will be able to cede sufficient loss to recoup the profit. THIS WILL ENSURE THAT WE ALWAYS HAVE A MECHANISM TO RECOUP THE PROFIT. (Ex. 19 at RENRE 000563.)

48. Cash then discussed the Reinsurance Agreement:

Because we will pay a premium . . . we can attach this cover at a level that will leave apparent risk to Inter-Ocean. For example, if the Q[uota] S[hare] is expected to produce $40 million of Premium to Inter-Ocean and the multi year contract has a premium of $8 million, then the attachment can appear to be at $48 million . . . showing a justification for why we might want to enter into such a transaction on a stand alone basis.


49. On March 12, 2001, Cash sent another e-mail to Merritt and Nichols, this one with the subject line "needs sanitizing before sending . . ." In this e-mail, Cash explained that

[a] simple example of how to pass sniff tests is to simply have a very standard reinsurance contract which doesn't look like there is anything out of the ordinary, but to have loose language around what the covered business can be (auditors will often not focus on whether a contract has well defined descriptions of what other business might be included as covered business). (Ex. 20 at RENRE 000218.)

50. These e-mails unequivocally demonstrate that Cash fully understood that the purpose of the transaction on which he was working at Stanard's request was to transfer profit to a future year in which "a big loss occurs"; that the method of doing so was to be a bogus reinsurance agreement; that in order to accomplish these goals, it would be necessary to deceive the auditors; and that the illicit nature of his project required caution in eliminating a paper trail (although his ignorance regarding electronic communications prevented him from achieving the latter goal).

V. Stanard's Role in the Inter-Ocean Transaction

51. The SEC contends that Stanard knew all along that the Inter-Ocean transaction was a sham, or at least that he was reckless in failing to know it. The SEC also contends that Stanard knew that Merritt concealed key facts about the transaction from the Company's auditor, Ernst & Young, and that Stanard made knowing misrepresentations to Ernst & Young in management representation letters. (Am. Compl. ¶¶ 5-6, 17, 27, 36, 40, 42, 52, 58-59.)

52. Stanard denies these allegations. He claims that, although he was aware generally of the transaction with Inter-Ocean and supported its business concept, he understood that it was carefully structured to transfer sufficient risk to allow the transaction to qualify for reinsurance accounting under FAS 113. He further claims that he relied on Merritt to ensure that the transaction complied with the applicable accounting requirements, and that he was told at the time that Ernst & Young had signed off on the accounting for the transaction. (Tr. 444-45, 465-66, 582, 782-83.)

53. Although there is no direct evidence that Stanard knew that the Inter-Ocean transaction did not comply with GAAP, the preponderance of the circumstantial evidence supports the conclusion that Stanard did know about RenRe's fraudulent accounting.

A. Stanard Initiated the Inter-Ocean Transaction

54. On January 10, 2001, Stanard sent to Merritt and to Kevin O'Donnell, a RenRe senior officer who was responsible for ceded reinsurance, an e-mail with the subject line "leveling contract." He also copied Cash, William Riker, and Dave Eklund, a senior underwriting officer. The e-mail read:

Kevin (and Marty) we should make another attempt at structuring a ceded contract that allows us to "put away" $25 million (maybe each quarter, in several different contracts). We could go to Chubb or Underwriters or OPL or Lincoln (or maybe all of them). I'd like to try to get an outline of the terms within a ...

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