A former chief executive at Cologne Re Dublin pleaded guilty last week to federal criminal conspiracy charges and agreed to testify against management at American International Group allegedly involved in a phony accounting scheme.

John Houldsworth entered his plea on June 9 in U.S. District Court in Alexandria, Va. He was scheduled for sentencing on Dec. 9 after Judge Claude Hilton advised him that he faces up to five years in prison and a fine of up to $250,000, or twice the gross gain or loss resulting from his actions.

Earlier in the week–on the day his U.S. attorney, John Byrne, revealed he had reached a plea agreement with the Justice Department Criminal Fraud Division–the U.S. Securities and Exchange Commission filed documents in a separate action disclosing investigators probing the AIG transactions have tape recorded telephone conversations, mentioning “ways to cook the books,” e-mails and handwritten notes.

The deal with Houldsworth also involves a separate agreement to cooperate with a continuing SEC probe and a judgment preventing Houldsworth from serving as a corporate officer or an accountant in the United States.

The SEC complaint, filed in U.S. District Court in Manhattan, charged that on Oct. 26, 2000, AIG’s since ousted CEO, Maurice Greenberg, asked Ronald E. Ferguson (then the CEO of Houldsworth’s parent company, General Re) to assist in a securities fraud to brighten AIG’s financial picture.

The complaint detailed how as a result, Houldsworth would go on to structure contracts to make it appear AIG had bolstered its loss reserves, “even though all parties understood” that $500 million in losses being reinsured by AIG/National Union “involved virtually no insurance risk and would not qualify as reinsurance for accounting purposes.”

Greenberg, who has been questioned about the company’s accounting activities by federal and state investigators, has refused to answer questions and invoked his Fifth Amendment right against self-incrimination, according to his attorneys.

The SEC complaint states that Greenberg made clear in discussions he wanted to increase reserves without actually reinsuring and that Ferguson knew it only was going to “look like reinsurance for AIG’s accounting purposes.”

AIG announced on March 30 that it had concluded that the General Re transaction documentation was improper and, in light of the lack of evidence of risk transfer, the transactions involved should not have been recorded as insurance. AIG said then that its financial statements would be adjusted to list the transactions properly.

According to an SEC transcript of a taped telephone conversation on Nov. 14, 2000, while the deal was still in the talking stage, Gen Re Chief Financial Officer Elizabeth Monrad said to Houldsworth: “Well, I think if we spend a lot of time trying to figure out how to transfer $500 million of risk, we won’t get this deal done in the time they want.”

In response, Houldsworth said: “Yeah, I mean as you say, if there’s enough pressure on their end, they’ll find ways to cook the books, won’t they?”

The transcript reflects Monrad laughing as Houldsworth says: “It’s no problem there, it’s up to them! We won’t help them do that too much. We’ll do nothing illegal.”

In fact, according to the SEC, they did a lot of things illegal–including later preparation by Houldsworth of a false paper trail to make it seem that Gen Re had proposed the transaction, not AIG.

Houldsworth also was recorded telling other executives about AIG: “You know, we can charge the $500 million for a 500 limit and get them to book that as a reserve, but I would be staggered if they get away with that.”

Gen Re Senior Vice President Richard Napier, according to an e-mail cited by the SEC, referred to the transaction as the “MRG [Maurice R. Greenberg] reserve project.”

Among others identified in the complaint with knowledge of the scheme are AIG’s vice president of reinsurance, Chris Milton, and CFO Howard Smith. Both have been dismissed by AIG.

Houldsworth–who lives and works in Dublin, Ireland–agreed to settle the criminal action by pleading guilty to one count of conspiring to misstate AIG financial statements, including some filings with the SEC.

In other news involving AIG, attorneys for Maurice Greenberg, the company’s ousted chairman, last week released a letter announcing his decision to leave the board of the giant insurer. The letter said his resignation was effective immediately.

Daniel Hays is a senior editor of NU’s Property & Casualty edition. (Additional reporting by Matt Brady.)