International
Tuesday Newspaper Review - Irish Business News and International Stories
By Finfacts Team
Mar 29, 2005, 06:30

The Irish Independent reports that Dublin-based insurance subsidiary of investment guru Warren Buffett is the subject of a major investigation.

General Re Corporation Finite, a unit of the Omaha billionaire's Berkshire Hathaway, is in talks with the Irish Financial Services Regulatory Authority (IFSRA), along with other regulators, over matters concerning a controversial type of insurance product it offered called finite reinsurance. Yesterday the Dublin unit had no comment to make.

However, it is understood to be actively working with IFSRA and other regulators to resolve any outstanding issues. IFSRA is understood to be working with New York Attorney General Eliot Spitzer, the Securities and Exchange Commission, and the US Justice Department, as well as Australian and British regulators.

A spokesperson for IFSRA was unavailable to comment yesterday.

The probes have focussed on transactions made by Berkshire insurance affiliates and, in particular, a unit of General Re's Dublin office, a report in the New York Times claimed yesterday.

It is examining transactions involving this unit, (based in La Touche House in the IFSC) which may have led to the collapse in 2001 of HIH Insurance Ltd, Australia's second-biggest general insurer.

Australian regulators claim that a company named FAI used finite reinsurance products to feign profitability before HIH bought it in 1998.

HIH subsequently collapsed as a result of buying FAI and other problem companies.

Insurers buy reinsurance to limit their exposure to large claims.

The Irish Independent also reports that a row between the Irish Dental Association (IDA) and the Competition Authority over allegations that member dentists have been advised to boycott a new VHI DeCare insurance scheme is set for the High Court next month.

The case will be heard on April 26 and follows a six-month investigation by the Competition Authority, which was sparked by a complaint by VHI DeCare that the IDA was blocking the introduction of the scheme. It is the first major dental insurance scheme to be introduced to Ireland.

The Authority claims that the IDA has made informal and formal contact with members advising them not to complete the DeCare claim form, unless a negotiated agreement on the form is reached with the association.

The IDA has shied away from commenting on the row. However, it is understood that the body will deny that it is boycotting the scheme, but will claim that it has concerns on the adequacy of the documentation dentists have to fill out in an Irish context.

According to dentistry sources, the forms used by DeCare are based on the American system of denotation, which is different from the British and Irish system.

Dentists have been advised not to sign the form, but instead issue detailed receipts. One source said this demonstrated that the IDA was not against the scheme, but was unhappy with the form itself.

In a highly-litigious environment, dentists are wary of signing their names to any forms or documentation, and the IDA is seen by some as protecting its members.

One Cork-based dentist commented that the forms put the onus on the professional rather than on the patient and would be time consuming.

The Irish Times reports that the IRA is using untraceable money stolen from the Northern Bank robbery last December to buy properties for cash in the United Kingdom, the Government believes.

The £26.5 million was quickly broken up into "five or six parcels" in the days after the December 20th raid to help the IRA in its effort to "launder" the banknotes.

They believe each parcel was to be laundered separately. The property-buying operation went into action shortly after the bank raid, a senior Irish political source told The Irish Times.

"They are finding properties and then using frontmen to buy them and sign for the deeds," the source said.

In a bid to evade the UK's anti-money laundering legislation, the IRA has concentrated its efforts on cash-strapped property owners who need to sell quickly.

The laundering legislation requires estate agents and others to declare all transactions over £10,000 to the Financial Intelligence Division of the National Criminal Intelligence Service.

The NCIS in 2003 was told of 100,000 such transactions and this number is understood to have increased rapidly since, particularly after the laundering legislation was further tightened in March 2004.

Meanwhile, the IRA also managed to launder a significant element of the bank haul at the four-day Cheltenham races, where up to £1.5 million was bet on each of the races.

The focus of the investigation - which involves the Criminal Assets Bureau and the Garda Bureau of Fraud Investigation - has now broadened considerably as gardaí try to identify businesses around the country which may have been used to launder the money.

The Irish Times also reports that medical devices giant Boston Scientific has agreed to mediation in its row with Israeli supplier Medinol over a secret Irish plant that replicated stents produced for the US company by Medinol.

However, it has denied reports in the Israeli media that it has offered nearly $1 billion (€777 million) to end the dispute.

"The two companies have agreed in recent days to the selection of a mediator but no negotiations have yet taken place," said Boston Scientific spokesman Paul Donovan.

He rubbished reports in Israeli newspaper Yedioth Ahronoth that it had agreed a hefty settlement with the Israeli group, dismissing the figures as "neither justified nor realistic".

"We have had no discussions with Medinol for quite some time regarding settlement of our disputes and we have made no settlement offers of any kind or amount," Mr Donovan said.

The dispute arose over a secret operation based in Ireland to copy a Medinol machine used to produce the coronary stents - devices that hold open arteries after surgical procedures.

To do so, Boston Scientific set up an elaborate system of front companies to disguise what it was doing even from most of is own staff.

The operation, called "Project Independence", only emerged when US Department of Justice investigators visited the US group's Galway plant on a separate matter.

The Irish Examiner says that the Irish economy will have the fastest growth rate in the developed world over the next 15 years, a major study from Deutsche Bank reveals.

Out of 34 countries survey by the bank, Ireland will surge pass every economy in the Organisation for Economic Cooperation and Development (OECD) area and will have the sixth fastest-growing economy overall.

It predicts that gross domestic product will expand by at least 3.8% every year, faster than the rate in the US, Britain and other Eurozone bloc members.

However, because much of the economy depends on foreign investment, with many companies sending their profits out of the country, the average income per head will still lag behind the US. We will, though, have the second-highest income in the world at just under $50,000 each.

The Irish Examiner also reports that the eurozone's Harmonised Index of Consumer Prices (HICP) may have risen above 2% again in February, but in reality the figures should be of great comfort to the ECB.

The core Harmonised Index of Consumer Prices (HICP) rate, which excludes energy and unprocessed food, fell to 1.6%.

Thus, having been stuck at 2% or above for a number of years, core inflation has at last decelerated to well under 2%. The recent decline reflects two factors in particular. First, increases in administrative health charges in early 2004 have now dropped out of the annual rate. Second, clothing prices have declined recently.

Indirect tax hikes are contributing to high alcohol and tobacco price inflation, which is running at 7.2% in year-on-year terms. If these goods, which comprise just 4% of the HICP, are also excluded, then underlying core inflation is now running at just 1.3%.

Despite all this good news, it would appear that the ECB Governing Council is itching to raise official interest rates.

One should not be surprised by such a low inflation rate given the weakness of consumer spending and wage growth and the strength of the euro. As things stand, high oil prices are the main factor keeping headline inflation above 2%.

The Financial Times reports that Japan’s jobless rate rose in February while household spending fell, government data showed on Tuesday, highlighting an unstable recovery from last year’s economic recession.

But analysts and government officials said there was no need to be too pessimistic, since employment conditions were still in a long-term recovery trend and spending figures were skewed by last year’s being a leap year.

The seasonally adjusted unemployment rate rose to 4.7 percent from January’s 4.5 percent. The market’s median forecast had been for no change.

“Given the rapid improvement in the jobs market, it’s not surprising to see a pause,” said Seiji Adachi, senior economist at Deutsche Securities.

The jobs-to-applicants ratio for February stayed unchanged at 0.91, meaning 91 jobs were available per 100 applicants.

A government official said he was unsure why the jobless rate rose in February, adding that it may not be an accurate reflection of the latest business conditions.

“The recent trend is that when the economy worsens, the unemployment rate goes up, but when the economy improves, it does not necessarily go down,” the official said.

The FT also reports that the value of global mergers and acquisitions activity fell 23 per cent in the first quarter compared with the previous three months as Europe failed to keep up with the pace of deals in the US and Citigroup experienced an embarrassing drop in adviser rankings.

The volume of M&A activity worldwide declined from $670bn in the last quarter of 2004 to $513bn so far this year, according to preliminary figures from Thomson Financial, the data

The New York Times says in an article on business ethics, that two senior investment bankers at Bank of America were summoned to a meeting this month where their boss, visibly uncomfortable and flanked by bank lawyers, read them a statement. They were both dismissed and asked to leave the building immediately. The decision was final.

Stunned, the bankers asked if they had broken any regulations. No, they were told. Nor had they traded on any inside information. Within the hour, they had turned in their BlackBerrys and laptops and were on their way home to the suburbs.

In the ruthlessly competitive world of investment banking, these two men had been doing what presumably was their job. Acting on a tip from a rival banker, they had called a company preparing to merge with another and asked to get in on the deal. In a different era, such an action might well have been seen as an example of what hungry bankers do to secure an edge with a client and maybe even a better bonus - not an inappropriate use of confidential information and cause for termination.

But with regulatory scrutiny heightened after the collapse of Enron and other companies, corporations and their boards are adopting zero-tolerance policies. Increasingly, they are holding their employees to lofty standards of business and personal behavior. The result is a wave of abrupt firings as corporations move to stop perceived breaches of ethics by their employees that could result in law enforcement action or public relations disasters.

"We are in a regulatory frenzy," said Ira Lee Sorkin, a senior white-collar crime lawyer at Carter Ledyard & Milburn in Manhattan. "Corporations are acting out of fear and they don't want to take a chance that employees did something wrong under their watch, so they are basically cleaning house. Someone has to say enough."

The seemingly frantic reach for the moral high ground is driven as much by self-interest as any attempt at righteousness, now that boards and chief executives have seen how public scandals can torpedo stock prices, alienate customers and end careers.

The reasons for the dismissals vary widely, ranging from actions that are potentially illegal to conduct that is unseemly. Last week, for example, Thomas M. Coughlin, a former vice chairman and director, was forced to resign from Wal-Mart Stores over questions relating to his knowledge of corporate gift card and expense account abuses. Wal-Mart also referred the case to the Justice Department. Earlier this month, insurance giant American International Group fired two senior executives for refusing to cooperate with a regulatory investigation.

At Boeing, Harry C. Stonecipher, the chief executive, was abruptly pushed out this month by his board for having a consensual affair with an executive, behavior that in a more permissive time might even have been winked at.

"There is a new kind of Puritanism," said Marjorie Kelly, editor of Business Ethics magazine, replacing what Ms. Kelly said was an era of "arrogance and ignorance, an attitude that boys will be boys."

There are exceptions, of course. After paying a $300 million fine to settle charges by the Securities and Exchange Commission that it overstated advertising revenue, Time Warner elected last week not to dismiss the executives, including the chief financial officer, who approved the fraudulent accounting. The three officials settled separate charges of securities law violations without admitting or denying guilt.

But the reaction has been most severe on Wall Street, where investment banks, mutual funds and insurers have felt the sting of legal prosecution for ethical lapses most acutely.

Bank of America, which has paid nearly $1 billion in fines over the last year, in many ways exemplifies this trend. Earlier this year, the bank acted in a similarly extreme fashion when it fired a highly regarded bond analyst, Andrew Susser, for his stab at humor in compiling a research report on the casino and lodging industry. On its cover, which carried the title "Checking In," Mr. Susser's face was superimposed over the body of a woman in a cocktail party dress and heels, as he was carried over the threshold by another man. There is no evidence that any client complained. Instead, the bank concluded on its own that the image was inappropriate.

It is not only Bank of America that is cracking down.

Citigroup, which has been plagued by a series of ethical lapses by its employees and has suffered a decline in stock price as a result, recently fired three senior executives after the breakdown within the firm's private banking unit in Japan. Japanese regulators forced Citigroup to close its private bank, based in Tokyo, because of numerous violations, stemming from a lack of internal controls, including potential money laundering in one account. One of the fired executives, Thomas W. Jones, has filed a lawsuit against a consultant who wrote an internal report on the matter. Mr. Jones said he was not at fault.

Next month, Citigroup will start an online ethics training program that will be mandatory for all of its 300,000 employees.

The NYT also reports that insurance giant severed all ties last night with Maurice R. Greenberg, the irascible executive who had built the company into a global giant over four decades.

Stripped of his chief executive title two weeks ago, Mr. Greenberg, 79, informed the board last night that, upon his return from Europe, he would retire as nonexecutive chairman of the board, according to a letter from his lawyer, David Boies, to Richard I. Beattie, a lawyer at Simpson Thacher & Bartlett, who is representing the independent directors.

Mr. Greenberg will not run for re-election as a director after his current term expires in May. The first draft of the letter announcing his retirement was written on Thursday. He was forced to step down as chief executive on March 14 after directors learned of a transaction with General Re that he initiated in 2000; the transaction made the company's financial position appear stronger than it really was.

Frank Zarb, the lead director, will assume the duties of chairman as the company considers who to elect. In a statement, Mr. Zarb said: "Hank Greenberg leaves this company one of the strongest and most skilled competitors in the business. We thank him for one of the most spectacular performances in any business career."

The news about Mr. Greenberg followed several tumultuous days for the company as regulators stepped up their investigation. The Securities and Exchange Commission and the New York attorney general's office have been poring over dozens of transactions with scores of reinsurance companies to determine how many transactions A.I.G. might have used to bolster its bottom line.

So far, an internal investigation has uncovered nine transactions, which were described to regulators in a conference call yesterday. Others may still be found.

In a conference call yesterday to update regulators, A.I.G. conceded that it had misled New York State insurance regulators about at least one of those transactions, two people briefed on the meeting said. It is unclear what transactions were at issue.

On Friday, the S.E.C. and the New York attorney general's office sent a new round of subpoenas to A.I.G. requiring the company to produce details of any transaction done with an offshore reinsurance company that A.I.G. could have controlled.

Then, over the weekend, the attorney general's office and the S.E.C. sent subpoenas to the Bermuda-based Starr International and C. V. Starr, two privately held entities that are controlled by A.I.G. executives, two people briefed on the investigation said.

Regulators were alerted by A.I.G.'s lawyers about the possibility that documents were being removed from the building. That call served as a catalyst to regulators who immediately issued the subpoenas, which means any document destruction or improper removal would be considered destruction of evidence.

In the letter to the board, Mr. Boies, who is representing Mr. Greenberg, said that "in order to lead meaningful changes in the industry and at A.I.G., the company and its officers and directors must resolve any outstanding questions or issues and move forward. To that end, Mr. Greenberg recognizes the need to promptly and cooperatively resolve all inquiries and investigations by regulators and other authorities."

In an interview, Mr. Boies, said regulators did not press for Mr. Greenberg's final split with the company. "It was his decision," Mr. Boies said, describing Mr. Greenberg as "comfortable with his decision."

"Moving on doesn't describe it because he's almost 80 years old and he's not retiring to pursue other business interests," said Mr. Boies, who spent the weekend shifting his attention from a deal that would sever the ties of Bob and Harvey Weinstein with Disney, to the Jets' bid to build a football stadium in Manhattan to Mr. Greenberg's decision. Mr. Greenberg is set to appear before regulators on April 12.

Eliot Spitzer, the attorney general of New York, said late yesterday:

"While there is a long way to go before this investigation is complete, the wise actions of the A.I.G. board will help set this investigation on a path toward resolution. I commend the A.I.G. board for acting in a way that sets it apart from other boards that have faced similar problems in recent years."

Mark K. Schonfeld, director of the S.E.C.'s Northeast division, which is handling the A.I.G. investigation, declined to comment.