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S.E.C. v. Stanard, Not Reported in F.Supp.2d, 2009 WL 196023, Fed. Sec. L. Rep. P 95,053

Facts

RenaissanceRe Holdings, Ltd. (RenRe), founded by James N. Stanard, became a leading reinsurance company. Stanard, as CEO, was known for his financial conservatism. The SEC's case arose from a transaction in 2001 involving RenRe and Inter-Ocean Ltd., where RenRe improperly accounted for the transaction as reinsurance, despite it not transferring any real risk. This misrepresentation led to significant inaccuracies in RenRe's financial statements, which were later restated.

RenaissanceRe Holdings, Ltd. (“RenRe”) is a Bermuda corporation with its principal corporate office in Bermuda. RenRe specializes in writing property catastrophe reinsurance. RenRe was founded as a private company in 1993 by James N. Stanard. The company went public in 1995. By 2000, RenRe was one of the world's largest writers of excess of loss catastrophe reinsurance.

Issue

Did James N. Stanard and others commit securities fraud by misrepresenting the nature of the transaction between RenaissanceRe and Inter-Ocean, thereby violating securities laws?

Rule

The court applied the standards set forth in the Securities Act and Exchange Act, particularly focusing on the definitions of reinsurance accounting under FAS 113, which requires a reasonable possibility of loss for a transaction to qualify as reinsurance.

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.

Analysis

The court analyzed the structure of the transaction, determining that it was designed to create the appearance of risk transfer while in reality, it did not. The evidence showed that Stanard and his associates were aware that the transaction was a sham and that they intentionally misled auditors to present a false financial picture. The court found that the accounting treatment did not comply with GAAP, as there was no reasonable possibility of loss for Inter-Ocean.

The court found 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.

Conclusion

The court concluded that Stanard and others committed securities fraud by knowingly misrepresenting the nature of the transaction, leading to significant misstatements in financial reporting. The SEC's claims were upheld, resulting in penalties for the defendants.

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.

Who won?

Securities and Exchange Commission

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.

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