AIG COULD NOT STAY OUT of trouble. After pursuing the PNC-AIG Financial Products for two years, from 2002 to 2004, the Department of Justice and Paul Pelletier spent the next frustrating six years trying to corral what they were convinced was the serially law-flouting insurance company. The next big case against AIG involved one of the biggest names in American business: Warren Buffett, one of the richest men in the world, and his giant industrial and financial conglomerate, Berkshire Hathaway.
In February 2005 Tom Hanusik, the accounting and white-collar expert who had rejoined the criminal division of Main Justice from the Enron Task Force, began investigating a questionable insurance transaction between AIG and General Reinsurance Corporation, one of Berkshire Hathaway’s companies. Gen Re specialized in selling insurance to other insurance companies, known as reinsurance, and dabbled with exotic derivatives and other complicated financial deals. The SEC and Eliot Spitzer, the New York State attorney general, also began to investigate. Hanusik went down to Richmond, Virginia, for a meeting with prosecutors at the Eastern District of Virginia and power lawyer Ron Olson, of the firm of Munger, Tolles & Olson, for materials. (Charlie Munger, the vice chairman of Berkshire and a founding partner of the firm, is a charming and curmudgeonly billionaire who has long played second-fiddle to Buffett’s grandfatherly Oracle of Omaha act.) Olson delivered a binder of documents to the prosecutors.
Hanusik didn’t have anything to do that evening, so when he got back to his hotel room, he opened up the binder. He spent two hours just putting the disorganized documents in chronological order. Then he went through them. By the end of the night, he realized what he was reading. The next day, Hanusik met again with Olson and thanked him for the materials. “Maybe I’m mistaken, but do those documents show a half-billion-dollar sham transaction?” he asked Olson. Two weeks later, Hanusik was interviewing people about the case.
Every investigation requires agents. Usually they come from the FBI, but in white-collar cases at the time, the Justice Department often drew agents from the Postal Inspection Service, a vestige from when white-collar crime often carried a mail fraud charge. Postal inspectors were a secret weapon of the Justice Department. Agents were frequently certified public accountants and experts in complex financial shenanigans. Throughout their history, the inspectors had cracked bank and train robberies. In the early 1970s, they proved that the letter written to author Clifford Irving allegedly awarding him exclusive rights to ghostwrite reclusive millionaire Howard Hughes’s autobiography was a fraud (as was the manuscript, which Irving and a writer friend invented wholesale, with no involvement whatsoever from Hughes, who then sued both Irving and his publishers). The late 1980s brought investigations into insider trading, and the unit was also instrumental in putting televangelist Jim Bakker in prison after his ministry collapsed in a sex and fraud scandal.1 By the mid-2000s, however, the US Postal Service faced desperate finances and squeezed the budgets of the inspection units.
Hanusik and a postal inspector named James Tendick worked the case, interviewing other top AIG and Gen Re executives. They brought in Buffett for an interview in the Woolworth Building in downtown Manhattan, giving him a “queen for a day” proffer. Under such an agreement, the government immunizes a witness temporarily to free him up to speak frankly. Buffett gave good shtick but was otherwise unhelpful to the investigation. The Oracle did help himself, though, managing to convince the prosecutors that he knew little about the details of the transaction.
Despite having no luck with Buffett, Hanusik and Tendick began to excavate what had happened. The autocratic chairman and CEO Hank Greenberg led AIG. He had his insurance company manage its earnings to the penny a share, never daring to miss Wall Street estimates. If the Street was paying attention to another financial performance measure, it appeared to the prosecutors that Greenberg had his company massage those figures as well. In 2000, analysts and investors worried that AIG was manipulating the money it reserved to pay out insurance claims, a measure called “loss reserves.” Investors want to see the loss reserves going up in conjunction with new business. If the company isn’t reserving, it may face big losses in the future from all the new insurance contracts it is writing today. Even though AIG was writing new insurance business at a good pace, loss reserves were falling. Investors thought AIG might be drawing down its reserves to boost its earnings.
In October 2000, to quell the disquiet, Greenberg called up Ronald Ferguson, the head of Gen Re. The two struck a deal: AIG entered into two sham transactions with Gen Re worth $500 million—deals designed to appear like insurance but, in fact, were merely loans to AIG. For its part, Gen Re charged a secret fee and AIG took on no risk. Thus, the deal boosted AIG’s loss reserves without it taking a hit to earnings. Greenberg would insist that the deals he discussed were not shams and that he did not order a risk-free transaction. Like Buffett, but less credibly, he contended that they didn’t know the details.2
Spitzer remained unconvinced and pressured the AIG board to get rid of Hank Greenberg. In March 2005 he succeeded: the board forced the CEO to step down from the company he’d built. In his tenure as New York attorney general, Spitzer regulated the financial world aggressively, often outpacing and embarrassing the Feds. (He also got in the way. In another AIG investigation, he immunized an executive, inadvertently stymying a Department of Justice probe.) In May AIG said it realized that there hadn’t been any transfer of risk and restated its earnings for the entire period the deal had covered.
Meanwhile, Hanusik pounded away on the criminal case. He had learned from Michael Chertoff that the most important factor in a white-collar investigation was to keep the momentum going. In early June Hanusik reached plea agreements with two executives from Gen Re. Now the government had two executives who would testify that they knowingly helped AIG misstate its finances. The prosecutors also had tapes, containing evidence they viewed as dynamite. The tapes indicated that executives understood the deals were about manipulating earnings and not substantive insurance transactions. Proving that executives knew what they were doing was wrong is the single biggest challenge of any white-collar case. Elizabeth Monrad, then General Reinsurance’s chief financial officer, said on tape that the company would have “a tough time getting the accounting they want out of the deal” in a November 2000 conference call. Monrad said, “These deals are a little bit like morphine. It’s very hard to come off of them.”3
The AIG–Gen Re probe started promisingly. But the saying at the department is “Big cases, big problems.” Usually that means political problems within the bureaucracy. AIG–Gen Re was as big as they come. Plenty of offices had a tangential claim to jurisdiction on the case and wanted in. The deputy attorney general’s office is in charge of adjudicating Department of Justice turf battles. Paul McNulty, then the US attorney for the Eastern District of Virginia, pushed to participate in the case. Hanusik wasn’t happy. Adding a new prosecutor meant getting him or her briefed on the complexities, slowing momentum. Sure enough, an assistant US attorney named Ray Patricco was added. The prosecutors waded through the tar of the investigation as the prey fled. Hanusik fretted that the executives weren’t feeling enough pressure.
After securing the plea agreements, Hanusik left the department to go into private practice. Colleen Conry, then a ten-year veteran of the Department of Justice, with several highly complex litigations on her résumé, picked up the case. Paul Pelletier, now the deputy chief in the fraud section, thought highly of her. She felt the same about him. Conry leaned on Pelletier for advice.
Pelletier emphasized that on such a serious case, the department had to go after the highest-ranking culpable people. He and Conry believed they could deter executives from committing white-collar crime if they saw their colleagues go to jail. Pelletier hadn’t been able to prosecute individuals in his previous case against AIG over the PNC matter, but he wanted the department to concentrate on individuals here. The two of them knew what that meant: an enormous commitment of time, energy, agents, and money. Pelletier helped Conry game out who should be included in the initial indictments. Was there clear evidence each executive intended to do something wrong? What were the weaknesses of the case? How will the defense counter?
Pelletier was tearing a swath through Washington just as he had done in Miami. His mantra was “Thin to win,” the great trial wisdom that Peter Fleming had advocated in the United Brands case decades earlier. Pelletier advised prosecutors to bring simple charges and few of them. Hold short trials with only the necessary witnesses. Make matters as clear for the jury as you can. He’d hear prosecutors expecting a three-month trial and, without knowing anything more about the case, predict they were going to lose. Invariably, they did. “Anything over six weeks, the trial turns into a shit-show, and you risk losing the jury,” he says.
But the key to a good trial was a good, strong investigation. Pelletier had an adage: “Indict and good things will happen.” In white-collar cases, it’s too easy for a prosecutor to keep investigating, ever so deliberately, fearing there is something he or she doesn’t know while hoping that somewhere lies a nugget of golden evidence to uncover. This resulted in investigations that lasted years, until the case was so old that all the department could do was plead out this or that little scrap and claim victory. The Pelletier motto was the antidote. In Miami, they said in law enforcement, B-plus work brings A-plus results. His troops thrilled to the Pelletier Way, while supervisors and the genteel defense bar did not. The attitude posed hazards. The gambling prosecutor risks losing. Sometimes it’s necessary to cancel membership in the Chickenshit Club, as Jim Comey had laid out in his famous speech. But supervisors did not like it. And an aggressive prosecutor attracted criticism—not only from the defense bar, but sometimes also from judges or the media.
For the most part, prosecutors and defense attorneys, especially in Washington and New York, speak a common language. They understand that they negotiate for a living. Each side stakes out an extreme position and then works its way to the middle. It was comfortable and well understood. Paul Pelletier didn’t speak that tongue. He didn’t understand it or believe in it. He didn’t seek the defense bar’s approval. He might not be able to make and keep friends from the defense bar, but he was a damn good friend to good prosecutors. He had a knack for putting together investigative and trial teams, for motivating and supporting people, and for bringing cases to fruition. If you couldn’t do that, you were a “paycheck thief,” and he devoted himself to driving you out of government.
In 2005–06 Pelletier supervised the Jack Abramoff case, in which the Department of Justice prosecuted for corruption one of the most powerful Republican lobbyists and his network of businessmen and politicians. The fraud section teamed up with the sleepy Public Integrity Section to carry out the investigation. (Internally, the section was called PIN, but Pelletier called it PIS: “Prosecutors Interested in Sleeping.”) The case involved politically fraught and sensitive work. In such an investigation, the best protection prosecutors have against accusations of partisanship or bias is to do what they always do. That came naturally to Pelletier. He didn’t know any other way to conduct prosecutions.
But he was lost when trying to manage the delicate internal politics. Pelletier remained in a constant state of fury at what in his view was some of his colleagues’ frequent incompetence. At one point, the front office, where the political appointees resided, gathered the teams together to get them to make nice. Pelletier’s younger colleague, Guy Singer, was, to Paul’s mind, overly deferential to the other guys. Pelletier listened for a while as Singer agreed to this and agreed to that. Singer was happy enough to make minor concessions to get what he wanted out of the meeting. Pelletier did not have that gene. He could feel his neck tightening and his ears flushing in consternation. As the meeting droned on, he sent a note to Singer: “If you agree one more time, I am going to rip off your head and shit down your neck.”
In the summer of 2004, the FBI requested the fraud section’s help in its investigation of Qwest Communications, a darling telecom company out of Denver that had engaged in accounting fraud that boosted revenue by $3 billion. The local US Attorney’s Office in Colorado had just lost a related trial that put a subsequent case against the CEO, Joseph Nacchio, in jeopardy. Pelletier and his colleagues determined the office had the wrong theory. Prosecutors wouldn’t be able to make an accounting fraud case, but they could indict Nacchio for having dumped over one hundred million shares when he knew that the company wouldn’t hit its earnings targets. In December 2005 a grand jury indicted Nacchio on forty-two counts of insider trading.
Pelletier thought forty-two counts far too many. But what was done was done. He helped the prosecutors on the trial tighten up their case to make it a six-page indictment and reduce the trial to finish within the magic six-week window. In April 2007 they won, convicting Nacchio on nineteen of the forty-two counts. He was sentenced to six years in prison. But with white-collar executives, it’s always difficult to make these cases stick through the appeals process. The defense teams throw endless resources and efforts at challenges. In March 2008 a Tenth Circuit US Court of Appeals panel reversed the conviction. Pelletier had little doubt the panel had gotten it wrong. The department was ready to give it up, but he relentlessly pestered the appeals lawyers and the Solicitor General’s Office in the Department of Justice. He argued to push the case to take it “en banc”: to a session in front of the entire court rather than the three-judge panel. His instincts turned out correct. In February 2009 the full Tenth Circuit appellate court reversed its panel, reinstating both the conviction and the sentence. Nacchio served more than four years in prison.
When Josh Hochberg, a studious and mellow career prosecutor, left as head of the fraud section in 2005, Pelletier wanted the promotion. As Alice Fisher, head of the criminal division, mulled her choice, Pelletier assumed the role as acting chief. Anyone else would have moderated his style, quieted down on occasion, and broken bread with his enemies within the department. Not Pelletier. He rampaged through his investigations, backing his people and making sure they all knew what he thought of them.
Fisher couldn’t bring herself to put him in charge. She brought Pelletier in to the office and sat him down. She offered him the principal deputy position. “Let’s celebrate,” she said and pulled out a bottle of wine.
“Celebrate? Put that bottle away! I wasn’t coming here to find out I flunked!” Pelletier said. He couldn’t hold back tears. The job went to his friend, another career prosecutor, Steven Tyrrell.
Prosecutors brought indictments of four Gen Re executives in February 2006, including the former CEO of Gen Re and the chief financial officer. But Colleen Conry was having problems getting along with the Eastern District’s Ray Patricco. The assistant US attorney kept suggesting that he could go over her head and hinting that he was friends with Paul McNulty, the former US attorney in the Eastern District of Virginia—who was now deputy attorney general at Main Justice. Pelletier tried to defend Conry, but she wanted off the case. He set about trying to fix the AIG–Gen Re investigation.
The defendants wanted to move the venue from Virginia to Connecticut, where Gen Re was based. A third US court district got involved, Connecticut, which, of course, meant it had to put its people on the case as well. Now it was a clusterfuck, squared.
In late summer 2006, Pelletier found a Main Justice prosecutor, Adam Safwat, to put on the case. Safwat, who had just joined from the Delaware office, had experience investigating white-collar and corporate fraud. He was a perfect Pelletier foil: even-keeled where Pelletier was emotional, and he had a fetish for detail, while Pelletier could see the big picture.
The prosecutorial team spent the rest of the year putting the case together, arguing about strategy with the other offices as much as they spent investigating. Safwat and Pelletier had little respect for Patricco. They weren’t alone. The agents working this case were also unimpressed with the Virginia and Connecticut folks. On one call, the squabbling was so acute, the postal inspector James Tendick yelled out, “Guys, what the fuck is going on here? Get your shit together!”
In the spring of 2007, Safwat and Pelletier flew up to Hartford for a meeting with Patricco to go over pretrial conferences and motions. The two arrived around midnight and jumped into a taxi to go to New Haven for their meeting the next morning. Pelletier took out a little notebook. Over the next forty-five minutes, they sketched out trial strategy and fixed the witness list. Initially, Patricco and another prosecutor had identified seventy people as potential witnesses. The prosecutors wouldn’t have gotten to the main focus of the trial for two or three weeks—intolerable for a jury. Safwat and Pelletier whittled the list down to ten. Patricco proposed starting with agents describing which documents they’d compiled and where they’d obtained them. Amateur stuff, they thought!
Pelletier and Safwat argued that they needed to start with their main cooperator and, in the first half hour, have him lay out the fraud up front to the jury. Then, after the jurors have heard the prosecution narrative, they could backfill the chronology and fill in the witnesses as necessary. Research suggests jurors make up their minds in the first moments of a trial and then interpret the remaining evidence in a way that confirms their initial impression.
They didn’t settle the matter at the meeting, however. It took knocking heads for the rest of the year before Pelletier and Safwat prevailed in setting the case strategy they had outlined in the cab ride.
As Pelletier and Safwat continued with their prosecution of AIG and Gen Re, problems roiled the Department of Justice. In February 2005 George Bush appointed Alberto Gonzales to succeed John Ashcroft as attorney general. Cronyism and incompetence marked his short tenure of two and a half years. In November 2007, two months after Gonzales had stepped down, the Justice Department’s Office of the Inspector General decried the lack of confidence in the institution. He cited scandals such as the administration’s political purge of US attorneys after Bush’s reelection in 2004 and the department’s improper hiring practices for career positions. At the time, only three of eleven presidentially appointed top Justice Department positions were filled.4
White-collar prosecutions suffered from not just a leadership vacuum but also a resource drain. During the years after 9/11, the Department of Justice took money and people away from white-collar investigations, and that shift continued through Gonzales’s tenure. The FBI transformed from a domestic investigative body to an international intelligence agency, focused primarily on terrorism. In May 2002 the FBI revamped its priorities and shuffled its staff accordingly. In a list of its top ten priorities, the agency listed first: “Protect the United States from terrorist attack.” Number two was “Protect the United States against foreign intelligence operations and espionage.” Coming in at seventh, after cyber crime and public corruption: “Combat major white-collar crime.”
Between 2000 and 2004, the FBI moved 1,143 field agents from traditional areas—including drugs, organized crime, and white-collar crime—into terrorism. Notionally, the bureau’s number of white-collar agents fell only by about 120. But in addition to the formal reassignments, the agency reduced the workload of 1,200 agents who remained in the traditional areas so they could help with terrorism probes. The shifts affected about a quarter of all agents.5 The Postal Inspection unit, which had been so helpful to the Southern District and Main Justice, retreated from complex corporate fraud investigations. The Post Office changed course to have its remaining agents investigate simple mail fraud. As a result of the leadership vacuum during this period, the Department of Justice struggled with white-collar cases because of prosecutorial inexperience and incompetence, and because it overreached in its notions of what was criminal.
Another scandal began brewing in July 2008, during the waning months of Bush’s second term. A grand jury returned a seven-count indictment of the powerful and long-serving Alaskan senator Ted Stevens for failing to disclose hundreds of thousands of dollars in gifts, including home renovations, from a local businessman. As Bush left office and Obama came in, the case fell apart. Prosecutions operate under a set of rules to preserve the constitutional rights of the investigated and accused. The government must give the defense the evidence it is relying on to build its case, called Jencks material, after a 1957 Supreme Court case. More significantly, the government must give over all exculpatory information it uncovers to the defense, or so-called Brady material, after a 1963 Supreme Court case. The Giglio rule, from a related 1972 Supreme Court case, holds that prosecutors must tell the jury about any deals they have made with witnesses not to prosecute in exchange for testimony.
Eventually the court found that prosecutors in the Stevens case violated the Brady and Giglio rules. The judge threw out the case. Eric Holder would request in 2009 that the judge dismiss the Stevens charges. Tragically, in the fall of 2010, one of the prosecutors on the case committed suicide. In 2012 a court-appointed special prosecutor would write that at least two federal prosecutors had “intentionally withheld and concealed” evidence from the defense team that would have helped the late senator’s defense. (Stevens lost a bid for reelection in 2008 and then died in a plane crash two years afterward.) Lower-level prosecutors were blamed. Supervisors escaped. The message was clear: be cautious in any high-profile case. All prosecutors worried a little about losing cases. But the Stevens debacle held a more acute lesson: a trauma like that might destroy your career and drive you to suicide.
In January 2008, as the department’s chaos swirled, Pelletier’s and Safwat’s trial of five executives—four from Gen Re and one from AIG—began. When the prosecutors got to court, it was hard not to be intimidated. Defense lawyers love to talk up the might and terror of government power, which is true in some respects. But in this case, there were five defense teams. The cables for the computers blotted out the legs of the tables. An army of associates, administration, support helpers, and jury experts sat behind the lead lawyers. At the opposing table sat the handful of poorly paid government workers who didn’t get along very well.
Ray Patricco took the testimony of the star cooperator from Gen Re, senior vice president Richard Napier. Patricco started off with the Pelletier model—getting him to lay out the fraud—but then seemed to forget about the jury. He walked Napier through dozens of documents; so much material that the jury was visibly slack jawed. During a break, one of the defense attorneys joked with a member of the prosecution team, “Please save us from this misery!” At another point in the trial, after a long and detailed session with another witness, Patricco pulled out yet another binder of materials. A juror rolled his eyes as if to say, “Oh my God, here we go again!”
During Napier’s initial testimony, Patricco pushed the witness just a little further than the Gen Re executive had been before, to recall facts over which he did not have full command. The defense pounced. On cross-examination, Reid Weingarten, who was representing Gen Re executive Elizabeth Monrad, exposed Napier. Weingarten was defense bar royalty, having represented numerous CEOs and cabinet officials. In a small-world connection, Weingarten had hired Patricco to be a junior lawyer on his team at his firm, Steptoe & Johnson.
Now Weingarten outflanked his one-time protégé. On the stand, Weingarten forced Napier to acknowledge some mistakes. Though the Gen Re executive didn’t recant his allegations, the defense damaged his credibility. After the cross-examination, the prosecution team and the agents huddled in a room. They were miserable. Patricco lay dazed on a couch. Another prosecutor fumed about how Napier had botched matters for them.
Pelletier calmed down everyone. He sketched out how to do the redirect, in which the prosecution gets a limited chance to revisit the issues the defense brought up in the cross-examination. Pelletier walked through how to focus the questions and how to deal with the way the defense impugned Napier’s credibility. Patricco’s redirect was effective.
The prosecutors jockeyed for position throughout the trial. Initially Pelletier had responsibility for the final rebuttal, but Patricco wanted it, too. The US attorneys from Connecticut, the Eastern District of Virginia, and the head of the criminal division, Alice Fisher, held a conference call with the prosecutors and agents. She resisted, but they decided to give the rebuttal to Patricco.
During the rebuttal summation, Patricco made a humanizing argument: that the fraud hit the stock price. He argued, “Behind every share of [AIG] stock is a living and breathing person who plunked down his or her hard-earned money and bought a share of stock, maybe to put it in their retirement accounts, maybe to put it in their kids’ college funds, or maybe to make a little extra money for the family.”
This line was a mistake. The prosecution’s argument was not predicated on the notion that the fraud had caused shareholder losses. Instead, the prosecution’s argument was that the fraud mattered to shareholders—that it was “material.” The distinction was significant but fine. Each was a different charge requiring different proof. This passage would haunt the prosecution on appeal.
Despite the tensions and the mistakes, the government brought the trial to a close in five weeks, just at the margin beyond which Pelletier believed the government lost a jury. They hadn’t lost this one. In late February 2008 the jury returned a resounding victory for the government, convicting all five defendants on all counts.
The prosecutors considered this victory only the first step. Pelletier and Safwat wanted to move up the ladder to the higher executives. They wanted to convict Greenberg, though understanding that it would be difficult. After the trial, they wanted to charge Joseph Brandon, who had been a senior executive at Gen Re when the transaction happened and had been briefed on it. Brandon was promoted to CEO in 2001 and appeared to understand the deal’s contours. Brandon was a golden boy at Berkshire Hathaway, mentioned as a potential successor to Buffett. He was a big target. Patricco argued against charging Brandon, fearing the evidence wasn’t solid enough. The government never charged him.
Hank Greenberg eluded them. The onetime CEO appointed an AIG executive, Christian Milton, to be the point man on the deal. He was convicted at trial but did not flip to give evidence against Greenberg, his chief executive. Pelletier and Safwat believed the sentences for all five were too light—“country club” sentences. Former CEO Ferguson received two years. The former CFO Monrad got eighteen months. Others got off similarly. Pelletier urged the teams to immunize the guilty executives and put them before the grand jury, forcing them to explain under oath what they knew about Greenberg’s role. That was how to work up to the top of the corporation. But the other offices rejected the tactic, arguing the evidence didn’t support the effort and thwarting Pelletier’s ambition. In 2017 a ninety-one-year-old Greenberg finally admitted the transactions distorted AIG’s books (though he still contended he had not committed fraud), in a settlement after a twelve-year-long court battle with the New York State Attorney General’s Office.
Pelletier and Safwat also began negotiating with Gen Re itself. The sides had one sticking point. Even though he had not been chief executive at the time of the deal with AIG, Brandon, the current Gen Re CEO, had known about it. Pelletier and Safwat explained to the company and its attorneys that the government could not enter into a resolution with Gen Re if the company had the same CEO who had been there for the fraud. They never came out and said that the company needed to get rid of him, but—come on!—the board shouldn’t oppose the concept, they thought. Instead, the defense team cried foul, citing the KPMG case.
From then on, Safwat and Pelletier became ultracautious in every conversation with Gen Re and AIG’s counsel. Prosecutors avoided any mention of lawyers’ fees, joint defense agreements, and the employment status of the executives under investigation. They were working in the post-KPMG, post–Thompson memo world. Eventually, on January 20, 2010, prosecutors reached a nonprosecution agreement with Gen Re, which paid more than $90 million. The company admitted that its senior management knew the point of the deal was to enable AIG to falsely report increasing loss reserves to both the public and the SEC.
Years later, the Gen Re–AIG case ended in frustration. On August 2, 2011, a panel of judges on the Second Circuit Court of Appeals overturned the convictions of the Gen Re–AIG executives. Dennis Jacobs, a George H. W. Bush appointee and leading libertarian on the court, wrote the ruling, determining that prosecutors had overreached in attributing stock market losses to the particular frauds they hoped to prove. Judge Jacobs manifested hostility to almost every securities law prosecution, in the eyes of the government, at least. He deemed stock charts presented in the trial prejudicial, writing they “suggested that this transaction caused AIG’s shares to plummet 12 percent during the relevant time period, which is without foundation, and (given the role of AIG in the financial panic) prejudicially cast the defendants as causing an economic downturn that has affected every family in America.” There was only one problem with this assertion: the timing was wrong. The trial had taken place in early 2008, concluding in February—a full eight months before the financial crisis hit. It would have been impossible for the jury to have been prejudiced by an event that had yet to happen.
By now, Pelletier had left the Justice Department for private practice. Safwat argued that the department should go en banc, to ask for the entire Second Circuit to review the case and panel’s decision, just as Pelletier had in the Nacchio case. Instead, the Solicitor General’s Office advised against asking the panel to reconsider. The panel corrected its factual error but upheld its decision. The Department of Justice could have then petitioned the whole court, but didn’t. It could have taken the case to trial again, but there was no appetite. A signature white-collar success had also come undone.
Before the disappointment of the loss on appeal, while Pelletier and Safwat were buried in their Gen Re–AIG investigation and trial, the global financial bubble began to feel pinpricks. Housing prices peaked in 2006, and mortgage securities began to tumble in value starting early the following year. AIG started taking losses on its mortgage securities later that year. In February 2008 the company reported a loss of $5.3 billion, the worst quarterly deficit in its history, going back to 1919. Few investors or analysts understood why the company was taking losses. PricewaterhouseCoopers (PwC) was about to report that the AIG books had a “material weakness”: a warning that investors cannot rely on a company’s numbers. AIG was hemorrhaging money on subprime mortgage securities.
Safwat and Pelletier saw the news as they waited for the jury verdict in the AIG–Gen Re case. They reached out to the company and the SEC for more information. Safwat dug in. Soon after returning to DC, he went into Pelletier’s office and told him they had to investigate.
“Is this just a valuation argument?” asked Pelletier. Cases about the value of assets on the books were notoriously difficult. These instruments did not trade, so the value had to be estimated. The prosecution could hire an expert witness to determine the value but the defense would counter with an expert of its own. The jury would then just shrug its shoulders.
“No, Paul, it’s not. I can’t quite put my finger on it, but it’s something unusual. Something very wrong happened here.”
Pelletier nodded. “Yeah, let’s go see.”
For five years, off and on, Paul Pelletier had investigated crimes at AIG. The epicenter of AIG’s current mortgage problems was AIG Financial Products, the London-based derivatives factory. Pelletier knew the unit well. He had investigated AIG FP during his probe of the PNC off-balance-sheet deals. Back then, the government hadn’t been able to find enough evidence to prove that the top AIG FP executives had committed crimes. Now it looked as if AIG FP was involved in still more dodgy activity. Again, Paul Pelletier would be investigating a man soon to become notorious as one of the people most responsible for the 2008 financial crisis: Joseph Cassano.