Buffett could be called as witness in 2008's first major legal battle

The trial of five former executives of General Re started this week in what promises to be one of the most scrutinised legal cases of 2008.

On Monday the trial opened with prosecutors alleging that Ronald Ferguson, GenRe's former chief executive, conspired to inflate American International Group’s (AIG) loss reserves and deceive investors.

Prosecutors also allege that these fraudulent reinsurance transactions were conducted with the knowledge of Warren Buffett, Gen Re’s CEO and president, which has sparked widespread media interest and a slurry of “Did he know?” headlines.

Ferguson is charged along with four other executives - Robert Graham, former Gen Re senior VP and legal counsel, Christopher Garand, former senior VP, Elizabeth Monrad, former chief financial officer, and Christian Milton, AIG’s former VP for reinsurance.

The defendants are accused of using a string of bogus reinsurance deals to help AIG inflate reserves by some $500m between 2000 and 2001.

In lying on its balance sheet, AIG could potentially have deceived investors.

Defence lawyers argue, meanwhile, that the defendants believed they were involved in a legitimate deal.

They also argue that rather than the “no risk” deal that was alleged to have been stuck, the agreement made in 2000 was actually a finite risk contract.

Also implicated in this case is former AIG CEO Maurice “Hank” Greenberg who was ousted from the company in 2005 after admitting other accounting irregularities within AIG.

Assistant US attorney Raymond Patricco alleged in his opening remarks that the defendants had created a fake paper trail to cover the fact that Greenburg had initiated the transaction in a 2000 phone call to Gen Re’s Ferguson.

"The goal of this conspiracy was to help AIG lie," said Patricco.

Although identified as a co-conspirator in this case, Greenberg has not yet been charged. Buffett has also escaped any charges of wrongdoing and has maintained his innocence from the outset.

The trial continues.