Deloitte & Touche LLP is facing a $2 billion legal claim related to its audits of a North Carolina insurance company that specialized in reinsurance for aviation risk.
Two Japanese insurers, who were forced into bankruptcy, claim they relied on Fortress to minimize their risk. They charge that its unconventional coverage and fraudulent accounting resulted in $3.5 billion in total losses for them and another insurer, who also went bankrupt, the Wall Street Journal reported.
Deloitte denies liability. In a statement, Deloitte said that "the entire premise of this lawsuit - that two of Japan's largest and most sophisticated insurance companies did not understand their own high-risk business strategy - is demonstrably false and incredible on its face." The accounting firm said it explained the extent of the liabilities to its client, Fortress. If Fortress failed to provide the Japanese insurers with accurate information, Deloitte added, "any claim would be against their own agent, Fortress, not Deloitte."
The Securities and Exchange Commission, the Justice Department and New York Attorney General Eliot Spitzer recently have launched investigations into the industry's use of products similar to those involved in the Deloitte case. In this case, Fortress provided protection for insurance companies, which can collect on the policy if they get hit with big claims - from a plane crash, for example. By the late 1990s, the Fortress pool was among the world's largest players in the field of aviation reinsurance.
Sompo Japan Insurance Inc. and Aioi Insurance Co. say they discovered that Fortress was relying on "financial reinsurance." This type of coverage is cheaper and like a loan, and it had the effect of forcing the Fortress pool to absorb additional losses on every claim, the Journal reported.
Two principals of Fortress have already been convicted of fraud for using misleading accounting and the men settled with the Japanese insurers by turning over assets valued at more than $400 million.
Now the Japanese insurers believe they have convincing evidence against Deloitte - e-mails and other memos from a Deloitte actuary who questioned why the liabilities related to the loan-type of insurance weren't being recorded.
"I have a concern over the lack of recognition" of future liabilities, the actuary, John Slusarski, wrote in one 1999 e-mail quoted in plaintiff filings. A year later, he put the value of the unbooked liabilities at $1.4 billion, the filings say. The plaintiffs say Deloitte ignored the actuary's warnings.
Deloitte is expected to counter that the Japanese insurers were aware of the use of the loan-type of insurance, and actually took advantage of the unusual accounting practices to post large profits from the Fortress pool.