SEC prevails in first suit over finite insurance

By Emily Chasan

NEW YORK, May 25 (Reuters) - The U.S. Securities and Exchange Commission has won its first case over whether companies abused a certain type of insurance to hide earnings losses, it said on Friday.

The U.S. market regulator had accused an executive at cell phone distributor Brightpoint Inc. (CELL.O: Quote, Profile, Research, Stock Buzz) of scheming to overstate the company's actual earnings through improper use of an insurance policy.

After a four-day trial, a New York jury found the defendant in the case, Timothy Harcharik, the company's director of risk management, liable for aiding and abetting Brightpoint's fraud and other violations of securities laws, the SEC said.

In November, insurer American International Group Inc. (AIG.N: Quote, Profile, Research, Stock Buzz) agreed to pay $126 million to settle U.S. Department of Justice and SEC allegations that it sold products that helped PNC Financial Services Group Inc. (PNC.N: Quote, Profile, Research, Stock Buzz) and Brightpoint inflate earnings.

The SEC has been probing into whether insurers sold policies akin to business loans that might have helped companies camouflage earnings weakness.

In these situations, rather than turning to a bank for a traditional loan or selling corporate debt, the company would borrow money from its insurer. The loan would then be repaid in the form of increased premiums for traditional insurance, falling into the category of finite risk insurance.

Several insurers have received regulatory subpoenas or requests concerning the products, including Ace Ltd. (ACE.N: Quote, Profile, Research, Stock Buzz), Chubb Corp. (CB.N: Quote, Profile, Research, Stock Buzz) and Travelers Cos. (TRV.N: Quote, Profile, Research, Stock Buzz).

"Cracking down on the abuse of so-called finite insurance and reinsurance to cook the books of public companies has been a priority for us," said Mark Schonfeld, director of the SEC's New York Regional Office. "This verdict makes clear that such conduct is fraud, plain and simple."

An attorney for Harcharik could not be immediately reached.

U.S. District Judge Harold Baer will impose sanctions on Harcharik at a later point, the SEC said.