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AIG Fraud Case: Using the Market To Set Jail Terms

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In coming weeks, five former insurance executives, including General Reinsurance ex-CEO Ronald Ferguson, are due to appear in federal court in Hartford. There, U.S. District Judge Christopher F. Droney will sentence them for their role in a sham transaction to boost the loss reserves of American International Group (NYSE:AIG - News). When the deal was disclosed in 2005, prosecutors contend, it caused AIG's share price to drop 6% to 15%. Because of that, the defendants, who were convicted of fraud in February, could go to prison for life.

While the case involves events that seem far removed from the present financial crisis, it highlights an issue that's sure to be front and center if prosecutors seek retribution for the market losses of recent weeks. Under federal guidelines, the base-level sentence for someone convicted of securities fraud is zero to six months. But a variety of factors can increase time behind bars -- including the size of shareholder losses, the number of victims, and whether a defendant is an officer or director at a public company. In reaction to the implosion of Enron, WorldCom, and other scandals that cost investors billions, lawmakers sharply raised the potential penalties in 2003. Now, instead of a few years in prison, fraud that results in stock losses exceeding $400 million could earn a defendant a life term.