AmTrust and EX-CFO to Pay $10.5 Million to Settle Fraud Allegations
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On June 17, the US Securities and Exchange Commission announced charges against AmTrust Financial Services, Inc. and its former CFO Ronald E. Pipoly Jr. for failure to disclose material facts relating to how AmTrust estimated its insurance losses and reserves.
The complaint alleges that AmTrust and Pipoly disclosed the company's general actuarial process for estimating loss reserves, but failed to disclose that Pipoly made consolidated accounting adjustments that did not properly consider the actuarial analyses and diverged from the company's actuarial estimates.
The filing specifies a date range between March 16, 2010 and February 29, 2016 where the company did not disclose their process for reporting management's best estimate of loss reserves. The complaint specifies that the process was performed by AmTrust's former Chief Financial Officer Ronald Pipoly.
Under Generally Accepted Accounting Principals (GAAP), insurers are required to disclose the methodology for estimating loss reserves, which also includes major risks and uncertainties underlying those estimates, which are commonly known as "management's best estimates" (MBE).
The complaint states that although AmTrust disclosed the "general actuarial process for estimating loss reserves," AmTrust did not:
• disclose and describe Pipoly’s methodologies to determine MBE on a total and segmental basis, including all the quantitative and qualitative factors that Pipoly considered in his analyses;
• disclose the manner in which Pipoly’s process to determine MBE on a total and segmental basis diverged from the actuarial analyses of AmTrust’s internal and external actuaries; and
• disclose that Pipoly’s process included consolidated accounting adjustments that diverged from internal actuarial estimates to report MBE in the Company’s consolidated financial statements (“MBE Adjustments”), including the total and segmental amounts of MBE Adjustments, their impact on AmTrust’s reported loss reserves and expenses, and the specific factors or assumptions supporting management’s judgment to record the MBE Adjustments.
The filing also accuses AmTrust of failing to maintain sufficient supporting documentation for MBE, a sufficient system of internal accounting controls of MBE, and effective disclosure controls and procedures of MBE.
AmTrust and Pipoly have neither agreed with or denied the SEC's allegations. Pipoly will reportedly pay $237,500, and AmTrust will pay $10.3 million.
It was reported in 2018 that an auditor secretly taped conversations regarding AmTrust's audit using a recording device disguised as a Starbucks gift card. The auditor was allegedly cooperating as a whistleblower with the SEC and taped the conversations for the FBI.
AmTrust was a publicly traded company until 2018, when the company went private.
A copy of the SEC's complaint can be viewed here.
Read more at US Securities and Exchange Commission