By Rebecca Zuill

AmTrust Financial Services, Inc shares fell by 4.6 percent on August 19 following an investigative report suggesting that a 16 percent block of stock held in non-profit foundations could be forcibly sold to comply with US tax rules, according to Insurance Insider. The stock regained some ground yesterday, closing at $43.75, up 1.72 percent.

On August 8 it was reported that Tower Group of Companies shareholders had overwhelmingly backed a deal that would see the Bermuda-based ACP Re Holdings Ltd take over the struggling insurer. ACP Re was described as a takeover vehicle whose major shareholder is a trust established by AmTrust Financial founder Michael Karfunkel.

Southern Investigative Reporting Foundation (SIRF), which authored the report, has claimed it is the Michael Karfunkel 2005 Grantor Annuity Trust (GRAT) that owns ACP Re.

Tower Group shares were down 2.7 percent, or $2.13 yesterday.

Insurance Insider is reporting that SIRF has looked at the Michael Karfunkel 2005 GRAT, which he gifted with 320,000 AmTrust shares, explaining a GRAT is a tax-efficient trust used by wealthy individuals to pass on part of their estate. GRATs allow a grantor, in this case Michael Karfunkel, to transfer assets into a trust for a specified period. In return the trust pays the grantor an annuity over a set period of time. At the end of the term, what assets remain can be distributed tax-free among beneficiaries. However, SIRF is reported as saying the donation of shares was prohibited as it occurred after the GRAT had been established.

In addition, SIRF has questioned whether the Karfunkel brothers — who are board members and majority shareholders of AmTrust — could be forced to sell off around four-fifths of the 20.1 percent of the company’s stock held in two private foundations, known as Hod and Chesed, according to the Insider report.

In the SIRF report it is alleged that the Karfunkel brothers had put too many AmTrust shares into the two foundations and that Hod and Chesed respectively hold 9.6 percent and 10.5 percent of the shares outstanding. To comply with US Inland Revenue Service (IRS) rules they could be forced to sell off 12.1 million of them, which would equate to dumping a 16 percent stake on the market.

According to the Insider, SIRF explains traditionally the IRS allows foundations permitted holdings of 20 percent of the shares outstanding less the percentage of stock held by disqualified persons which, it said, in the case of the Karfunkel family’s already high stakes in the firm, made the point moot. “However,” said the publication, “under a provision there was a second approach, known as the ‘de minimus rule,’ which would allow each foundation to hold two percent of the outstanding shares.”

In a response to SIRF, the Karfunkels said that the report’s authors had not made it clear what ‘IRS rules and regulations’ it was referring to.

Also according to the report, in December AmTrust’s shares lost up to 40 percent of their value in a week after short seller GeoInvesting published “highly critical research” on the company’s finances.

GeoInvesting accused AmTrust of flattering its loss figures through a series of internal reinsurance transactions with its Luxembourg-based subsidiaries. AmTrust denied the allegation, describing the GeoInvesting report as ‘false and misleading’.

Tower Group announced on Tuesday that it had received a notification letter from The Nasdaq Listing Qualification Department on August 14, stating that because Tower has not yet filed its Form 10-Q for the period ended June 30 with the Securities and Exchange Commission it was not in compliance with the continued listing requirements under Nasdaq Listing Rule 5250(c)(1).

Under Nasdaq rules, Tower has 60 days to submit a plan to Nasdaq to regain compliance with the listing rule. Tower said it expects to file the 10-Q with the SEC within approximately the next 20 days.