An arbitration panel ordered collapsed reinsurance firm Fortress Re to pay $1.12 billion in damages because it found the firm defrauded a big Japanese insurer, according to the Wall Street Journal.

It has been reported that North Carolina insurance company Fortress Re had ceded hundreds of millions of dollars to its Bermuda subsidiary, Carolina Re which went into liquidation in December 2001.

Carolina Re then paid more than $400 million in dividends to its owners who were also the principals of Fortress Re.

Sompo Japan Insurance Inc. had filed suit in the United States last year, claiming that Fortress Re, based in Burlington, North Carolina, had cheated it out of large sums through an allegedly deceptive accounting scheme, the newspaper said last week.

Fortress, an aviation-reinsurance firm, was dealt a heavy blow by the September 11, 2001 terror attacks and other airline disasters, including a passenger jet crash in Queens in November 2001, and subsequently collapsed. Fortress had acted as a manager selling reinsurance on behalf of three major Japanese insurance firms: Aioi Insurance Co., Taisei Fire & Marine Insurance Co., and Nissan Fire & Marine Insurance, which then merged into Sompo.

In a suit filled in US District Court in Greensboro, North Carolina, Sompo originally estimated the total losses for all its pool members at more than $2.5 billion but amended the complaint in November to increase that figure to about $3.5 billion, including more than $1.4 billion in losses related to September 11.

Sompo, which had a 26 percent share of the Fortress pool, had ordered an audit of Fortress?s books following September 11 and discovered what it claimed were huge hidden losses going back years. Last year a federal judge allowed Sompo?s suit to go forward against Fortress?s principals while referring its complaint against Fortress itself to go to arbitration.

In the arbitration ruling dated December 16, the three judge panel found that the principals had committed ?actual fraud? and ?knowingly misrepresented material facts? in presenting financial information to Sompo. It also found that Fortress Re had fraudulently caused pool members to transfer hundreds of millions of dollars to Fortress and its shareholders, in part through ?illegitimate? commissions.

The panel awarded Sompo $1.009 billion in actual damages along with $100 million in punitive damages and attorney?s fees, plus the return of $10.6 million that Fortress was holding in escrow accounts. In October arbitration a dispute between Aioi Insurance Company and Fortress Re was halted in order for emergency depositions to be taken in Japan. When the Japanese insurers on whose behalf Fortress Re had written insurance policies sought to recover claims stemming from the series of aviation disasters they found that both Fortress and Carolina were insolvent.

Carolina Re which should have paid out an estimated $600 million had just $62 million in assets. Carolina Re?s joint liquidators, John McKenna and Gareth Hughes, are continuing their search for assets to pay off its massive liabilities.

When the suit was filed against Fortress in 2002 by Aioi, it said it expected to lose 148 billion yen ($1.23 billion) from reinsurance deals with Fortress Re. Another Japanese insurer, Taisei Fire & Marine Insurance, failed in 2001 due to heavy exposure to Fortress Re. Sompo and Aioi have also filed seperate suit against Deloitte & Touche, which was the auditor for Fortress Re?s reinsurance pool.