$585 Million Settlement at Hand in Credit Lyonnais/ELIC Fraud Case

Nothing apparently concentrates the corporate mind so effectively as being named in a criminal complaint. A week after a federal grand jury in Los Angeles issued a sealed indictment which reportedly accused it, and numerous others involved, of criminal fraud, French bank Credit Lyonnais (CL) and the Consortium de Réalisation (CDR), a French government agency established to take over the bank’s debt mountain in 1995, agreed with federal prosecutors in Los Angeles to pay approximately $585 million in order to settle the criminal charges.

The Aug. 28 indictment may not have been the only reason for the bank to settle a case that has been in negotiations for years, but it certainly was a powerful incentive to do so. CL stood to lose too much, including its license to operate in the U.S., if the charges against the bank and various associated companies surrounding the takeover of Executive Life Insurance Corp. (ELIC) in 1991 were proven.

The complex affair began when Altus Finance, then purportedly owned by a group of French and Swiss investors, agreed to purchase ELIC’s assets for $3.25 billion. At the time it was the largest California-based life insurer with 340,000 policyholders and $10.1 billion in assets, but it had become so indebted that the California Department of Insurance sought someone to bail it out. The meltdown in “junk bond” values following the sharp fall in the stock market in October 1987 had cut the value of its investment portfolio in half. The CDI, headed by then newly appointed Insurance Commissioner John Garamendi, sought a solution that would protect policyholders and minimize losses.

It accepted Altus’ bid to acquire ELIC and its assets (notably the junk bonds). The company was reorganized under the direction of French Insurer MAAF Assurances, eventually emerging as Aurora National Life Assurance. Who actually controlled Altus Finance at the time of the original transaction is one of the critical points raised by the investigations and is a factor in several lawsuits, including one filed by California Attorney General Bill Lockyer and one by Garamendi’s successor Chuck Quackenbush.

The allegations have accused CL of being the real owner of Altus, and of using an elaborate network of secret agreements and concealed affiliates and intermediaries to handle the transaction, including Artemis S.A., the holding company of French billionaire François Pinault. The charges allege that CL undertook the subterfuge in order to avoid violating the Glass-Steagle Act, then in force, which prohibited banks from participating in the management of insurance companies. CL also allegedly violated California statutes, which prohibit foreign governments from investing in domestic insurers, as it was majority owned and controlled by the French government when the ELIC transaction occurred.

The bank’s announcement said only, “Credit Lyonnais today [Sept. 3] announced that it has reached an agreement in principle with the United States Attorney’s Office in Los Angeles to settle a federal investigation related to the former Executive Life Insurance Company. The terms of the agreement will remain confidential until the implementing documents have been finalized, a process that is expected to take several weeks.” Bertrand Hugonet, the head of CL’s press relations, indicated that it would probably “be four to six weeks” before details were released, and that the agreements needed judicial approval.

Reports from various sources indicate, however, that the CDR will contribute around $100 million and another French bank, Credit Agricole, which is in the process of acquiring control of CL, will pay another $100 million in fines and penalties. Part of the agreement also apparently stipulates that CL will keep its U.S. banking license. In addition the CDR will reportedly contribute $350 million to a fund that could be tapped by Executive Life policyholders. MAAF Assurances has reportedly agreed to pay $35 million into the same fund to settle the charges against it. Assuming all these obligations are met, the criminal charges would be dropped.

The amount of the settlement comes as something of a surprise, especially in France. Last December the French newspaper Le Monde published an article describing the two sides as being close to agreement on a deal providing for CL to pay a fine of between $50 and $100 million. Recent reports on settlement negotiations indicated nothing in excess of $200 million.

Ironically CL may not end up paying anything. That burden, at least as far as the criminal charges are concerned, will fall mostly on French taxpayers, as the CDR is a government agency funded by general revenues. It was originally set up to sell off and liquidate some 15 billion euros ($16.8 billion) in CL debt, following a disastrous expansion spree in the late 80’s and early 90’s. Its obligations are now estimated at around 10.8 billion euros ($12.1 billion).

The settlement of the criminal charges, however, will not end the matter. Hugonet indicated that he wasn’t aware of what provisions, if any, the formal settlement agreement might contain concerning the other defendants, notably Artemis and Pinault, who were apparently named in the indictment. Whether they will still face charges, now that the main actors have settled is therefore a matter of conjecture.

There also remains the matter of the civil suits, which are seeking recoveries of several billion dollars. Tom Dressler of the California Attorney General’s Office indicated that “legally it [the settlement agreement] would have no effect.” Such undertakings frequently contain language that the accused isn’t admitting guilt, but even if that is the case, it may make the fraud and misrepresentation charges in the civil complaints easier to prove. Dressler noted that the AG’s action has been transferred to the federal courts, and is currently stayed, as the defendants have challenged the standing of the Attorney General to file it. The CDI’s civil action, however, is currently going through the discovery phase of litigation in L.A.

A summary of that action states: “The suit alleged that the defendants intentionally deceived the Commissioner in order to gain control of ELIC’s junk bonds and insurance policies. The suit seeks disgorgement of all profit gained by them and, alternatively, all damages caused by their deceit. The lawsuit against the defendants is ongoing. Recoveries from the lawsuit would go to the policyholders.” It goes on to state that if the CDI had known that the companies involved were violating federal and state laws it wouldn’t have entered into the deal to save ELIC by selling them the company and the junk bonds. While that’s undoubtedly true, it doesn’t really answer the fundamental question of what damages ELIC’s policyholders have suffered. The CDI’s summary goes on to state: “Had the bond portfolio not been sold to Altus in March 1992, the portfolio would have been managed by the Commissioner, transferred to other bidders, or otherwise disposed of in a manner that would have resulted in substantially greater profits to the ELIC estate and a higher recovery by the ELIC estate and the policyholders.” Whether the CDI can prove those allegations remains a major issue in the case. One also has to wonder how the CDI would have gone about managing a junk bond portfolio.

As far as the French are concerned, the fact that CL, Altus, etc. may have broken a U.S. law is one thing, but most writers and analysts, who have commented on the case, see no connection with that fact and any alleged losses. It’s viewed as similar to having an accident while driving without a license. You may have broken the law, but that doesn’t automatically mean the accident was your fault. CL took a chance that the bonds were as worthless as everyone thought they were at the time. Just because they turned out to be considerably more valuable isn’t in itself proof that anybody’s guilty of fraud – bad judgment or bad timing, maybe, but not fraud – a case of “hindsight always being 20/20.”

For that reason the settlement did not sit well in France. Many commentators referred to it as out and out blackmail. In an editorial in the French financial newspaper Les Echos Henri Gibier pointed out that the $585 million was roughly half the sum that the big Wall Street investment banks agreed to pay as a result of their phony investment advice during the dot com bubble. Those violations were more widespread and cost people billions more than anything CL may have done.

He indicated that the whole thing seemed very much politically motivated, either by the current political tensions between France and The U.S. over Iraq, or by pressures emanating from California’s upcoming recall/gubernatorial contest. He also recalled, as have many other commentators, that there were apparently no other serious candidates seeking to bail out ELIC in 1991.

Another aspect ought to be considered as well. Theoretically fines and penalties are assessed to punish wrongdoers and discourage further misconduct. Everybody at CL with even a remote connection to the ELIC transaction is long gone. The French government no longer owns it and the Glass-Steagle Act has been repealed. The people who will ultimately pay the fines are the French taxpayers* and the shareholders of Credit Agricole, neither of whom had anything to do with ELIC, so why are they being punished? On that basis it would seem just as logical to punish Garamendi for making a bad business deal, or ELIC’s management for having created the mess in the first place by buying junk bonds. Has anyone examined these possibilities?

*The author is one of those French taxpayers, and hereby acknowledges his self-interest.

Topics Lawsuits California USA Fraud