To prosecute, or not to prosecute. The U.S. Department of Justice continues to face that dilemma in its ongoing investigation of French bank Credit Lyonnais’ (CL) role in the takeover of Calif.-based Executive Life in 1991. The U.S. attorney’s office in Los Angeles wants to prosecute but so far has not gotten the go-ahead from Washington. California Attorney General Bill Lockyer is not under such constraints and has already filed several civil suits.
Meanwhile the action initiated by ex-Insurance Commissioner Chuck Quackenbush is making its way through the courts, along with several other lawsuits.
Lockyer’s original action, filed last June against CL, several related companies, French financier François Pinault and his holding company Artemis S.A., seeks to recover some $2 billion that his office says is owed to policyholders due to misrepresentations by the consortium that purchased Executive’s assets. He recently expanded the action by filing a lawsuit against financier Leon Black, a former colleague of junk bond king Michael Milken, alleging that he also participated in the sale, despite the fact that Quackenbush’s investigation had apparently cleared him.
Except for the new additions, the legal actions are based on the same set of circumstances as those originally detailed in the California Department of Insurance’s (CDI) lawsuit filed in February 1999.
The complex affair started when Altus Finance, then purportedly owned by a group of French and Swiss investors, agreed to purchase Executive’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 had run up huge debts and was forced into liquidation. A significant portion of its capital had been invested in “junk” bonds, which, following the 1987 stock market decline, had lost a significant amount of their value.
California authorities, led by newly appointed Insurance Commissioner John Garamendi sought a solution, which would protect policyholders, and minimize losses.
The CDI accepted Altus’ bid to acquire Executive and its assets (notably the junk bonds).
Other bidders have since sued Credit Lyonnais on the grounds that they were denied the profits they would have made had their bids been successful. Executive was reorganized under the direction of French Insurer MAAF Assurances, eventually becoming 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 lawsuits.
Starting in 1992, Artemis S.A. acquired part of Executive’s bond portfolio from Altus, and eventually became the owner of Aurora when it acquired a 67 percent stake in New California Life Holdings, Aurora’s parent in 1994. Pinault controls his business empire, which includes Gucci, Le Printemps Department Stores, La Redoute mail order sales and Christie’s auction house, through Artemis.
When it appeared that Executive’s assets were in fact worth a good deal more than the price the Commissioner’s office had agreed to sell them for, Quackenbush launched an investigation, which led to the filing of the lawsuit against Altus, CL, MAAF and eventually Pinault and Artemis. All of them have vigorously denied the allegations.
That complaint, and the more recent one brought by Lockyer’s office, alleges that Altus was not, in fact, controlled by individual investors, but by CL, whose majority shareholder at the time was the French government. If true, CL would have been in violation of the Glass-Steagle Act, then in force, which prohibited banks from participating in the management of insurance companies. It would also contravene California statutes, which prohibit foreign governments from investing in domestic insurers. The later charges against Pinault, and now against Black, accuse them of knowing the real situation, and failing to disclose it, and as acting as behind the scenes participants in the deal.
As part of a separate privatization plan CL divested itself of any interest in Altus in 1995, when it sold it to Consortium de Realisation (CDR), a group of private investors, formed to assume the bank’s huge debt burden, as part of a general restructuring.
In December 2000 the U.S. Attorney’s office and the SEC announced that they were investigating the possible violation of Federal laws in connection with the Executive Life transaction. CL denied any liability and agreed to cooperate in all respects with the SEC, the Commissioner’s office and the Federal investigation. Although Jeffrey Isaacs, an Assistant U.S. attorney in the Los Angeles office, who has been in charge of the investigation, announced last May that he would seek indictments, none have yet been approved by his superiors in Washington, despite a lot of rumors and speculation that they were imminent. The SEC has not announced any charges either.
There are several possible explanations for the Department’s inaction, but at this point it is impossible to give any precise reasons. A senior executive in CL’s New York office confirmed that the bank has promised federal investigators that it wouldn’t comment on the case.
According to reports, the Bush administration is still weighing whether to give Issacs permission to seek indictments, but the decision is not all that straight forward, as it’s become highly politicized. France has let it be known in no uncertain terms that indicting a French bank for criminal offenses allegedly committed while it was owned by the French government, would, to say the least, be viewed with extreme disfavor.
One of CL’s chief lawyers is George Terwilliger, a former Deputy Attorney General in the first Bush administration, whose name was mentioned for the post of F.B.I. Director.
A video conference was scheduled for Feb. 11 between Michael Chertoff, the head of the Justice Department’s criminal division, Lockyer and Insurance Commissioner Harry Low, but, at press time the nature of their discussions had not been disclosed, nor had any decisions been announced.
The case is further complicated by election year politics. Lockyer, a Democrat, is seeking re-election and has pictured the lawsuit as a long overdue attempt to gain reimbursement for Executive’s policyholders. Garamendi has announced that he will seek to regain his former post as California Insurance Commissioner, and will run in the March 2002 primary elections. The undertone in Lockyer’s allegations, that the Insurance Department was naïve and failed to uncover the bidders’ misrepresentations, reflects on Garamendi as the Commissioner.
Garamendi’s defense, and CL’s as well, if they were allowed to talk about it, is that at the time the transaction was made they offered the highest bid, took a big liability off the hands of state regulators and did eventually rehabilitate Executive as Aurora, which continues to operate successfully from its Santa Monica headquarters. Its policyholders may have lost some money and benefits, but not their entire investment. If the junk bonds eventually failed to be less junky than they were when the deal was made, that was the premium that the buyers got for taking the risk that they’d turn out to be worthless.
Eventually the courts will decide who is right.
Was this article valuable?
Here are more articles you may enjoy.