Credit Lyonnais Indicted by Federal Grand Jury in Executive Life Case

August 28, 2003

Another chapter has opened in the long running saga concerning the involvement of French Bank Credit Lyonnais (CL) in the bail out of California insurer Executive Life with the announcement by federal prosecutors in Los Angeles that a grand jury has issued a sealed indictment which reportedly accuses the bank and others involved with it of criminal fraud.

The complex affair started in 1991 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 then newly appointed Insurance Commissioner John Garamendi, sought a solution, which would protect policyholders, and minimize losses.

The CID accepted Altus’ bid to acquire Executive and its assets (notably the junk bonds). 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 investigation and is a critical factor in several lawsuits, including one filed by California Attorney General Bill Lockyer.

To make matters more complicated, another French company, Artemis S.A. started acquiring part of Executive’s bond portfolio from Altus in 1992. It eventually became the owner of Aurora when it acquired a 67 percent stake in New California Life Holdings, Aurora’s parent in 1994. Artemis is the holding company of French billionaire François Pinault through which he controls an extensive business empire, which includes Gucci, Le Printemps Department Stores, La Redoute mail order sales and Christie’s auction house.

When it appeared that Executive’s assets were in fact worth a good deal more than the price the CID had agreed to sell them for, then Commissioner Chuck 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.

Although the charges in the indictment have not yet been made public, the prior accusations have asserted 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.

Although settlement talks have been conducted off and on over the past two years, no agreement has been reached. As the Statute of Limitations would soon bar criminal actions, federal officials reportedly gave CL and the others named in the indictments until August 1 to reach a settlement. When they were unable to do so, the AG’s office sought the indictment.

Settlement may still be a possibility. Last December the French newspaper Le Monde carried 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, but which would allow it to keep its U.S. banking license, and wouldn’t require an admission of wrongdoing.

So far none of the parties involved have issued any comments on the case, or what their plans might be, other than to indicate that the discussions are continuing.

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