Executive Life Fraud Alleged in Lawsuit : Insurance: Lawyers for a 12-year-old girl say her annuity payments are endangered because of the company’s investment practices.

Legal trouble mounted for Executive Life Insurance Co. on Wednesday as a suit was filed accusing its directors of defrauding tens of thousands of people who bought policies and annuities from the firm.

The lawsuit, filed in Superior Court in San Francisco, is the second to be brought against the Los Angeles insurance company in the days since Insurance Commissioner John Garamendi seized control of it, citing defaults in its $6.4-billion junk-bond portfolio.

The plaintiff is a 12-year-old Marin County girl whose relatively small $59,941 annuity was being managed by Executive Life. The girl’s lawyers are asking that the court declare the suit a class action on behalf of 400,000 people who have insurance policies or annuities purchased through the firm.

The state court suit charges that First Executive and its chairman, Fred Carr, were part of a “vast intertwined financial network” run by junk-bond king Michael Milken, who is serving a 10-year prison sentence for federal securities law violations.

According to the suit, Milken and his brother Lowell--central figures in many of the biggest corporate takeovers of the 1980s--used Executive Life to “keep the prices of junk bonds artificially inflated” by having the insurance company buy junk bonds peddled by other firms that were part of a so-called “daisy chain.”

Upward of 60% of Executive Life’s $10 billion in assets are junk bonds.

Officials of Executive Life and its parent company, First Executive Corp., could not be reached for comment.

There is sure to be a massive amount of civil litigation over Executive Life in the coming years, given the number of policyholders and the amount of money at stake.

The San Francisco lawsuit was filed by a Burlingame law firm headed by Joseph Cotchett and a San Diego law firm that brought a similar suit against First Executive last week in Los Angeles. The two firms have also taken a leading role in litigation involving failed Lincoln Savings.

Under terms of her Executive Life annuity, Kathlene Koehler, the girl who is the lead plaintiff, is to start receiving monthly payments of $756 when she turns 18 in six years. The payments are a part of a 1986 settlement of a lawsuit brought after she injured a hand in a coin-operated laundry, said Marie Seth Weiner, one of the lawyers working on the case.

Koehler’s lawyers contend that the payments are in jeopardy because of Executive Life’s investment practices.

The suit does not name the insurance company itself as a defendant, largely because what remains of it likely will be under the control of the courts and the state Insurance Department.

Rather, the defendants include Executive Life’s directors and executives, the Milkens, Executive Life’s accounting firm, and two rating agencies--Moody’s Investors Services and Standard & Poor’s--that gave Executive Life high ratings until last year, thus suggesting that the company was healthy.