State Sues Lloyd’s, Accusing It of Fraud
California regulators have sued Lloyd’s of London, accusing the British insurance giant of defrauding 500 California investors, whose losses to date total $100 million and potentially much more.
The Corporations Department, which oversees state securities laws, contends in a suit filed late Wednesday in Los Angeles County Superior Court that Lloyd’s and various of its agents and business affiliates recruited investors in California over the last 25 years without adequately disclosing huge potential risks.
The suit seeks restitution of Californians’ losses, plus fines of $7 million to $10 million for alleged violations of state securities laws.
The department also seeks a temporary restraining order to keep Lloyd’s from collecting $400 million that it contends the investors still owe and to place a hold on a $10-billion Lloyd’s account at Citibank to ensure that funds are available for restitution.
No Lloyd’s representative could be reached for comment Thursday.
Three-century-old Lloyd’s has been hammered with billions of dollars of losses in the last five years, stemming from massive insurance claims for industrial pollution and asbestos disease, mainly among American workers.
However, the losses actually fall on the Lloyd’s investors--called Names--who pledge their fortunes in exchange for a share of the expected underwriting profits.
Of a peak global membership of some 32,000 Names, about 3,000 are thought to be Americans and about 500 of them in California.
The lawsuit alleges that Lloyd’s knew as early as 1970 of “massive and unquantifiable” potential losses from pollution and asbestos claims but did not inform the Names before signing them up.
The Corporations Department also contends the investment contracts between Lloyd’s representatives and the Names were securities and should have been registered as such under state law.
At least four other states--Ohio, Illinois, Colorado and Virginia--are pursuing similar action against Lloyd’s, but California’s is believed to be the most far-reaching, Corporations Department spokesman Damian Jones said Thursday.
In addition, thousands of Names have joined in legal actions against Lloyd’s in federal and state courts as well as in England. Lloyd’s is trying to settle these lawsuits but so far has not been able to reach agreement with the majority.
Lloyd’s is not an insurance company but a collection of several hundred independent underwriting groups, called syndicates. Individual syndicates and agents are among the 104 defendants in the California regulators’ lawsuit. The syndicates recruit Names to supply the capital that backs the policies they write.
Because numerous British celebrities and aristocrats were known to be Names at Lloyd’s, the investment carried considerable snob appeal--a selling point for many U.S. investors, critics have said.
The downside was a contract that subjected Names to unlimited liability, “down to the last cuff link.”
Indeed, many Names in England have seen their entire fortunes wiped out.
Most U.S. investors have avoided impoverishment but a number have had their bank accounts drained dry by “cash calls” from Lloyd’s.
It was an impending cash call of $400 million on California Names that prompted the Corporations Department to rush to court with its suit, Jones said.
