French Bank Is Target of U.S., California Probes

U.S. authorities are investigating whether a French government-owned bank broke California and federal laws when it acquired the assets of the failed Executive Life Insurance Co. of Los Angeles in the early ‘90s. The deal has resulted in some $2.5 billion in profits for the bank and other French firms while leading to billions in losses for Executive Life policyholders and other individuals.

Former top-ranking officials of Credit Lyonnais, a Paris-based bank, are being investigated by the U.S. attorney’s office in Los Angeles and the Federal Reserve Bank in New York in connection with the deal, say sources close to the inquiry. Investigators want to know, the sources say, if Credit Lyonnais skirted U.S. federal laws that prohibited banks from owning insurance companies.

In addition, the bank and several of its former business partners are the targets of a related lawsuit filed early this year by the California insurance commissioner, in an action that seeks to recoup $2 billion in losses. It also is the target of a separate suit by a group of policyholders.

The French bankers lied to state and federal regulators about the nature of their plan to obtain and manage the seized assets of Executive Life, according to California Insurance Commissioner Chuck Quackenbush. The commissioner’s suit accuses them of violating a state law prohibiting foreign governments from owning California insurance companies.

The deal with Credit Lyonnais diverted assets that could have gone to pay off former Executive Life policyholders, many of whom recouped only a portion of their insurance benefits after the insurer collapsed in 1991 in the largest insurance failure in U.S. history.

Credit Lyonnais, if it is found guilty of wrongdoing, could face enormous criminal and regulatory penalties.

Assistant U.S. Atty. Jeffrey B. Isaacs, who is heading the investigation in Los Angeles, said Credit Lyonnais officials are cooperating with investigators. “The investigation of the activities of Credit Lyonnais in this district has been and continues to be a high priority for the U.S. attorney’s office and the FBI,” Isaacs said.

However, even if federal authorities bring criminal charges against the bank and its former officers, it would be difficult to bring them to trial because France does not allow its citizens to be extradited here.

Credit Lyonnais’ lawyers did not return phone calls for this report. The French bank has acknowledged in a recent memorandum filed with the U.S. Securities and Exchange Commission that it could be hit with “substantial” penalties, including suspension of its U.S. banking license.

Credit Lyonnais is “vigorously investigating the facts surrounding the Executive Life matter and believes . . . [it] involves principally certain former members of the senior management of the bank,” the bank stated in the SEC filing.

It is unclear who all those former executives are.

Named in Quackenbush’s suit, however, are Jean-Francois Henin, former chief executive of the Altus Finance subsidiary of Credit Lyonnais; Jean Irigoin, director of the MAAF insurance consortium that acquired Executive Life’s insurance business; and Jean-Claude Seys, another officer of MAAF.

Regardless of who or what is to blame, Quackenbush wants Credit Lyonnais and the several other French firms allegedly involved in the deal to pay the money back.

“Two billion [dollars] would be a nice start and would go a long way,” said Gary Fontana, a San Francisco attorney who is representing the insurance commissioner in the civil suit against Credit Lyonnais. The suit was filed in February in Superior Court in Los Angeles but has since been moved to U.S. District Court in Los Angeles.

Maureen Marr, a spokeswoman for Action Network for Victims of Executive Life, said her group of 2,500 former Executive Life policyholders will soon join the commissioner’s suit.

A number of Executive Life policyholders have filed a separate class-action suit in U.S. District Court in Los Angeles naming Credit Lyonnais and several other French firms as defendants. The suit claims that people who received monthly payments from Executive Life--through policies stemming from personal injury lawsuits--were unfairly forced to accept losses and discounts when the French took over.

Among those policyholders are Sue and Vince Watson of Phoenix.

The Watsons had won a $4-million award against a Phoenix hospital that botched their 21-month-old daughter’s treatment, leaving her with severe brain damage. After it lost the case, the hospital purchased a policy with Executive Life that paid the Watsons $12,000 a month so that they could afford around-the-clock care for their daughter. That payment was slashed in half after the French took over, Sue Watson said.

“We ended up losing our house and having to come out of semi-retirement to go back to work,” Sue Watson said. “It was the most devastating thing to our family.”

The federal investigation into Credit Lyonnais revives the controversy over the 1991 seizure of insolvent Executive Life by John Garamendi, who was the California insurance commissioner at the time.

In 1992, Credit Lyonnais paid $3.25 billion for Executive Life’s junk-bond portfolio. The bank advanced an additional $300 million to a consortium of French firms that separately bought Executive Life’s insurance business.

Before sealing the deal, top officials with Credit Lyonnais--and their lawyers--insisted in documents filed with insurance regulators and statements to the judge overseeing Executive Life’s receivership that the foreign-owned bank would neither own nor manage the insurance business.

But documents recently obtained by investigators reveal that members of the French consortium were not the true buyers. The consortium had entered into secret “parking” agreements to serve as fronts for the bank’s Altus Finance subsidiary.

That arrangement, according to court papers, was planned to skirt a host of banking and insurance regulations.

California’s insurance code prohibits a foreign government entity from owning a state insurer. Federal laws at the time of the Executive Life deal prohibited banks from engaging in non-banking activity and in particular from owning insurance firms. That law was liberalized this year.

Shortly after the acquisition of Executive Life’s junk-bond portfolio, the value of the bonds shot up, producing hundreds of millions of dollars in instant profit for Credit Lyonnais.

Because Credit Lyonnais acquired the bond and insurance portfolios in separate deals, it didn’t have to share those huge returns with Executive Life’s policyholders. (If the insurance commissioner knew that a single entity was purchasing both the bonds and the insurance business, he would not sell them separately.) At the end of 1992, Credit Lyonnais faced a major problem: The bonds would convert into controlling equity stakes in about two dozen major U.S. companies, including Samsonite luggage, Converse and Florsheim shoes, and the Vail ski resort. And under the federal Bank Holding Company Act, a banking institution such as Credit Lyonnais could not own equity interests in excess of 25% in any U.S. industrial companies.

Enter Francois Pinnault, one of France’s richest men and a close friend of French President Jacques Chirac--and also one of Credit Lyonnais’ biggest debtors.

In November 1992, Credit Lyonnais and Pinnault set up a new company called Artemis. Credit Lyonnais owned a 40% interest in Artemis and lent the company $2 billion to buy the Executive Life junk-bond portfolio.

At the same time, Credit Lyonnais transferred to Artemis all its rights to the parked shares in Executive Life’s insurance business, according to a statement made to a French newspaper by Henin, the former Altus Finance executive. When the parking agreements expired in summer of 1994, Artemis bought the insurance business.

In obtaining the California insurance commissioner’s approval to purchase those shares, Artemis had to agree that no director of Credit Lyonnias would have any control over the insurance business. But documents from the insurance commissioner’s office show Artemis failed to disclose that it was acquiring these shares in accordance with the parking agreement and that Pinnault was a director of Credit Lyonnais, an apparent violation of state insurance laws.

Since acquiring the bond and insurance business, Artemis has raked in profit in excess of $2 billion, according to court papers. The commissioner has not named Artemis in the suit.

Fontana said attorneys for Artemis told him their client is “entirely innocent” of any wrongdoing. “We have told them to produce all of their documents showing what they knew and when,” Fontana said. “Depending on what we find out, they could still be sued.”

Attorneys for Pinnault declined to comment.

The information about the deals between Altus and members of the French consortium would not have come to light but for a whistle-blower who contacted Fontana earlier this year, bearing copies of the parking agreements.

Fontana has declined to identify the whistle-blower beyond saying the individual is “someone in Europe involved in the transaction.”

A few months ago, Quackenbush hired Fontana to take over a suit filed by the whistle-blower on behalf of the insurance commissioner’s office. If the suit is successful, the whistle-blower stands to gain 15% of all the money recovered.

Fontana said the remaining funds would be used to pay policyholders and people who suffered losses as a result of the alleged deception by the French.

Fontana said he is also cooperating with federal authorities investigating Credit Lyonnais.