Tycoon Has Law Hot on His Heels
Francois Pinault owns Christie’s, but he couldn’t use the auction house’s front door recently for one of this year’s largest art sales.
Like a movie star dodging paparazzi, Pinault climbed out of his black limousine and scurried toward a side door of Rockefeller Center. He was ushered to a private balcony overlooking the auction floor from where he watched such bidders as casino magnate Steve Wynn, deal-maker Eli Broad and Snapple millionaire Thomas H. Lee splurge on contemporary artwork to the tune of $15 million.
By avoiding the auction floor, Pinault dodged seven process servers ready to serve subpoenas in a suit filed against him by California insurance regulators.
Pinault eluded the process servers, but he will soon have to face up to a question being asked by a phalanx of investigators: Did he become one of the world’s richest men by legitimately acquiring the assets of a bankrupt California insurer? Or did he participate in the largest fraud in California history?
Whatever the truth, it’s the latest chapter in one of the most extraordinary success stories in European business. A self-made billionaire who got his start with a Brittany sawmill, Pinault now hobnobs with heads of state and collects modern art masterpieces. Americans may not know him, but every time they buy a Samsonite suitcase, eat a fajita at Chi-Chi’s or ski at Vail, they are partaking in Pinault’s globe-girdling empire.
But court papers filed in Los Angeles paint a seamy side to the success story. According to insurance regulators, Pinault and corporations controlled by him were among a group of French finance and insurance firms that violated U.S. laws in the way they took over the assets of now defunct Executive Life Insurance Co. of Los Angeles in 1991.
Those assets gave Pinault controlling stakes in several prized American companies and turned him into a multibillionaire. But they have now made him a focus of investigations by the California insurance commissioner, the Federal Reserve Board and the U.S. Justice Department.
Pinault, 63, says that the lawsuit targeting him and his company is “unfounded” and that he intends to contest it “vigorously.” His lawyers are seeking to have the lawsuit dismissed.
The California lawsuit comes at a time when Pinault’s vast holdings--which stretch from Africa to America--are being pored over by lawyers and criminal investigators on both sides of the Atlantic.
French Police Seize Documents
Last month, Pinault cut short a lunch to rush to his mansion in the 7th Arrondissement on Paris’ Left Bank, where investigating magistrates accompanied by 15 police officers searched his offices in connection with a separate fraud probe involving Pinault’s 1992 sale of a trio of kitchen furniture-manufacturing companies.
Pinault is suspected of having falsely overvalued one of the firms to the tune of $70 million, when in fact it was on the verge of collapse.
The tycoon looked on as investigators carted away two truckloads of documents and computers. It was the first time authorities in the French capital have pried so closely into Pinault’s business affairs.
In France, Pinault is an extreme rarity: an entrepreneur who has clawed his way to the top by sheer drive, instinct and ruthlessness and not ridden there because of a lucky birth or diplomas from elite schools.
The French media call him “the president’s billionaire,” because of his close friendship with French President Jacques Chirac, and “le capitaliste sans capitaux (the capitalist without capital)” because of his knack for making millions without investing a penny of his own money.
Co-workers remember the former high school dropout, who describes himself as a “Breton peasant,” uttering two sayings almost daily: “Merchandise that’s bought well [for the right price] is easy to sell” and “Who am I going to screw today?”
During the last decade, Pinault has been gobbling up trophy companies at a rate that caused the French magazine Marianne to describe him as “the man who wants to buy everything.” Forbes estimates Pinault’s empire at $7.8 billion and ranks him as the 32nd-richest person in the world, ahead of such billionaires as Jeff Bezos (47th), Kirk Kerkorian (50th) and Eli Broad (103rd).
In France, Pinault is best known for owning a network of gilt-edged firms, including the prestigious Chateau-Latour vineyards, the Paris-based couturier Yves Saint Laurent, Printemps department stores, FNAC book and record mega-retailers, La Redoute catalog shopping, the Gucci fashion house and Christie’s, the world’s oldest auction house.
Pinault also owns the Paris news weekly Le Point, a small stake in Le Monde newspaper and a 16% share in a French company that both manufactures concrete and owns the country’s most popular TV station.
Junk Bond Holding Served as Attraction
In the United States, Pinault is hardly a household name, even though his American assets are believed to equal or outweigh his French ones. He owns sizable stakes in Converse and Florsheim shoes, Samsonite luggage, the Vail ski resorts, Culligan water, Chi-Chi’s restaurants and more.
The deal that eventually gave Pinault ownership in these companies began in the early 1990s when Executive Life, run by insurance maverick Fred Carr, invested billions of dollars in junk bonds of companies advised by infamous junk bond king Michael Milken.
When the value of the junk bond portfolio plummeted and Executive Life tottered toward bankruptcy in early 1991, then-California Insurance Commissioner John Garamendi seized control of the firm.
Leon Black, a former close aide to Milken, knew that Executive Life’s junk bond portfolio contained buried treasure--stakes in American companies that could result in huge windfalls when the market improved and the debt would be converted to controlling equity stakes.
Garamendi, faced with thousands of policyholders anxious to preserve their annuities and the cash value of their policies, quickly sought a buyer for Executive’s assets.
Black’s company Apollo Advisors counseled the French bank Credit Lyonnais to buy Executive Life and its junk bond portfolio.
According to the insurance commissioner’s lawsuit, the deal came together this way:
Through a subsidiary, the bank paid $3.25 billion to get the junk bonds. In what was supposed to be a separate transaction, an unrelated group of investors led by a small French insurer, MAAF, acquired Executive Life’s insurance business in exchange for injecting $300 million in new capital.
But the MAAF group had a secret agreement to serve as a front for Credit Lyonnais. This so-called parking arrangement was to be kept hidden from “any and all third parties,” regulators have said in court papers.
The bank entered into these agreements to get around a federal law prohibiting a bank from owning an insurance company, the lawsuit alleges. And California law made it illegal for insurance firms to be owned by foreign governments or companies controlled by such governments.
In December 1992, while under pressure to improve its balance sheet by year’s end, Credit Lyonnais sold a portion of the junk bond portfolio to a new entity, which it set up with Pinault, one of the bank’s biggest debtors.
The new company was baptized Artemis, sister of the Greek god Apollo and goddess of the hunt. To seal the deal, the bank loaned Pinault $2 billion to buy the bonds.
The bank’s decision to sell Executive Life assets was Pinault’s gain. Even before the sale, the junk bonds were converting into sizable stakes in lucrative American companies. So far, the bonds have resulted in more than $1 billion in gains for Pinault, plus an equal amount for Credit Lyonnais, by some estimates.
According to Jean-Francois Henin, the Credit Lyonnais official who orchestrated the transaction, Artemis also gained control of the secret parking agreements at the same time it acquired the junk bonds.
Artemis eventually bought the MAAF consortium’s stake in the insurance business, which was renamed Aurora National Life of Santa Monica.
Deal Was Divulged by Whistle-Blower
The parking agreements might never have come to light but for a whistle-blower who went to San Francisco attorney Gary Fontana last year bearing copies of the agreements.
Fontana, who identifies the whistle-blower only as “someone in Europe involved in the transaction,” filed a damage suit against Credit Lyonnais and several European firms. He has since been hired by the California insurance commissioner’s office to represent its interests in the suit.
The commissioner’s office wants the bank and its associates to repay all the profits made from the Executive Life deal--about $2.5 billion--plus punitive damages, which would be distributed among policyholders.
A few months ago, Fontana also named Pinault and Artemis as defendants in the case.
“At the end of the day, it would surely seem that Pinault made more money on this deal than any other individual,” Fontana said. “And he did so with the knowledge that the bonds and the insurance company were bought in violation of American law.”
Robert Weigel, a New York attorney who represents Pinault, said Artemis didn’t know the details of any parking agreement.
In a separate interview, a top Artemis official who spoke on condition of anonymity said the firm learned of the parking agreements just before buying the insurance business.
Weigel insists that Artemis “did not benefit at all from any parking arrangements. . . . Artemis has always been straightforward and honest in its dealings with the insurance commissioner.”
In recent court filings, Weigel and other attorneys for Artemis argued that even if everything the commissioner’s office alleges is true, Executive Life’s policyholders didn’t lose any money and, therefore, state regulators have no valid claims against Pinault or Artemis.
Said Fontana: “That’s no different than saying I bought stolen merchandise at a huge discount from a fence. At the end of the day he’s not entitled to keep any profits from what he made.”
Fontana also disputes the claim that no policyholders’ money was lost. He said that when Executive Life folded, policyholders were unfairly forced to settle for $3 billion less than the face value of their policies.
As Fontana crafts his case against Credit Lyonnais, Pinault and other defendants, the FBI and Federal Reserve Board are also scrambling to reconstruct the sale of Executive Life’s assets and determine who should be held responsible.
Sources say FBI agents have interviewed Garamendi, Apollo’s Black and many key people in the deal.
Pinault has hired Los Angeles’ William Bonner, a former federal judge and head of the Drug Enforcement Administration in the Bush White House, to head a team of lawyers now representing him.
Credit Lyonnais, which acknowledges in documents filed with the Securities and Exchange Commission that it could lose its U.S. banking license as a result of the investigation, has turned to former U.S. Atty. Gen. Benjamin Civiletti.
The unfolding Executive Life scandal has placed unprecedented attention on Pinault, who until recently had shunned the limelight.
A school dropout at 16 who once claimed to have started in life with no more credentials than “my driver’s license,” Pinault worked for two years in a sawmill run by two uncles, then used a loan from his first father-in-law to set up his own wood importing business at age 26.
He crushed competitors by negotiating directly with timber suppliers and sawmills in Scandinavia, and with furniture companies and other wood users in Brittany.
“He knows how to wait. But when he attacks, he doesn’t let go of his prey,” Edouard Stern, a friend and high-level executive of the Lazard bank, has said of the corporate raider.
Pinault is a collector of modern art, especially the paintings of Mark Rothko. He and his second wife, Maryvonne, divide their time between a chateau in the Paris outskirts and an 18th century mansion on the Left Bank near the Luxembourg Gardens. Pinault has adorned this living and working space with some of the finest examples of modern art.
Does Business With French Left, Right
In rare interviews, Pinault stresses his lowly roots, but he has astutely cultivated politicians during his ascent and bent with the changing currents to be able to do business with both the French left and right.
In 1981, he helped a rising French politician worried about his reelection chances by buying a failing sawmill in a rural district of the Correze department. Twenty jobs were saved right before an election, and the politician, Jacques Chirac, went on to a brilliant career. A close, and useful, friendship was born.
In 1987, when Chirac was prime minister, Pinault used his contacts in government to buy an ailing state-owned newsprint mill on the cheap, then unloaded it two years later at a profit of more than $100 million.
When the Socialists were in power, Pinault exploited their desire to construct big integrated companies to safeguard employment by buying up failing companies. According to Pierre-Angel Gay and Caroline Monnot, authors of an unauthorized biography, Pinault did little or nothing to save workers’ jobs: He unloaded most of his purchases as soon as he could find a way to make a profit.
Often, recount Gay and Monnot, the French government plowed in millions’ worth of investment or granted him generous tax breaks, taxpayer funds that ended up boosting the price Pinault was able to wring from buyers. For years, a quartet of his subordinates haunted the bankruptcy courts of France, looking for promising pickings.
Capital, a French business magazine, has found that many of Pinault’s practices, though legal in France, could land him in trouble in other countries. He has “dipped into the treasury of his new acquisitions to reimburse his own debts, neglected the recriminations of minority shareholders, used and abused all the strings that can be pulled in French-style capitalism,” the magazine said.
Earlier this year, the Economist magazine claimed that filings made by Pinault to stock market regulators “had persistently included incorrect and misleading information” and that this was “ideally suited to avoid paying taxes in France.”
A high-ranking official with Artemis called the Economist’s allegations malicious, saying they were not worthy of a response.
But Pinault may not be able to remain silent for long. If he is unable to get the case against him dismissed, he may be forced to answer questions about his personal assets. And that, critics say, is one conversation he may not be looking forward to.
*
Maharaj reported from Los Angeles and Dahlburg from Paris.
