Credit Lyonnais Probe Could Lead to Loss of U.S. License

One of Europe’s most powerful banks, Credit Lyonnais of France, could be stripped of its U.S. banking license and some of its top former executives may face criminal charges for their roles in an illegal deal that cost policyholders of a now-defunct California insurer billions of dollars, sources said.

U.S. prosecutors are readying criminal indictments against the state-controlled bank and at least a dozen French nationals who were involved in the 1992 takeover of Executive Life Insurance Co., according to the same sources. The indictments would culminate an 18-month investigation into Credit Lyonnais’ purchase of Executive Life from state insurance authorities who seized the insurer after its large portfolio of junk bonds collapsed.

Sources say prosecutors in the U.S. attorney’s office in Los Angeles have been able to show that Credit Lyonnais, in its efforts to skirt federal and state laws concerning ownership of insurance companies, filed false information with regulators and used some clients as fronts to acquire Executive Life’s junk bonds and insurance businesses.

During the last few months, a steady parade of French witnesses--most of them current and former Credit Lyonnais executives--have traveled to New York and Los Angeles to answer questions from attorneys with the Justice Department and Federal Reserve Bank, the two agencies investigating the deal.

“The U.S. authorities know more than I do,” said one senior Credit Lyonnais executive who was interviewed by government attorneys. “They know more than enough” to institute criminal action against the bank. The executive, like two other sources familiar with the investigation, spoke to The Times on condition of anonymity.

Assistant U.S. Atty. Jeffrey B. Isaacs, who is spearheading the investigation, declined to comment, as did officials with the Federal Reserve Bank in New York.

But sources said criminal charges could be issued as early as next month and could range from mail and wire fraud to violations of U.S. banking laws.

In Paris, financial analysts said the loss of its American license would be a damaging blow for Credit Lyonnais, which earns 10% of its global revenue in the U.S. market.

“If the license were suspended [for a time], that would be moderately bad for their image. They would lose several million euros,” said Frederic Bourgeois, banking and insurance analyst with Natexis Capital in Paris. “I can’t imagine they would be definitively forbidden from doing business in the U.S. If that were the case, it would be extremely damaging. They would have to resell all of their” $200 billion in U.S. assets.

The case against Credit Lyonnais and its former officials has been crafted by federal prosecutors and FBI agents poring over thousands of documents, some of which have been turned over by the bank itself.

Foremost among them is a 17-page memo about the Executive Life deal that current Credit Lyonnais Chairman Jean Peyrelevade received shortly after he took the job in 1993.

The memo details how Credit Lyonnais’ subsidiary, Altus Finance, in 1992 won then-California Insurance Commissioner John Garamendi’s fire sale on Executive Life’s junk bonds, a $6-billion portfolio marked down by 50%. The junk bonds contained stakes in American companies that could result in huge windfalls when the market improved and the debt would be converted to controlling ownership in the companies.

But standing in Credit Lyonnais’ way was a federal law that at the time prohibited a bank from owning an insurance company. A separate California law made it illegal for insurance firms to be owned by foreign governments or companies controlled by such governments.

The memo detailed how the bank paid $3.25 billion to get the junk bonds. And in a separate transaction, a consortium of French investors, led by a small French insurer, MAAF, acquired Executive Life’s insurance business in exchange for injecting $300 million in new capital.

But, according to the memo to Peyrelevade, the MAAF group was merely serving as a front for the bank. “We have a commitment to buy back the shares and the right to nominate others to hold them,” the memo stated, describing what is also referred to as a “parking” agreement.

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, Artemis, which it set up with Francois Pinault, one of the bank’s biggest debtors. As part of the deal, the bank loaned Pinault $2 billion to buy the bonds.

According to Jean-Francois Henin, the Credit Lyonnais official who orchestrated the transaction, Artemis also gained control of the secret parking agreements with MAAF 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.

State and federal regulators say the deals involving the junk bonds and the insurance business violated the laws governing ownership of insurers by banks and foreign-government-controlled entities.

So far, Credit Lyonnais and Pinault, one of the richest men in the world, have earned $2.5 billion from the Executive Life deal. That money would have gone to the thousands of Executive Life policyholders, many of whom were accident victims who saw their payouts from policies and annuities slashed by as much as 40% after the insurer collapsed.

The California insurance commissioner has since sued the bank, Pinault and other French entities to recover the profits.

Pinault has denied any wrongdoing.

For its part, Credit Lyonnais insisted that it alerted U.S. authorities of possible violations by its subsidiary when it became aware of it in 1998.

But the memo to Peyrelevade, first reported by London’s Economist magazine this month, casts doubt on that assertion and places special scrutiny on the 61-year-old bank boss.

A Credit Lyonnais spokesman told The Times in Paris that Peyrelevade’s deputy did not pass along the full memo to his boss. “It is certain that Peyrelevade didn’t see the document at all,” the spokesman said.

Peyrelevade has offered for more than a 1 1/2 to meet with U.S. officials, the spokesman said, but the Americans so far have requested no meeting.

Isaacs refused to say whether prosecutors had asked to interview Peyrelevade, referring The Times to Peyrelevade’s New York attorneys, who did not return telephone calls.

Gary Fontana, a San Francisco attorney who is representing the insurance commissioner’s office in its suit against Credit Lyonnais, Pinault and others, said the “only credible conclusion” is that Peyrelevade knew of the scheme and didn’t alert regulators earlier.

“This is as deliberate a fraud and deceit of federal and state regulators as I have ever seen,” said Fontana, who was given a copy of the memo. “It is one carried out by the highest levels at Credit Lyonnais.”

The unfolding scandal is only the latest blow to a European financial institution struggling to live down a recent past marred by huge losses, bad management and fraud.

Formerly government-owned but privatized in July 1999, Credit Lyonnais was one of the motors of the go-go style of French state capitalism of the 1980s, when Socialist President Francois Mitterrand was in power.

A slump in the Paris property market and the disastrous decision to finance the purchase of MGM Studios helped plunge the bank, then France’s largest, into the red.

Frightened that the problems of Credit Lyonnais, if they became known, would undermine the franc and throw hundreds of thousands of French out of work, officials of the bank and government agreed to issue a false balance sheet that showed Credit Lyonnais turning a 20-billion franc (around $4 billion at the time)profit in 1992.

Since then, bailouts to Credit Lyonnais have cost French taxpayers an estimated $20 billion, a European record for a bankruptcy or near-bankruptcy. Various criminal investigations have been launched, but unlike in the U.S. savings and loan scandal that occurred about the same time, not a single official of the bank has gone on trial in France.