California Amends Credit Lyonnais Suit
California Atty. Gen. Bill Lockyer has added a fresh crop of defendants to a multibillion-dollar lawsuit that accuses Credit Lyonnais and affiliates of the French bank of using phony business fronts to illegally acquire the assets of the defunct Executive Life Insurance Co. in 1991.
In an amended complaint filed in U.S. District Court in Los Angeles, Lockyer named Apollo Advisors of New York, Apollo President Leon Black--a former close associate of junk bond king Michael Milken--and three Apollo partners. The suit claims they helped to conceal the bank’s role in the purchase of Executive’s insurance business and junk bond portfolio for $3.25 billion.
California law bars foreign governments from owning insurance companies, and at the time of the purchase, the French government was majority owner of Credit Lyonnais. Moreover, under a federal law, since repealed, banks were prohibited from owning more than 25% of an insurance company.
Knowing this, the lawsuit states, Credit Lyonnais fronts and affiliates lied to the state to secure its approval of their bid for Executive Life. California authorities would not have approved the sale but for the “false statements and concealments,” says the suit, which was originally filed in June.
“Covert business arrangements that illegally included foreign investors were used to acquire the assets and bond portfolio of Executive Life at fire-sale prices,” said Lockyer, who filed the amended complaint Wednesday.
Besides Apollo and Black, the amended suit names John J. Hannan, an Apollo principal, and Craig M. Cogut and Eric B. Siegel, former partners. The men followed Black to Apollo after the collapse of Drexel Burnham Lambert and the criminal conviction of Milken.
Mike Weiner, general counsel for Apollo, on Thursday called the charges “irresponsible and baseless.” He said the allegations were especially surprising because the state insurance department--which is pursuing a separate lawsuit--determined his clients should not be charged.
The civil litigation is not the worst threat to Credit Lyonnais. Last April, the U.S. Attorney’s office in Los Angeles told the bank that it plans to seek an indictment on charges that might include mail and wire fraud, money laundering and making false statements to the Federal Reserve.
But federal prosecutors gave the bank’s lawyers time to appeal the decision to the Justice Department. Those discussions are continuing, and French authorities have asked the State Department to intervene on the bank’s behalf.
Collectively, more than 300,000 policyholders lost billions of dollars in the failure of Los Angeles-based Executive Life, which had been one of the country’s largest life insurers. Along with life insurance, the company sold high-interest annuities, banking on high returns from a $6-billion junk bond portfolio it had assembled with Milken’s help.
But the insurer’s fortunes fell with the junk bond market in 1989, and frightened policyholders began cashing out their policies. Then-state Insurance Commissioner John Garamendi wound up seizing the business.
In December 1991, Garamendi and a superior court judge approved the sale of the bonds and insurance business to a consortium led by a French insurer, MAAF. According to the lawsuit, the consortium was a front for the bank and a subsidiary, Altus Finance, which would maintain the real ownership and control.
The cast of characters and complex transactions multiply in the amended complaint. It says that at the time of the sale, Apollo was acting as an investment advisor to Altus, and was to share in profits from the insurance business and bonds.
The bonds included stakes in American companies that could be extremely valuable when the market rebounded. In 1992, Credit Lyonnais sold a portion of the bond portfolio to a company owned by French tycoon Francois Pinault, another defendant in the case. Altogether, authorities say, the individuals and businesses named in the case realized profits of more than $2 billion.
Although the state insurance department is pursuing a parallel suit on behalf of Executive Life policyholders and creditors, its lawyers have told the Apollo group that they won’t be sued.
“There was an evaluation of the evidence,” said Gary Fontana, a lawyer for the insurance department. “We reached one conclusion, and I guess they [the attorney general] reached a different” one. “We made the decision it was not appropriate to sue someone we thought was innocent,” he said.
Altogether, Lockyer’s suit accuses some 25 defendants of violating the state’s false claims and unfair competition acts, along with the federal anti-racketeering, or RICO, law. It seeks damages of $6 billion.
