Pinault Details Path to Executive Life

The way French billionaire Francois Pinault told it Tuesday, it was his own “good nose” for investments and the upbeat patter of a French-speaking New York cab driver that drew him into the long-running Executive Life Insurance Co. scandal.

Pinault and a company he controls are the remaining defendants in a 6-year-old lawsuit filed by California officials in federal court in Los Angeles that seeks to recoup billions of dollars lost by Executive Life policyholders when state insurance regulators seized the teetering Los Angeles insurer in 1991.

The appearance of Pinault on the witness stand seven weeks into the slow-moving trial was hotly anticipated by the French media. The fourth-richest person in France according to Forbes magazine, Pinault is a colorful and controversial figure in his homeland. He also controls an empire that includes world-class brands such as Gucci, Yves Saint Laurent and Christie’s auction house.

At least half of the day’s testimony was spent going over the details of the defendant’s rise to riches. Testifying in French, Pinault said he grew up in a small village in Brittany in northwest France, speaking a local dialect until he started elementary school. He tended cows on his father’s 25-acre farm and operated the farm’s steam-powered sawmill, the seeds of what would one day become a $6-billion personal fortune.

“I’m probably the only CEO of a big company in France who can fell a tree,” he said.

Under questioning by his attorney, the trim, 68-year-old executive denied the state’s contention that he conspired with French banking giant Credit Lyonnais to illegally gain control of Executive Life’s lucrative junk bond portfolio. He said he bought about $2 billion worth of the high-risk bonds in 1992 simply to diversify his holdings and get a foothold in a then-listless U.S. economy.

Pinault said he decided to take a plunge on the bonds during a visit that year to Manhattan, where he browsed Madison Avenue boutiques between meetings with investment bankers and advisors.

“The bankers and businessmen told me the [U.S.] economy was not too good, but one day it would pick up,” Pinault testified through an interpreter.

But it was a French-speaking Haitian cabbie’s observation that business was picking up that persuaded the billionaire “to buy this bloody portfolio,” Pinault said, grinning toward a courtroom packed with dozens of lawyers and a phalanx of Gallic reporters.

In its lawsuit, the state alleges that Credit Lyonnais used a series of front companies -- including Pinault’s Artemis -- to hide its involvement in the sale of Executive Life’s life insurance business, once the biggest in California, and its bond portfolio, which included debt issues from more than 200 U.S. companies.

At the time, federal law banned banks from controlling insurance companies, and state law prohibits foreign governments from owning California-licensed insurers.

Insurance Commissioner John Garamendi, who engineered the 1991 Executive Life sale during an earlier term as commissioner, feared the insurers’ bonds would continue to plummet in value and was anxious to sell quickly -- even if it meant steep losses for Executive Life’s 330,000 policyholders. But instead of plummeting, the bonds climbed in value after the state unloaded them, eventually delivering about $2 billion in profits to Pinault and Credit Lyonnais.

Pinault later bought Executive Life’s successor, Los Angeles-based Aurora National Life Assurance Co., in 1994. The Department of Insurance now says it never would have approved the change in ownership had regulators known that Artemis was part of the alleged fronting arrangement with Credit Lyonnais.

Pinault didn’t deny that front companies were involved in the Executive Life deal, testifying that in France, such agreements “are quite common and not at all improper.”

The Executive Life trial, which is expected to last another week, continues today with Pinault back on the stand for cross-examination by the Department of Insurance’s lawyers. Most of the original defendants in the state’s lawsuit, including Credit Lyonnais, earlier settled out of court for $600 million.

Gary Fontana, the state’s lawyer in the Pinault case, estimates total policyholder losses in the Executive Life collapse at $4 million to $4.5 million.