Executive Life Case About to Go to Trial

Thirteen years ago, then-California Insurance Commissioner John Garamendi boasted that he couldn’t think of “a better gift for policyholders” than his sale of Executive Life Insurance Co. to a group of French investors.

The deal with banking giant Credit Lyonnais and MAAF Vie, a small Paris-based insurance company, ensured that Executive Life would be “rehabilitated” and that policyholders’ investments were “secure,” the commissioner told reporters in December 1991.

These days, Garamendi is singing a different tune. Back in office after an eight-year hiatus, the insurance commissioner is vigorously pushing a lawsuit filed by predecessor Chuck Quackenbush that accuses the French companies -- and, by extension, the French government -- of fraud and conspiracy. After six years of pretrial maneuvering, and barring a last-minute settlement, jury selection in the case is set to begin Wednesday in a federal courtroom in Los Angeles

Garamendi claims that he was tricked into selling the crippled insurer and its depressed portfolio of junk bonds to Credit Lyonnais. The lawsuit alleges that the deal deprived Executive Life and its 350,000 policyholders of $2 billion in profit made by the French after the bonds rebounded in value during the 1990s.

“The Credit Lyonnais group profited mightily as a result of its fraud,” Garamendi said recently. “This trial is about bringing justice to the policyholders and making sure the defendants are forced to disgorge their ill-gotten gains.”

Because Credit Lyonnais was owned by the French government at the time of the Executive Life sale, a win by Garamendi in the courtroom could leave French taxpayers on the hook for billions of dollars in damages. And that possibility is aggravating already strained Franco-American relations.

News about the Executive Life case appears regularly on the front pages of major Paris dailies. The trial has attracted a phalanx of French reporters and is expected to rival the Michael Jackson child molestation case being tried in Santa Maria for the attention of French readers.

“It’s a big story in France, and every development has been followed consistently and closely for many years,” said Marc Levine, Los Angeles bureau chief for Agence France-Presse, the French news service. “But now that we’re gearing up for the trial, interest is at an all-time high.”

George Terwilliger III, lead attorney for Credit Lyonnais and the French government, dismisses the suit as grandstanding by a politically ambitious elected official and contends that the state of California and Executive Life policyholders got a good deal back in 1991.

“The French taxpayer should not be forced by some legal fiction to pay the bill for the mismanagement of Executive Life,” Terwilliger said.

Executive Life, the largest life insurance company in the country when it slid into insolvency in 1991, was laid low by the collapse of a junk bond portfolio that was once worth as much as $7 billion. The company’s policyholders were threatened with losing some or all of their death benefits, and people who owned annuities sold by Executive Life -- many of them elderly or disabled -- were faced with the loss of their monthly annuity checks.

In an effort to protect policyholders, Garamendi took over the company, selling the junk bond portfolio to Credit Lyonnaise and the insurance business to insurer MAAF.

The rescue effort wasn’t a total success. Many annuity owners complained of losing as much as 40% of their income, and owners of basic life policies said they were hit with higher premiums and lower payouts. Municipal pension funds, meanwhile, suffered big losses on investment contracts sold by Executive Life.

Altogether, victims suffered an estimated $4 billion to $4.5 billion in damages, according to Garamendi’s special counsel, Gary Fontana.

And many have been protesting ever since.

Two weeks ago, former Executive Life policyholders placed ads in major California newspapers, urging Garamendi to aggressively fight for them in the upcoming trial.

“We feel we’ve lost a great deal,” said Wallace Albertson, a West Hollywood widow whose two annuities are worth only two-thirds of their value in 1991. “Most of the policyholders were middle-aged and elderly people. Many lost their homes.”

Garamendi is seeking as much as $3.5 billion in damages to make good at least some of the losses, while an insurance industry group that backstops failed insurers is seeking $2.5 billion. In addition to the French government, Credit Lyonnais -- which was privatized in 2003 -- and a handful of other companies could be hit with sizable judgments if Garamendi prevails.

The lawsuit, based on accusations made by a French whistle-blower in 1998, alleges that MAAF’s purchase of Executive Life’s insurance business in 1991 was a fiction.

According to court filings, a secret agreement between MAAF and Credit Lyonnais gave the bank effective control over the insurance company, an arrangement that Garamendi claims violated a California law that prohibits foreign governments from controlling insurance companies doing business in the state.

The arrangement also violated a federal statute in force at the time that outlawed banks from owning more than 25% of a non-banking business, the lawsuit alleges.

Had he known of the secret contracts, Garamendi contends, he would not have blessed the sale of Executive Life’s insurance business and junk bond portfolio to the French.

In a related criminal case, Credit Lyonnais, a separate French government-owned company, MAAF and its chairman agreed in December 2003 to plead guilty in federal court in Los Angeles to charges of making false statements to U.S. banking regulators in connection with the Executive Life deal. The defendants paid a record $772-million settlement. Some of the funds were set aside for disbursement after a settlement or judgment in Garamendi’s lawsuit.

Meanwhile, an appeals court in Paris upheld the filing of a complaint against the U.S. prosecutors in the case, accusing them of bribing witnesses, according to a report Friday in the French newspaper Le Monde.

That action underscores what some say is the French view that Garamendi’s legal attack is as much about politics as money.

“It’s basically Garamendi versus Chirac,” said forensic accountant Nicholas Feakins, referring to French President Jacques Chirac.

The ongoing legal battle, he said, has generated “a great deal of resentment in Paris.”