French Settle Executive Life Suits
Credit Lyonnais and the French government agreed Tuesday to pay $600 million to settle their part of a long-running legal battle over the 1991 collapse of Executive Life Insurance Co.
The settlement of two consolidated lawsuits brought by California Insurance Commissioner John Garamendi and a Bay Area company, Sierra National Insurance Holdings Inc., is expected to be endorsed today by a U.S. District Court judge in Los Angeles.
Credit Lyonnais, a major French bank, and two French-government controlled companies have agreed to pay $525 million to the state and $75 million to Sierra, according to attorneys familiar with the agreement.
The payments would settle fraud claims arising from the purchase of failed Executive Life and its portfolio of devaluing junk bonds by the bank and MAAF, a Paris-based insurance company. Sierra was a losing bidder to buy the insurance business and the bonds.
The state’s suit, originally filed six years ago by then-Insurance Commissioner Chuck Quackenbush, alleges that Garamendi, during his previous 1991-94 term in office, was defrauded by Credit Lyonnais and other French companies that tricked him into selling them the crippled insurer and its junk bond portfolio, which they later sold at a big profit.
At the time of the sale, Credit Lyonnais was controlled by the French government, which assumed any liabilities related to Executive Life. California law bars foreign governments from owning insurers licensed to do business in the state.
If approved by the court, Tuesday’s agreement will remove the two main French defendants from the suit.
But that doesn’t necessarily mean a trial won’t take place. There are two other defendants: Artemis, a holding company controlled by French billionaire Francois Pinault that bought some of the Executive Life bonds, and MAAF, the insurance company.
Garamendi has been seeking to recover as much as $3.5 billion from the French, and word that he might settle the case for substantially less caused outrage among many of Executive Life’s approximately 350,000 large and small policyholders.
The commissioner’s special counsel in the case, Gary Fontana, has estimated that policyholders lost upward of $4.5 billion in the value of their life insurance death benefits, annuities and lawsuit settlements over more than a decade.
“We’re just devastated,” said Vince Watson of Phoenix, whose daughter Katie, 25, is getting only about half of the monthly payments she was receiving as part of a structured settlement of a malpractice lawsuit in 1986.
Watson said court documents indicated that policyholders like his daughter could expect to receive only 14% of any settlement. Most of the money would go to a national guaranty association that paid more than $2 billion in Executive Life claims in the early 1990s, to pension funds holding investments backed by Executive Life policies and to attorneys’ fees.
Fontana alone is slated to receive as much as $70 million in legal fees, sources close to the case said.
Maureen Marr, a spokeswoman for a policyholder group, the Executive Life Action Network, likened the proposed $600-million payout to a slap on the wrist or a traffic ticket.
“We demand full and just compensation for our losses, and we will call for Mr. Garamendi’s immediate resignation if this settlement is so little and so late,” she said.
Marr said the group was asking the state Senate Insurance Committee to investigate the Department of Insurance’s handling of the Executive Life estate, which spanned the terms of three commissioners: Garamendi from 1991 to 1994 and again from 2003 to the present, Quackenbush from 1995 to 2000, and Harry Low from 2000 to 2002.
Elliott Associates, a New York hedge fund with $400 million in bonds backed by Executive Life policies, denounced the settlement as “patently unfair and totally ludicrous in the face of the billions that have been stolen from policyholders and investors in this sordid criminal saga.”
A spokesman for Sierra couldn’t be reached for comment on the deal. A Garamendi spokesman, Norman Williams, defended the settlement as money on the table versus the uncertainty of a jury trial.
“Six hundred million dollars is a great deal of money. It will go a long way toward helping policyholders who were harmed by the fraud of the Credit Lyonnais group,” he said.
What’s more, the settlement money would be available for immediate disbursement to policyholders and doesn’t need to wait for the completion of a three-month trial and possibly years of legal appeals, he said.
The proposed settlement includes a payment of $225 million on top of $375 million from Credit Lyonnais that had been set aside as part of a 2003 criminal plea bargain struck with federal prosecutors by the bank, MAAF and MAAF’s chairman.
Executive Life was the largest life insurance company in California when it began sliding into insolvency because of steep losses in what had been a $7-billion portfolio of junk bonds. In an effort to protect policyholders, newly elected Commissioner Garamendi took over the company, selling the junk bonds to Credit Lyonnaise and the insurance business to MAAF.
