Commissioner: Buyer of Exec Life Was Veiled

Insurance Commissioner John Garamendi testified Wednesday that he never would have sold the junk bond portfolio of failed California insurer Executive Life Insurance Co. to a French investor group if he had known they had signed “secret side agreements” that he claimed hid the true identity of the buyer.

“If we had known about the agreements,” said Garamendi, taking the stand in a civil suit in federal court in Los Angeles, “it would have been, ‘Goodbye, go back to France. Get out of here.’ ”

The state of California is suing Artemis, a holding company controlled by French billionaire Francois Pinault, over its role in the sale of Executive Life’s assets to a group of French investors during Garamendi’s first term as commissioner in the early 1990s.

The lawsuit, filed in 1999 by then-Insurance Commissioner Chuck Quackenbush and now being pursued by Garamendi, alleges that French banking giant Credit Lyonnais, controlled at the time by the French government, used a series of front companies to acquire Executive Life’s assets in 1991. State laws prohibit foreign banks from owning insurance firms licensed to do business in California.

The state contends that Artemis, formed in December 1992, was created by Credit Lyonnais solely to conceal from U.S. regulators the bank’s role in the Executive Life deal.

In testimony Wednesday, Garamendi said that in 1991 he made it clear to the French investors that state law prohibited foreign banks from owning insurance companies. Documents introduced in court showed he was aware that Credit Lyonnais had loans to the investors group, but Garamendi testified his legal advisors signed off on that issue.

“We were told that money was not ownership or control,” Garamendi said. “It was a loan.”

Attorneys for Pinault argued that Garamendi knew all along that Credit Lyonnais was behind the French investors, but chose to ignore that fact because theirs was the higher bid. Their offer also achieved what the attorneys contend was Garamendi’s goal of separating the then-foundering junk bond portfolio from Executive Life’s insurance business, which the commissioner denies.

Garamendi sold the junk bonds to the investor group for $3.25 billion, while Executive Life’s portfolio of insurance polices were sold to a French insurance company. The investors ended up reaping billions of dollars in profit when the junk-bond market recovered.

Pinault’s attorneys have argued that Artemis acquired the bonds from the French investor group, and thus the company should not be included in litigation stemming from Garamendi’s original sale of Executive Life’s assets.

In Wednesday’s cross-examination by Pinault’s attorney, James P. Clark, Garamendi admitted that he had never spoken to or met Pinault.

In February, the French government, Credit Lyonnais and other defendants agreed to settle with Garamendi for $600 million. Other defendants have settled or opted not to defend themselves.

Garamendi’s cross-examination is set to continue today.