Jury Gives Mixed Verdict in Exec Life Fraud Trial
A jury reached a split decision Tuesday in the long-running legal battle over the collapse of Executive Life Insurance Co., finding that a company controlled by French billionaire Francois Pinault defrauded California regulators in a scheme to acquire the failed insurer’s assets, but clearing Pinault himself of wrongdoing.
The decision, which came after an eight-week trial and more than 12 full days of deliberation, left open the question of whether damages would be assessed against Pinault’s firm, Artemis. The state had been seeking damages of $1 billion.
U.S. District Judge A. Howard Matz postponed a hearing on the issue until the last week of May at the earliest and urged both sides to settle.
“It’s time to stop the posturing,” Matz told attorneys on both sides. “It’s time to stop the muscle flexing. I hope you will resolve your differences.”
Los Angeles-based Executive Life was the largest life insurance company in California when it collapsed in 1991 because of steep losses in what had been a $7-billion junk bond portfolio. In an attempt to protect policyholders, state Insurance Commissioner John Garamendi took over the company and sold the assets for $3.25 billion in 1992 to an investor group financed by French banking giant Credit Lyonnais. The investors later sold the assets for a big profit.
The state Department of Insurance filed suit in 1999, alleging that Credit Lyonnais, owned at the time by the French government, used a series of front companies to acquire the junk bond portfolio and the insurance assets of Executive Life, in violation of a state law that prohibits foreign government entities from owning insurance firms in California.
Specifically, the state’s suit alleges that Artemis was created in part by Pinault in 1992 in a scheme to help Credit Lyonnais unload the assets after U.S. officials began asking questions. Pinault, one of the richest people in France, controls a financial empire that includes fashion brands Gucci and Yves Saint Laurent and Christie’s auction house.
In its verdict, the jury cleared Pinault of civil charges that he engaged in intentional misrepresentation, concealment or fraud when he acquired some of the assets of Executive Life.
However, the jury found that Artemis was liable for conspiracy and fraud for its role in the deal.
The jury deadlocked on the question of whether state regulators, had they known of the scheme, would have sold the assets to another party.
Reflecting the hybrid nature of the jury’s decision, both sides claimed victory.
“We’re delighted that Mr. Pinault was vindicated totally,” said the billionaire’s attorney, James Clark of Los Angeles.
Garamendi, meanwhile, said he was “thankful the jury saw it our way on the fundamental point of fraud and conspiracy.” He added that he believed the state was in a “very strong bargaining position” going into any settlement talks, but declined to elaborate.
After the verdict, activists among Executive Life’s 330,000 policyholders, who have been fighting for years to recover financial losses from the failed insurer, said they were deeply disappointed.
They also expressed dissatisfaction with the handling of the case by Garamendi and his legal team.
“We were hoping for a recovery,” said Sue Watson of Phoenix. She said her daughter, Katy, 25, had lost an estimated $1.5 million on her Executive Life annuity. “As usual, the policyholders are just left behind.”
The commissioner’s special counsel in the case, Gary Fontana, has estimated that policyholders lost more than $4.5 billion in the value of their life insurance death benefits, annuities and lawsuit settlements in the years since the insurer collapsed.
In February, just days before the trial was slated to start, the French government, Credit Lyonnais and other defendants agreed to settle with Garamendi and another plaintiff for $600 million.
Other defendants have settled or opted not to defend themselves, leaving Pinault and Artemis as the last defendants.
Garamendi had been seeking to recover as much as $3.5 billion from the French, and the $600-million settlement caused outrage among many Executive Life policyholders.
In the wake of Tuesday’s verdict, Executive Life annuitant Nicole Leschinsky, 37, of Novato, Calif., who is paralyzed from the chest down from a 1982 automobile accident, said she now had little hope of augmenting a $1,400-a-month payment that covers only about half of her medical expenses.
Leschinsky and other policyholders said they were pinning their last hopes on a suit filed by California Atty. Gen. Bill Lockyer against Artemis, Pinault and a number of U.S. investment advisors who allegedly aided Credit Lyonnais in putting together the deal to acquire the Executive Life bonds.
The suit, which is scheduled for oral hearings before the California Supreme Court on June 1, contends that the alleged fraudulent acquisition of the junk bond portfolio violated the California False Claims Act. The defendants have argued in lower courts, so far successfully, that only the state Department of Insurance has legal jurisdiction to seek damages for violations of state insurance laws.
“The attorney general’s case remains an important part of this litigation, and we’re proceeding full speed ahead to the state Supreme Court,” Lockyer spokesman Tom Dresslar said.
Whether Garamendi will be a party in the attorney general’s case remains unclear. But in the meantime, the insurance commissioner could find himself bedeviled by his 14-year-old decision to sell the bonds as he seeks higher political office.
Garamendi is expected to run for lieutenant governor in 2006 and probably will face tough primary election competition from state Sen. Jackie Speier (D-Hillsborough). Speier, chairwoman of the Senate Insurance Commission, has asked a legislative audit committee to look in to Garamendi’s handling of the Executive Life estate and payments to policyholders.
*
(BEGIN TEXT OF INFOBOX)
Executive Life: Tracking a deal
April 11, 1991: California Insurance Commissioner John Garamendi seizes Los Angeles-based Executive Life Insurance Co., which is struggling with huge losses in its junk bond portfolio. It is the largest regulatory seizure of an insurer in the nation’s history.
May 1991: Garamendi puts Executive Life up for sale and reports receipt of a $3-billion bid from a French investment group.
November 1991: Garamendi announces conditional selection of the French group’s revised $3.55-billion bid, including $3.25 billion to acquire the company’s junk bonds.
September 1993: Deal closes after legal battles.
February 1999: California Insurance Commissioner Chuck Quackenbush sues bank Credit Lyonnais and a group of insurance and finance companies, alleging they hid information in the acquisition of Executive Life to skirt state and federal laws.
June 2001: California Atty. Gen. Bill Lockyer sues Credit Lyonnais and partners for allegedly conspiring to defraud policyholders.
May 13, 2002: A group of Executive Life policyholders loses a crucial round in their fight to keep alive their lawsuit accusing Credit Lyonnais and its partners of fraud in the purchase of the defunct insurer’s assets.
July 9, 2003: Credit Lyonnais negotiates with the Justice Department to pay as much as $600 million to avoid criminal indictment in connection with its allegedly fraudulent acquisition of Executive Life.
Dec. 11, 2003: French officials agree to pay $760 million to settle a criminal probe into the Executive Life deal. Credit Lyonnais pleads guilty to a financial reporting violation and later agrees to pay a $100-million fine.
June 9, 2004: As part of the settlement, the state Department of Insurance receives $110 million on behalf of 330,000 former Executive Life policyholders.
Oct. 29: Valencia-based Aurora National Life Assurance Co. agrees to pay $11.8 million to the losing bidder in the 1991 auction for the assets of Executive Life Insurance Co. to settle a civil lawsuit.
Feb. 15, 2005: The day before jury selection is to begin in the state Department of Insurance’s lawsuit, Credit Lyonnais and the French government agree to pay $600 million to settle their part of the suit.
Feb. 16: A group of former Executive Life policyholders demands that the state Senate Insurance Committee investigate the settlement.
Feb. 18: Trial begins for the last defendants in the Insurance Department’s Executive Life lawsuit: French billionaire Francois Pinault and Artemis, a company he controls.
March 2: Insurance Commissioner John Garamendi testifies that he never would have sold Executive Life’s junk bond portfolio to the French investor group if he had known they had signed “secret side agreements” that he alleged hid the true identity of the buyer.
March 15: State lawmakers call for an investigation of Garamendi’s authorization of various Executive Life settlements.
April 6: Pinault, completing two days of testimony, denies any wrongdoing in his purchase of the Executive Life bonds.
April 18: Jury begins deliberations.
May 10: Jury exonerates Pinault of wrongdoing but finds that Artemis conspired to defraud California regulators. Damages phase of trial is postponed.
Compiled by Times researcher Robin Mayper
Source: Times research
