European investors and a French government-owned bank engaged in a "conspiracy of deceit" to defraud hundreds of thousands of policyholders of the now defunct Executive Life Insurance Co., California Atty. Gen. Bill Lockyer charged in a lawsuit filed Tuesday.
Lockyer's lawsuit seeks $2 billion in damages and alleges that more than 300,000 policyholders were cheated out of billions of dollars when Credit Lyonnais and other investors, including one of the world's richest men, operated a racketeering enterprise that obtained the assets of the failed California company.
"They lied repeatedly, at times under oath, about the true identity, financial relationships and affiliations of the parties that were really acquiring" Executive Life, the suit said. "As a result of those lies, [they] illegally profited by billions of dollars."
California law prohibits foreign governments from owning California insurance companies, but Lockyer's lawsuit accused Credit Lyonnais, then a government-owned bank, of using dummy companies to front for the purchase of Executive Life in 1991. The state government approved of the sale at the time, not knowing of the alleged secret manipulations of the French bank and the other companies.
Once the European investors owned Executive Life, junk bonds under the new company's control increased in value. California consumers were denied the benefits of that increase in value.
If successful, Lockyer's suit could reimburse policyholders for the losses they suffered in the Executive Life debacle, a huge potential windfall in the 10-year-old case.
The lawsuit opens a second battlefront for Credit Lyonnais, which was controlled by the French government and has been fighting in recent months to derail a criminal investigation in Los Angeles.
Executives from Credit Lyonnais were not available for comment.
In December 1992 Credit Lyonnais sold a portion of its junk bond portfolio to Artemis, a new company owned by French tycoon Francois Pinault, whose junk bond interests as a result of the deal resulted in him having controlling stakes in Samsonite luggage, Florsheim shoes and Chi Chi's restaurant chains, among other holdings.
The lawsuit named Pinault as a defendant, accusing him of failing to disclose to then-Atty. Gen. John Garamendi the "deceit and misconduct" by the other conspirators.
Stephen R. Smerek, an attorney for Pinault, said the French businessman had no knowledge of the secret agreements.
"Mr. Pinault did not know about the . . . agreements when Artemis purchased the junk bonds from Altus" Finance, a corporation that Credit Lyonnais owned and controlled, he said. "The allegations in this lawsuit against Artemis and Mr. Pinault are baseless and wholly without merit."
Lockyer's lawsuit came exactly a decade after insurance giant Executive Life fell victim to the collapse of the junk bond market and was seized by Garamendi.
The attorney general's involvement provides the influential European banking and insurance interests that acquired Executive's assets with a potent adversary at a time when they already are fighting private lawsuits and legal action by the California insurance commissioner.
As attorney general, Lockyer was able to sue under the California False Claims Act, a law that allows him to collect triple damages if he can prove that the state itself was defrauded. Lockyer also accused the defendants of violating the federal civil RICO statute under which he claimed that the investors' conduct had constituted a racketeering enterprise.
The suit was filed in San Francisco Superior Court shortly before 5 p.m. Lockyer said his office had been working on the case for more than two years and had spent nearly $2 million on its investigation.
"We are simply seeking justice for policyholders and many elderly investors who were cheated out of billions of dollars," he said.
Assistant U.S. Atty. Jeffrey Isaacs, who has been investigating Credit Lyonnais for several years, notified its top officials last April that he planned to seek indictments against the bank and several former executives in the coming weeks.
Since then, the French ambassador to the United States and his lawyers have been making frequent trips to the U.S. State Department in Washington, lobbying against an indictment. Top French diplomats also were expected to raise the issue with White House officials during President Bush's trip to Europe last week.
An indictment could be devastating for Credit Lyonnais, which earns 10% of its global revenue in the U.S. market. Analysts have said Credit Lyonnais would have to resell all of its $200 billion in U.S. assets if it lost its banking license.
The international implications of the Executive Life case are rooted in a decision that Garamendi made 10 years ago to seek a buyer for Executive Life's assets. With junk bond king Michael Milken acting as its advisor, Executive Life had acquired junk bonds valued at more than $6 billion when the market began to fall apart in 1989 and 1990.