Multibillion-Dollar Junk Bond Portfolio Undersold For Major Loss to State
(SACRAMENTO) - Attorney General Bill Lockyer today added four associates from former junk bond purveyor Drexel Burnham Lambert to a lawsuit alleging an international conspiracy used to illegally acquire assets held by the state and reap billions of dollars from the State of California and policyholders in the wake of the failure of Executive Life Insurance Co.
The complaint filed earlier against more than a dozen companies and individuals, including Credit Lyonnais, a bank once owned by the French government, was amended Wednesday to include Leon Black, John Hannan, Craig Cogut, Eric B. Siegel and several companies they operated in the alleged scheme.
"The additional defendants result from our ongoing investigation in this case," Lockyer said. "We believe an illegal scheme of secret arrangements and hidden profits was used to essentially cheat the state and policyholders. Covert business arrangements that illegally included foreign investors were used to acquire the assets and bond portfolio of Executive Life at fire-sale prices."
When seized by the California Insurance Commissioner in April 1991, Executive Life was one of the largest life insurance companies in the United States, and it owned one of the largest portfolios of junk bonds in the world, which was valued at more than $6 billion. The decline of the junk bond market earlier left the company financially impaired. The Commissioner's restructuring plan called for a package deal in which both the bond portfolio and the insurance company had to be sold together.
The complaint alleges that a group of investors led by Altus Finance, an investment subsidiary of Credit Lyonnais, the giant French-owned bank, contracted secretly in August 1991 with a small, financially troubled French auto insurer, MAAF Assurances, and several other small companies to act as "fronts" to conceal the bank's true involvement in the purchase of Executive Life assets. The secret arrangements hiding the bank's true involvement violated federal banking laws, as well as state insurance laws that prohibit foreign governments from owning California insurance companies.
The bonds and interest in Executive Life insurance operations acquired by Altus and the MAAF group were later sold to French business tycoon Francois Pinault and his company group, Artemis. The complaint alleges the concealment of a secret agreements between these companies and the French bank which arranged payments of over $450 million for the assets.
According to the complaint, the fronting arrangements, known in France as "contrats de portage," allowed MAAF and other companies to appear to be the purchasers of Executive Life assets, while Altus and Credit Lyonnais actually had ownership and control. "In reality, the participation of MAAF and other fronts was a sham designed to deceive the state, the Commissioner, the ... Court and other bidders," the complaint said.
The complaint adds that Black, through his company called Apollo, shared business enterprises with Credit Lyonnais, through Altus. The complaint alleges that Apollo and Altus knew that they could not purchase the insurance business directly without violating U.S. and California law and that they could not purchase the bonds without the insurance business also being acquired.
In December 1991, without knowing of the secret illegal arrangements, the Insurance Commissioner and the state Superior Court judge approved a sale of the junk bonds and insurance business to Altus and the MAAF-led investor group for $3.25 billion.
The Attorney General's complaint states that neither the Court nor Insurance Commissioner would have approved the sale had the French bank, its Altus subsidiary or MAAF disclosed the secret contracts. The complaint adds that the sale would have been blocked had the truth been known about the business arrangements between Apollo and Altus.
The complaint states that the deceit cost California an opportunity to reap substantial benefits from the sale of the insurance business and the junk bonds that would have ultimately benefitted Executive Life policyholders and retirees, as well as the state. The complaint adds that the sale would have been rejected if the Insurance Commissioner had known of the true interests of Black and others with former ties to Drexel, which worked years earlier with Executive Life to amass the company's huge junk bond portfolio.
Pending in federal court in Los Angeles, the complaint alleges violation of California's False Claims Act and state unfair business practices laws. Additionally, the complaint alleges that the conspiracy constituted a racketeering enterprise under federal civil RICO (Racketeer Influenced And Corrupt Organizations) law. The complaint stems from a two-year investigation by the Attorney General's False Claims section.