Insurer Case Moves to Talks

A frustrated federal judge has decided that the best hope for ending the long battle over failed Executive Life Insurance Co. is to put the main antagonists in a room for two days and see if they can work things out.

It’s been three weeks since the jury in the state’s lawsuit over the 1991 collapse of Executive Life produced a muddled set of verdicts for the last two defendants in the marathon case.

The jury cleared French billionaire Francois Pinault, accused of concealing his role in the sale of Executive Life’s assets. But it found that Paris-based Artemis, a company that Pinault acknowledged in court that he controlled, was liable for conspiracy and fraud.

Rather than have the jury decide on damages, U.S. District Judge A. Howard Matz, who presided over the three-month trial in Los Angeles, suggested that the two sides try to reach a settlement. But with both Pinault and state Insurance Commissioner John Garamendi claiming victory, there has been little progress.

So Matz, clearly running low on patience, recently ordered Garamendi and Pinault to “come to their senses” and meet face to face Friday and Saturday in a windowless jury room in the federal courthouse in downtown Los Angeles.

The goal: to hammer out a settlement. The consequence for not showing up: a contempt citation.

Garamendi and Pinault have indicated that they’ll comply with Matz’s order. But Pinault’s attorney, James Clark, noted that his client was exonerated by the jury and has passed leadership of Artemis to his son, Francois-Henri Pinault.

Complicating matters is a pending lawsuit filed by state Atty. Gen. Bill Lockyer against Pinault, Artemis and Purchase, N.Y.-based deal broker Apollo Advisors. The state Supreme Court is scheduled to hear arguments Wednesday on whether Lockyer has jurisdiction to pursue his suit.

An adverse ruling by the justices could mark a setback in the effort, more than a decade long, by more than 300,000 Executive Life policyholders to recover an estimated $4 billion in losses from the failure of what was then California’s largest life insurer.

Garamendi and Lockyer both allege in their lawsuits that Pinault and the other defendants defrauded state regulators by conspiring to use “fronting” companies to acquire Executive Life’s assets -- including billions of dollars in junk bonds -- after Garamendi seized the tottering insurer in 1991.

The buyers, who later sold the bonds for an estimated $2-billion profit, used the front companies to circumvent state and federal laws that would have prevented Garamendi from approving the deal, the suits charge.

Both complaints originally named as defendants French banking giant Credit Lyonnais and a French-government-controlled company.

But in February, just days before Garamendi’s trial was slated to begin in Matz’s courtroom, Credit Lyonnais, the French government and all other defendants except for Pinault and Artemis settled with Garamendi and another plaintiff for $600 million. An undetermined amount of the settlement is expected to be paid eventually to Executive Life policyholders.

How much, if any, those policyholders might be entitled to receive as a result of the tangled verdicts that concluded Garamendi’s case could be decided by the trial jury if Garamendi and Pinault can’t reach an agreement.

But Matz is leaning hard on the parties, including Lockyer, to cut a deal with his court-appointed mediator, Boston University law professor Eric Green, that could put the case to rest once and for all.

The judge said he wanted “to put an end to the spectacle” of Lockyer and Garamendi “competing with the other to recover money on behalf of California from what is now ... a considerably reduced pot.”

Matz described Lockyer’s lawsuit as a potential roadblock to reaching a settlement, and he admonished the attorney general and the insurance commissioner at a May 19 status conference to represent “the full interests of the state of California” and not “merely to try to pursue some kind of conquest that looks good politically.”

Lockyer spokesman Tom Dresslar bristled at the judge’s criticism.

“The [attorney general] is the top law enforcement official in the state,” he said. “We’re not out to conquer anyone. We’re out to vindicate the laws of this state and the policyholders of Executive Life.”

Dresslar said Lockyer would send a representative to this week’s parlay. Because Lockyer’s suit isn’t in Matz’s court, the judge doesn’t have the option of ordering him to appear personally on pain of a contempt citation.

Lockyer’s complaint, though similar to Garamendi’s, has a key difference: It accuses investment bankers Apollo Advisors of playing a key role in orchestrating “the timing of formal transfers of ownership from the phony fronts to Artemis in order to avoid public scrutiny.”

In contrast, Garamendi’s outside counsel, Gary Fontana, said his “thorough investigation” cleared Apollo, founder Leon Black and other Apollo-related parties. “As far as we know, there’s no one on this side of the ocean who knew the true facts other than one employee of Artemis,” Fontana said.

For its part, Apollo stresses that the company was given a legal release from liability by the Department of Insurance and has provided documents and testimony used by Fontana to make his case to the jury. “The attorney general’s claims against Apollo are without merit,” said Jim Lyons, the firm’s attorney.

Policyholder activists, who contend that they’re mystified about why Apollo was left out of the Garamendi suit, are banking on a long-shot win by Lockyer to get them billions of dollars in potential damages out of Pinault’s and Apollo’s deep pockets.

“Apollo was involved from day one and was equal partners in the deal,” said Maureen Marr of the Executive Life Action Network, a policyholders’ advocacy group.