The California Attorney General's Office is considering expanding the scope of its multibillion-dollar lawsuit against various parties involved in the 1991 sale of defunct Executive Life Insurance Co., according to several sources familiar with the case.

The original complaint, filed June 20, alleges that several European entities and individuals conspired to fraudulently conceal the identity of French bank Credit Lyonnais as the true purchaser of Los Angeles-based Executive Life. Such an acquisition would have been prohibited under the Glass-Steagall Act, which made it illegal for banks to own more than 25 percent of any non-bank company.

Thus far, only Europeans almost all of them French have been named in the Attorney General's suit, essentially the same defendants as those named in a 1999 civil suit being pursued by the California Department of Insurance. Now, according to several attorneys involved in the two parallel state cases, one or more American parties are being examined as possible additional defendants. The Attorney General's case seeks damages of not less than $2 billion to repay losses sustained by about 340,000 Executive Life policyholders and retirees as a result of the 1991 sale. In addition, it asks for reimbursement of all court costs and "further or additional relief as the court deems proper."

Having U.S. defendants named to the state civil suits would come as a great relief to the European defendants, according to several involved attorneys, because it would disperse culpability at a crucial juncture. It also would put the spotlight on a group of powerful American financiers and attorneys who played a role in the Executive Life sale.

Already, the litigation has thrust attention on two longtime Democratic political figures former Insurance Commissioner John Garamendi, who oversaw the transaction, and current Attorney General Bill Lockyer.

Lockyer is running for re-election next year. Garamendi, currently a partner in Ronald Burkle's Yucaipa Cos. LLC, recently announced that he would run in next year's election to regain his former post as California Insurance Commissioner.

Federal inquiry

A spokeswoman for the Attorney General's Office would not comment on the case. "We wouldn't discuss in any way what we are working on," said spokeswoman Sandra Michioku. "What we have is a pending case We are not going to get into details of our case at this time."

Meanwhile, the U.S. Attorney's Office is expected to decide in the next few weeks whether to hand down criminal indictments in connection with the Executive Life deal.

After completing a multi-year investigation in April, Jeffery B. Isaacs, assistant U.S. attorney in Los Angeles, notified top federal officials that he planned to seek indictments against several French executives. Isaacs' findings have been forwarded to Washington, where they are being reviewed by Assistant Attorney General Michael Chertoff, head of the Justice Department's criminal division, sources said.

Justice Department officials had no comment.

If indictments are handed down and the defendants convicted, the federal government could permanently ban Credit Lyonnais from doing business in the United States. Such a move would be devastating to the French bank, due to its high volume of U.S. business and huge amounts of money transfers it handles in the United States. Any European individuals convicted would potentially face stiff fines and prison terms, if the United States is deemed to have jurisdiction (a potentially explosive political issue) and France agrees to extradite them.

As the various sides await a decision at the state and federal levels, infighting has erupted between the state Attorney General's Office and Department of Insurance over which state agency should take the lead role in the case. Meanwhile, attorneys for various European defendants are pushing for American parties to be named as additional civil defendants, or criminally indicted.

"The French are outraged why should they be punished for trying to come in and help a (U.S.) insurance company in trouble, in a deal that was brokered by a bunch of American guys?" said Brian Sun of O'Neill Lysaght & Sun, an attorney representing Jean Francois Henin, head of Credit Lyonnais' subsidiary Altus Finance S.A. and a defendant in the case. "My client and others at Credit Lyonnais relied very heavily on the Americans as to how to structure this deal."

Chief among the American entities involved in the deal were Apollo Advisors LP and Morgan Lewis & Bockius, which served as financial advisor and legal advisor, respectively, in the sale of Executive Life and its $6 billion junk bond portfolio to French entities. The portion of the deal alleged to have been fraudulent was the sale of Executive Life's insurance business to a syndicate led by MAAF Assurances but allegedly secretly controlled by Credit Lyonnais and its Altus unit, according to the state lawsuits.

Apollo principals who played roles in structuring the Executive Life deal are Leon Black, John J. Hannan and Craig M. Cogut, according to several attorneys involved in the case.

Apollo's attorney, James E. Lyons of Skadden Arps Slate Meagher & Flom, declined comment.

Garamendi's role

Attorneys Richard Drooyan and Cary Lerman, who have been retained by Morgan Lewis, said the Attorney General's Office has not contacted them about the Executive Life case, and there has been no indication that Morgan Lewis or any of its attorneys are suspected of any wrongdoing.

Morgan Lewis is mentioned in both the Attorney General's and Insurance Department's complaints, but neither it nor any of its attorneys are not named as defendants. The firm and one of its attorneys, David Harbaugh, are identified as having submitted various allegedly fraudulent documents on behalf of the French syndicate.

It was Garamendi who in early 1991 became concerned about the rapidly deteriorating value of Executive Life's junk bond portfolio that Executive Life Chief Executive Fred Carr had purchased from Michael Milken and others at Drexel Burnham Lambert. The department wound up seizing the company.

Garamendi was eager to auction off the bonds and the insurance company, realizing that the collapsing junk bond market would mean ever-lower proceeds to pay off policyholders. The state wound up selling Executive Life's $6 billion-plus junk bond portfolio to Credit Lyonnais' Altus subsidiary in the spring of 1992 for about $3.5 billion, after four public auctions were held.

A few months later, the state sold Executive Life's insurance business to a newly formed entity, Aurora National Life Assurance Co., which was believed to be owned by the MAAF-led French syndicate but is alleged to have been controlled by Credit Lyonnais and its Altus unit.

Informed sources close to the Attorney General's Office said Garamendi is not suspected of any wrongdoing, and he is not named as a defendant.

But several attorneys representing various French defendants, including French billionaire Francois Pinault (who now owns two-thirds of the former Executive Life parent company, since renamed New California Life Holdings Inc.) insist that Garamendi must have known about the alleged secret agreement between the French syndicate and Credit Lyonnais. They point to a Dec. 23, 1992 letter Garamendi sent to Henin, head of Credit Lyonnais' Altus unit.

"I would like to express my thanks to you personally for all your efforts in communicating with the Investor group," the letter states. "I do understand how difficult it has been to hold the Investor group together and explain what is happening in California."

Stephen Smereck, a senior associate at Gibson Dunn & Crutcher who is on Pinault's defense team, said, "the idea that the commissioner (Garamendi) did not realize the bank (Credit Lyonnais) had control over the MAAF group is astonishing.

"The only way that letter makes sense is if the commissioner knew the bank had a role and had some control over the investors and was able to keep them together," Smereck said.

Garamendi response

Garamendi, in a phone interview last week, denied any impropriety and said he never had any such knowledge of the French syndicate.

"We took great efforts to investigate the ownership of the French companies. That investigation was done by our most competent on-staff lawyer," said Garamendi.

One other participant is Eli Broad, who as chairman of SunAmerica Inc. ended up buying a one-third interest in New California Life Holdings and its operating company, Aurora National Life Assurance Co.

Broad did not return phone calls seeking comment. But in a written response, SunAmerica issued this statement:

"No one has alleged that SunAmerica was aware of, or in any way involved in, any alleged improper act described in any of the lawsuits," the statement reads. "In addition, Mr. Broad was not personally involved in the transaction. His only 'connection' is that, at the time, he was chairman and chief executive officer of SunAmerica."

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