Decision Near in Executive Life Criminal Case
Potential prosecution of Credit Lyonnais poses diplomatic quandary.
By MICHAEL STREMFEL
Staff Reporter
Senior officials at the U.S. Department of Justice will meet this month to decide whether to pursue criminal indictments against Credit Lyonnais and other European entities involved in the 1991 sale of Executive Life Insurance Co. and its $6 billion junk bond portfolio, informed sources told the Business Journal.
The meeting is to be headed by Assistant Attorney General Michael Chertoff, head of the Justice Department’s criminal division, as well as by Joshua Hochberg, chief of the department’s fraud section. Also in attendance will be officials from the U.S. Attorney’s Office in Los Angeles, who have been leading the multi-year criminal investigation, as well as attorneys for Credit Lyonnais and other involved parties.
“We’ll be going back to Washington at the end of the month, hopefully where we’ll get a final decision from ‘Main Justice,'” said one informed source.
A green light from the Justice Department would not necessarily result in criminal indictments, sources said. Instead, it would mean “completing the investigation and then initiating any settlement talks, of which there have been none to date,” the source said.
A negotiated settlement would be more likely than criminal indictments, some sources said, due to political sensitivities related to indicting a French firm.
The case involves the 1991 sale of Executive Life to entities tied to Credit Lyonnais, a deal that already is the subject of two multibillion-dollar civil cases, one by the California Department of Insurance and the other by the California Attorney General’s Office.
Both civil complaints allege that Credit Lyonnais and other European entities conspired to fraudulently conceal the identity of Credit Lyonnais as the true buyer of Executive Life. That deal ultimately resulted in massive losses for 340,000 Executive Life policyholders and retirees losses the state agencies are now trying to recoup.
Credit Lyonnais was controlled by the French government at the time of the Executive Life deal, and Bush administration officials are reticent to see a key ally indicted, especially after it provided crucial support during the war on terrorism.
“It would be unprecedented for us to indict our longest foreign ally,” said an attorney representing one of the French defendants. “We’ve only indicted a foreign government twice before South Africa and Iraq, and those were for arms dealing although I think the Iraq case may also have had a BCCI connection.”
(The Bank of Credit and Commerce International was a financial supermarket for arms dealers, terrorists and drug money launderers that became the subject of a global criminal investigation. It ultimately was shut down in 1991.)
While a negotiated settlement might be politically preferable, it may not be possible.
Cutting a deal
“I would not expect there to be any kind of negotiated settlement, based on the responses thus far by the defendants and their attorneys,” said one source close to the case. “So any green light (from the Justice Department) would essentially be moving toward indicting.”
However, a defense attorney in the case said, “In litigation, a negotiated settlement would never be precluded as an option. It would obviously depend on what the potential terms are the benefits and risks.”
Meanwhile, Credit Lyonnais and other involved European entities last week filed motions to have one of the state’s two civil cases dismissed. The motions, filed Jan. 9 in U.S. District Court in Los Angeles, assert that the California Attorney General’s complaint, filed last June, should be thrown out because the agency has no legal standing in the case.
Dismissal of the high-profile case would be a political blow to Attorney General Bill Lockyer, who is running for re-election this year and is widely considered a top candidate to run for governor in 2006.
Sandra Michioku, a spokeswoman for the Attorney General, offered only a terse response to inquiries.
“We filed our complaint and we believe we have a basis for it, so that’s why we’re pursuing it,” she said. “When there is an appropriate point in the process to provide a response, we’ll provide a response at that time.”
The Attorney General’s filing of its Executive Life case last summer came about two years after a virtually identical case was filed by the California Department of Insurance.
“The injuries if any, and we dispute there were any would be to the (California Insurance) Commission, which has exclusive standing to represent the interests of the Executive Life estate,” said Credit Lyonnais defense counsel Randolph Fishburn. “The Attorney General does not have legal standing, so its case is without merit.”
Gary Fontana, lead outside attorney for the state Insurance Commission, concurred with Fishburn. In fact, Fontana for months has been engaged in a turf war with the Attorney General’s Office over which agency should take the lead in the case.
“If the Attorney General thinks he’s going to take over and make the same claims of injury as the (insurance) commissioner has already made, he’s going to see his case dismissed,” Fontana said.
Immunity for advisors
The defendants’ motion to dismiss the Attorney General’s case comes almost a month after the insurance commission entered into a key immunity deal with Leon Black and two of his partners at Apollo Advisors L.P., who served as financial advisors on the Executive Life sale.
Black and his partners, Craig Cogut and John Hannan, agreed to testify against Credit Lyonnais and the other defendants in exchange for the insurance commission agreeing not to sue Apollo.
Black and other Apollo officials did not return phone calls.
Credit Lyonnais attorney Fishburn, when asked about Black and his partners promising to testify, said, “We didn’t do anything wrong, so there’s nothing they can say that’s going to change that.”
Besides the motions to dismiss and Apollo immunity deal, another recent wrinkle in the civil cases is that Chris Ames has taken over as lead in-house investigator on the Attorney General’s case. He replaces Brian Paugher, who retired. Ames, who works out of the agency’s San Francisco office, did not return phone calls last week.
Also, the Attorney General’s Office has retained San Francisco attorney Arthur Shartsis of Shartsis Friese & Ginsburg as lead outside counsel on the case. Shartsis declined to comment last week.
