The Vampires in

Executive Life
Insurance Co.


 

Sightings from The Catbird Seat

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October 2, 2006

Payback Delayed

By Geoff Metcalf

Mendacious: Given to or marked by deliberate concealment or misrepresentation of the truth.

John Garamendi is running for Lt. Governor and to supplement an apparent mendaciousness, he is praying for induced selective memory loss.

Some fifteen years ago, as California insurance commissioner, Garamendi seized the assets of the Executive Life Insurance Company. In doing so, he allowed a questionable junk-bond player and a French government-owned bank to realize a humongous windfall despite a bunch of annuities and policyholders getting the short (and dirty) end of the stick.

It is beyond troubling that the man who is ‘supposed’ to be the policyholders/victims advocate seems to have helped the sleazy exploiters instead...and then has consistently tried to hide both the truth and his own culpability.

Garamendi would love to see the entire Executive Life issue just disappear. He tried (hard) to settle out of Court. He needs (like breath) not to see the lawsuits make it to trial. From his perspective it would be a bad thing to have to answer questions about what did and didn’t happen…To have to answer probing questions ‘under oath’ would be real bad…To have to answer them before the election is unthinkable.

There are some very serious concerns/questions that should be (and never have been) clarified. Frankly, as a candidate for Lt Governor, if (there is that noxious word), Garamendi did nothing wrong regarding Executive Life, HE should be the one demanding the opportunity (under oath) to correct any mean spirited partisan attacks on his integrity. He has his integrity (or lack of it) and his intelligence (or lack of it) challenged. He ‘should’ be angry at these attacks. His failure to take on his critics raises yet more questions.

Garamendi had a relationship with the infamous Leon Black.

Black used to work for Michael Milken's Drexel Burnham

Black is the guy who educated the French as to the immense value of the troubled Executive Life bonds. Beaucoup bucks…n’est pas?

Black was the financier who had arranged Executive Life’s original portfolio of corporate junk bonds and he created Apollo Fund and Apollo Real estate group.

The Apollo group has close personal and business ties to Yucaipa Company (this is Ron Burkle's investment company).

Burkle has been a big contributor to Democratic candidates in California for many years.

Now, let’s take a brief look at the underbelly of politics and sausage making.

Garamendi left the U.S. Interior Department in April 1998. He left reportedly to join Yucaipa as a partner ‘based in Washington D.C.’. He ‘worked’ for Yucaipa from 1998 to 2001.

Forbes magazine looked into Garamendi’s role at Yucaipa and his six figure job. When John took the gig (or was gifted the gig) he said he would establish an office in Washington D.C. However, to date (more significantly, during the less than three years Garamendi ‘worked’ for Yucaipa) Yucaipa had NO D.C. office…and still doesn’t.

Beyond confirming he was a partner, Garamendi never has said what he was doing for the company (besides cashing their checks).

Again, if these questions, suggestions, and intimations about something ‘squirrelly’ are baseless, it should be Garamendi who should be screaming for any and all opportunities to respond. However, the silence is deafening….

When Garamendi returned to the California Department of Insurance post he appointed his friend Rick Baum as his chief deputy. No biggie…that kind of appointment happens all the time. Baum was Garamendi’s first chief of staff, and they had a close personal and professional working relationship. However, Baum was also responsible for handling the Executive Life case.

In the Executive Life scandal, Garamendi wants voters to believe he was a victim. It wasn’t HIS fault. He was ‘duped’ by, well a LOT of people….the French government, the French consortium, anyone and apparently everyone who was providing him advice and counsel…including Rick Baum.

Some partisan types complain Garamendi also has relationships with law firms and attorneys in California that perform work for his Department of Insurance and for consumer groups. These same firms have contributed money to his campaign and have handled litigation for the commissioner.

Hey, that kind of ‘reciprocity’ isn’t unique to Garamendi, or even Democrats. However, it does raise questions about his ability to be independent and a for real defender of the consumer.

The last time I addressed this New York Life debacle I noted, His own staff reported that losses to Executive Life policyholders were over $4.5-BillionSo why would Garamendi settle for less than $600-Million?

The candidate who wants the ‘one heartbeat away’ from the California Governor gig, continues to duck and hide and whine, “I was duped”.

Before Garamendi can presume to hold office, he should insist on a complete and thorough delineation of what did and did not happen (and how) with Executive Life.

Come on John…informed voters want to know.

www.calnews.com/archives/metcalf210.htm


 

September 30, 2005

California and the West; Judge OKs Settlement in State's Executive Life Case

A French agency will pay $600 million over bank
Credit Lyonnais' purchase of the insurer.

From Bloomberg News

A federal judge approved a $600-million settlement that the French government had reached on behalf of Credit Lyonnais with California insurance regulators over the bank's purchase of Executive Life Insurance Co.

Under the settlement, state Insurance Commissioner John Garamendi will get $516.5 million to pay Executive Life policyholders, according to the order filed Wednesday in U.S. District Court in Los Angeles.

Garamendi sued Credit Lyonnais in 1999, saying the bank used front companies to buy the failed insurance business and its junk bond portfolio in the early 1990s in violation of U.S. and California law.

"We're pleased the settlement has been approved," said Norman Williams, a spokesman for Garamendi's office. "We're hopeful this will allow us to move forward and distribute the money to the policyholders as soon as possible."

The settlement, announced in February, left Artemis, the Paris-based holding company controlled by French billionaire Francois Pinault, as the only remaining defendant in the lawsuit.


 

January 16, 2002

No Assurances

Are California authorities giving a free pass to a former Michael Milken crony who helped to gut an insurance company, leaving thousands of policyholders to pick up the pieces?

By Ellie Winninghoff, Mother Jones

Sue Watson's nightmare began in early 1982, when she took her pneumonia-stricken daughter Katie, then 20 months old, to a Phoenix, Arizona, hospital. What ensued was described by one local newspaper as a "tragedy of errors." Hospital staff failed to give the infant oxygen for six hours and a pediatrician prescribed an overdose of the barbiturate Phenobarbital. By the end of the following day, Katie was brain dead.

Four years later, Watson, a fundraiser for a Montessori school in Phoenix, and her husband settled a lawsuit with the hospital for $4.2 million. Legal fees and expenses ate up nearly half the award, while another quarter went towards building a home in which the Watsons could care for their stricken child. The remainder was invested in a so-called structured settlement that the hospital purchased on Katie's behalf from the Los Angeles-based Executive Life Insurance Company.

Watson said she and her husband opted to accept the structured settlement instead of a lump sum payment in hopes of establishing a reliable income for Katie as a hedge against inflation. The hope, Watson said, was that the income from the structured settlement would increase, if only slightly, year to year.

"We were told that structured settlements were very safe," she recalls.

Not this one.

In 1990, Executive was sold to a French bank and its partners. The deal was orchestrated by 50-year-old New York financier Leon Black, Michael Milken's unofficial right-hand man as co-head of mergers and acquisitions at the now-defunct Drexel Burnham Lambert.

In October, 1993, the insurer cut Katie's income by 54 percent. Watson, who personally cares for her stricken daughter, is still livid. And she is concerned that Katie's future -- one that will always require round-the-clock care -- hangs in the balance.

"This little girl needed that money," she says. "If I died, and my husband died today, the money she is getting from that annuity right now is not enough to take care of her."

The Watsons are not alone. An accounting conducted by the California Attorney General's office showed that more than 300,000 Executive Life policyholders have lost billions -- $4.7 billion, according to Maureen Marr, an activist who has worked on behalf of Executive Life policyholders for the last decade.

Where did all the money go?

By 1990, Executive Life was in deep trouble. The company had purchased billions of dollars of junk bonds -- high-yield, high-risk investments -- from Milken. A recession, combined with bungling by US and California regulators, had hammered the bonds' values. With the company teetering on the edge of bankruptcy, John Garamendi, California's publicity-loving insurance commissioner, seized Executive Life and announced he would auction it to the highest bidder.

In the end, Garamendi sold Executive to an unusual partnership comprised of several French and Swiss investors and the massive French bank Credit Lyonnais. The bank, controlled by the French government, bought the bonds. Since it was illegal for the bank to control the company, the French investor group bought Executive's insurance operations. Black was billed as the French bidders' advisor.

The winners of the auction were the only bidders to propose splitting off the insurance company's $6.1 billion bond portfolio. The bank and its partners paid a total of $3.5 billion -- $300 million for the insurance operations and $3.2 billion for the bond portfolio. Considering that the bonds alone had a face value of $6.1 billion, it was a sweet deal -- one that Milken, in a 1992 Forbes interview, called "the investment opportunity of the decade."

Garamendi, who had called the bonds "toxic waste" because of they were so depressed in value, preferred that approach, saying at the time that it would provide some funds to shore up the struggling insurance company. But the effect of that strategy was devastating for Sue Watson and other policyholders, who otherwise may never have lost their money.

Not only had the insurer been sold for less than its market value, the company's primary source of investment income -- its bond portfolio -- had been stripped off and taken by Altus. The more lucrative of the bonds gained from the Executive sale were placed in an investment fund managed and partially owned by Black and his colleagues.

In late 1993, with its investment income severely diluted, the company cut policyholders' payments. Executive had been gutted, and those its policies were meant to protect, like Katie Watson, were left to pick up the pieces.

"Blood money," Watson fumes. "That's what these people took."

The complex deal in which Executive was purchased is now the focus of two lawsuits, one brought by the California Attorney General's office and one brought by the California Department of Insurance -- the same office under whose auspices the company was sold in 1990. The deal is also the target of legal action by the US Attorney, who has notified French officials that he means to seek indictments related to the case.

All of the legal action, however, focuses primarily on the actions of Credit Lyonnais and its subsidiary, Altus, in the takeover. The two existing California lawsuits argue that secret contracts between the French bank and two members of the French investor group indicate that these investors were acting as fronts for Credit Lyonnais and Altus.

Black, the financial wizard who guided Altus to the complicated takeover of Executive Life and its bond portfolio, is not named as a defendant in either case and has claimed to be "amazed" and "shocked" at allegations that Altus Finance broke the law. Now, Black and his colleagues have agreed to testify in the insurance department's multibillion dollar lawsuit against the French bank.

In exchange, insurance authorities are essentially giving Black and his associates a free pass -- releasing them from liability in relation to the Executive deal even if there is evidence that they broke a laundry list of state or federal regulations or racketeering laws. Based on the agreement, the insurance department can only sue Black or his colleagues if there is direct evidence that they knew about the bank's secret contracts before September 1998. Even then, the agreement requires the insurance department to follow a complex and onerous process before bringing any suit against Black.

Black declined to comment on the agreement or his involvement in the Executive deal.

Why are Black and his Apollo colleagues being let off the hook?

"Their cooperation is important," says San Francisco attorney Gary Fontana, a partner at Thelen, Reid & Priest, who is representing the insurance department in the matter. "It will expedite collection of the evidence that would take a lot longer and cost a lot more to get without their help."

Others, however, suggest the insurance department is simply taking the easy way out -- and protecting itself in the process. According to the French partners to the lawsuit, Garamendi was well aware that Credit Lyonnais, not the alleged fronts, intended to control the insurance company. As a result, they argue, the lawsuit being pursued against the French bank is itself a sham.

"It's a sign of weakness," says Jean-Francois Henin, former chief of Altus Finance, the subsidiary of Credit Lyonnais involved in the deal. "It means he does not have a strong case."

In fact, a careful reading of the agreement suggests that the insurance department is well aware it may be letting Black off the hook. The release was signed on Nov. 1. But the effective date of the document, which asserts that the commissioner "has no basis" to believe that Black or his colleagues violated any laws with respect to the Executive Life transaction, is June 1.

In an interview, Fontana said that the June 1 date was chosen to ensure that lawyers for the state would have enough time under the statute of limitations to name Black as a defendant if they choose to.

"It's a protection for us and the policyholders," he said.

However, sources suggest that the back-date is more likely meant to protect the insurance department itself in the event that evidence implicating Black was collected after June 1.

In fact, the release even appears to address that issue, noting that "the Commissioner is aware that he may hereafter discover potential claims or facts in addition to or different from those which he now knows or believes to exist." According to reports in the LA Business Journal last August, attorneys close to the investigation said the California Attorney General was close to naming Black as a defendant.

So far, the Attorney General's office hasn't named Black in its case. California Department of Justice spokeswoman Sandra Michioku declined to comment on whether they intend to do so.

The insurance department's agreement with Black also exempts Black and his colleagues from having to disclose documents and information provided earlier to the Federal Reserve or the US Department of Justice in the course of the federal criminal investigation of the deal -- including documents concerning the Appollo partnership.

Fontana says the evidence in question is a non-issue for California regulators.

"It is not important to us," he said. "If they were to disclose what they had said in testimony for the FBI or Federal Reserve or grand jury that arguably creates issues with them for the Feds, we don't care."

Fontana's lack of interest in Black's role in the deal, while underscoring how determined the insurance department is to secure the financier's cooperation, could be short-sighted.

Documents obtained by MotherJones.com show that Black was more than just an advisor to the French bank, he was at the very center of the deal as an equity partner of the bank both before and after the auction. Black reached an agreement with Altus Finance, a subsidiary of Credit Lyonnais, in June of 1990 to create two investment funds. One of those funds, for which Altus would provide 88 percent of the capital while Black and his associates would provide the remaining 12 percent, would become the home of the most lucrative bonds won in the Executive auction. Black and Altus partially disclosed their 1990 relationship to the Federal Reserve in September of that year, but failed to disclose the nature of their partnership to California insurance authorities.

This would be no small infraction. The California insurance code requires the disclosure of all financial arrangements in the acquisition or ownership of an insurance company, and failure to do so constitutes not only a breach of the insurance code but also a violation of the state's False Claims Act. While only the California Attorney General can sue a party for violating the act, insurance authorities could use evidence of such a violation to support other charges, such as fraud, conspiracy or racketeering -- all charges included in the insurance department's complaint. In addition to effectively allowing Black off the hook, the Insurance Department's legal team appears to also be arguing that Black should not be pursued by the Attorney General.

Fontana has indicated that, as far as he is concerned, the Attorney General should have no jurisdiction in this affair. On November 6, during arguments before the Ninth Circuit Court of Appeals on a separate class action suit brought on behalf of Executive Life policyholders, Fontana went so far as to say that the Attorney General was afraid to serve his complaint because he has no standing as a policyholder and that his case was going to be dismissed, according to Marr and others who attended the session.

This would represent a remarkable about-face for Fontana, who originally filed the whistleblower complaint in 1999 which led to the Attorney General's current case. At that time, he said the Attorney General had legal priority over the insurance commissioner's lawsuit.

Meanwhile, Sue Watson is left to care for her crippled daughter and wonder at the legal goings-on in California. It's been 20 years since Katie checked into a hospital a sick little girl and checked out needing 24-hour-a-day care. Watson says she has little doubt that her daughter will outlive her. The only priority now, she says, is to pursue every legal option to ensure that those responsible for the manner in which Executive was taken over and restructured are held accountable -- and that Katie's future income is protected.

"I will fight for my daughter to my death," she says.

www.motherjones.com/news/feature/2002/01/insurance.html

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Last Update January 18, 2008, by The Catbird