Heading for court

FINANCE & ECONOMICS

Executive Life

Feb 10th 2005
From The Economist print edition

Does the French government really want the embarrassment of a trial?

BRINKMANSHIP has played its part in the scandal over Executive Life, a bust Californian insurance company whose business and junk-bond portfolio were bought illegally in 1991 by Crédit Lyonnais, a bank then owned by the French state. Here we go again. Barring a last-minute settlement, the trial of a civil case brought by California's insurance commissioner, alleging fraud and seeking $3 billion on behalf of policyholders, will start on February 15th, six years after he filed the suit.

According to an American lawyer close to the case (there are dozens), neither Crédit Lyonnais, since privatised and taken over by Crédit Agricole, nor the Consortium de Réalisation (CDR), a state-owned body that has indemnified the bank against any losses arising from the case, has made an offer to settle out of court for more than the $350m that the CDR set aside for potential damages in this civil action as part of a settlement in 2003 of a parallel criminal case, brought by America's Department of Justice (DOJ). The commissioner is seeking at least $1 billion more.

A settlement might have been expected. In a hearing last November, Howard Matz, the judge handling the case, evidently not relishing a four-month jury trial, urged the French to settle. “I think the fraud can be proven...it isn't just going to be the plaintiffs win and here's the number. There are going to be all kinds of findings...if I were counsel to entities in France, I would want to make sure my clients understood,” the judge opined.

One defendant for whom a civil trial might be embarrassing is François Pinault, one of France's wealthiest businessmen and a close friend of Jacques Chirac, the country's president. Mr Pinault, who assisted the DOJ in compiling its criminal case against Crédit Lyonnais, testified to the grand jury empanelled to indict the bank. If his testimony were to be unsealed for use in the civil case, as lawyers have requested, the extent of his co-operation would become clear.

Judge Matz also had some strong words for the commissioner and his lawyers: they would “have to deal with utterly inconsistent testimony that will undermine their credibility”. He added: “Conjuring up some amount for damages...isn't going to be easy.” As Executive Life's business and junk-bond portfolio were sold to the highest bidder, the judge was sceptical that the commissioner would be able to prove that policyholders had suffered financially.

The commissioner may do better with his other claim. Arguing that those who commit fraud should not gain from it, he is after all the profit—around $2 billion before interest, he calculates—that Crédit Lyonnais and Artémis, one of Mr Pinault's holding companies, made from Executive Life. (In the 1990s, Artémis bought the insurance business and some of the junk bonds from Crédit Lyonnais.)

If he were to lose on this score, Mr Pinault would face a bill of up to $1 billion (before interest) as well as a finding that he had taken part in a huge fraud. That might test the validity of an indemnity that Artémis has from the state-owned CDR—and, if the indemnity is valid, the patience of French taxpayers. Through Crédit Lyonnais, they in effect put up the money that allowed Mr Pinault to profit from Executive Life. They might balk at picking up the bill for his defeat in court as well.

So far Mr Pinault has apparently not offered a settlement of the civil action much beyond the $185m that Artémis paid to settle the criminal case. If he wants to count on his indemnity from the CDR, he cannot put more money on the table without the CDR's say-so.
The criminal case was settled at the last minute. Common sense suggests something similar ought to happen to the civil action too. Perhaps the CDR has not yet plucked up the courage to explain the predicament to its political masters.

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