Francois Pinault’s Artemis SA holding company, through which he controls PPR (PP) and its luxury goods brands including Gucci and Yves Saint Laurent, went back on trial in a $4 billion California junk-bond case.
Lawyers for the California insurance commissioner and Artemis gave opening statements today in federal court in Los Angeles. Arthur Shartsis, a lawyer for the insurance commissioner, said Artemis was liable for $4.33 billion in profits and interest from junk bonds that should have gone to policy holders of a restructured life insurance company.
The case, which first went to trial in 2005, dates back to the 1991 sale of failed Executive Life Insurance Co. and its junk-bond portfolio to a unit of Credit Lyonnais SA and a group of French and Swiss companies organized and secretly backed by the French bank to avoid regulatory restrictions.
“This case is about a fraudulent conspiracy that started in 1991,” Shartsis told the jurors. “If it hadn’t been for the fraud, these profits would have gone to the policy holders.”
The California insurance commissioner claims that Artemis, which acquired part of the junk-bond portfolio and a controlling interest in the insurance company from Credit Lyonnais’s Altus unit and the other conspirators, is liable because it joined the conspiracy in 1992.
“The jury at the 2005 trial found that Artemis had agreed to participate in the Altus/MAAF Group conspiracy,” the commissioner’s lawyers said in a Sept. 10 court filing. “A party that knowingly joins an ongoing conspiracy, as Artemis did here, is liable for all damages caused by that conspiracy.”
The jury at the 2005 trial concluded Artemis had participated in the fraud by Altus and the MAAF Assurances SA group against California insurance regulators. The jury didn’t award any compensatory damages to the California insurance commissioner. A federal appeals court sent the case back for a retrial on only one damages theory that hadn’t gone to the jury.
Pinault, 76, and his family are ranked 76th on Bloomberg’s billionaires index with a net worth of $11.8 billion. He also owns auction house Christie’s International Plc and Chateau Latour, one of the four original Bordeaux “first growth” wine estates. His son, Francois-Henri Pinault, who is married to actress Salma Hayek, runs Paris-based PPR.
The jury in 2005 found Pinault wasn’t liable for the California insurance commissioner’s alleged losses.
“Artemis itself did not commit fraud,” Robert Weigel, a lawyer for the French company, said today in his opening statement. “Mr. Pinault did not commit fraud.”
Weigel told the jurors that Pinault didn’t know about the so-called portage agreements between Altus and the MAAF Group, which aren’t illegal in France and which provided the group that bought Executive Life’s insurance business guarantees that Altus would take over their investment if the company fared poorly.
Executive Life, at one point the largest life insurer in California, was taken over by then-Insurance Commissioner John Garamendi after the value of its junk-bond portfolio imploded and the insurer became insolvent.
Garamendi sold the junk-bond portfolio to the Altus unit for $3.25 billion and the insurance company to the MAAF Assurances SA group, not knowing until 1999 that Credit Lyonnais had secretly organized that group to avoid California restrictions on a foreign government-controlled entity, as Credit Lyonnais was at the time, owning an insurance company.
Garamendi claimed at the 2005 trial that, had he known about the conspiracy, he would have picked a competing bid by the National Organization of Life and Health Insurance Guaranty Associations, or NOLHGA, that would have kept the junk-bond portfolio with the rehabilitated insurance company as well as the profits from the bonds that Altus and Artemis ended up making.
The 2005 jury was “hopelessly deadlocked” during the trial’s liability phase on the commissioner’s claim, according to the U.S. Court of Appeals in San Francisco. The appeals court ruled in 2008 that the trial judge had been wrong to preclude the commissioner from offering that theory during the subsequent damages phase.
U.S. District Judge Howard Matz had said that Garamendi’s trial testimony about why he would have picked the NOLHGA bid was “devoid of credibility” and that “no fair-minded jury would ever unanimously adopt the commissioner’s 2005 version of history.”
Weigel told the jury today that Artemis would provide evidence that NOLHGA, a not-for-profit organization of insurance guarantors that would have made up the difference between what Executive Life policy holders were owed and what the restructured insurance had available to pay them, only made its “bonds-in” bid to pressure Altus into increasing its bid.
“NOLHGA didn’t want the risk of the junk bonds,” Weigel said.
Commissioner Garamendi didn’t want to “double down” and keep the junk bonds, which were in free-fall at the time, with the restructured insurance company and expose the policy holders to the risk of the junk-bond market, Weigel told the jurors.
Garamendi had initially described the Executive Life rehabilitation as a “homerun for policyholders,” lawyers for Artemis said in a Sept. 10 filing. The commissioner came under pressure when the junk bonds, which he had first described as “toxic waste” and “really rotten junk,” increased in value, they said.
“Stripped of its superficial complexity, this case can be reduced to a high-profile case of ‘seller’s remorse,’” Artemis’s lawyers said.
Artemis, created in 1992, didn’t exist when Garamendi chose the Altus/MAAF bid over NOLHGA’s, the lawyers said.
Credit Lyonnais in 2004 pleaded guilty to criminal charges of making false statements to federal banking regulators as part of a settlement. The French government on behalf of Credit Lyonnais also settled for $600 million with California insurance regulators before the trial, leaving Artemis the only defendant in the civil case.
Artemis agreed to pay $185 million as part of the $770 million settlement with France and Credit Lyonnais to resolve the federal investigation into the Executive Life purchase. Artemis and its officers, who cooperated with the investigation, didn’t face criminal charges.
Artemis, Credit Lyonnais and MAAF last year separately settled claims by American International Group Inc. (AIG:US)’s SunAmerica for a combined $236.5 million to resolve claims by the AIG unit that it was defrauded when it bought a 33 percent stake in New California Holdings Inc., the new holding company for the restructured Executive Life, not knowing that the French owners were a front for Credit Lyonnais.
The French state had to bail out Credit Lyonnais in 1995 and transferred the unprofitable assets, including those related to Executive Life, to state-owned Consortium de Realisation. The bank was set up in 1863 to fund businesses in the French town of Lyon. Credit Agricole SA (ACA) bought Credit Lyonnais in 2003.
The case is Garamendi v. Altus Finance SA, 99-02829, U.S. District Court, Central District of California (Los Angeles).
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