Bloomberg News

Artemis Wins Trial Over California $4 Billion Junk Bonds

October 30, 2012

Francois Pinault’s Artemis SA holding company prevailed at a trial over $4.33 billion in profits and interest sought by the California insurance commissioner from a junk-bond portfolio sold to French investors in 1991.

A federal jury in Los Angeles yesterday rejected the claim that if not for a conspiracy by the French investor group, then- Insurance Commissioner John Garamendi, the conservator of Executive Life Insurance Co., would have accepted a bid in 1991 for the insolvent insurer’s assets from a group of guaranty associations that would have kept the profits from a junk-bond portfolio in the company.

“We are very thankful for all the jurors’ hard work,” Robert Weigel, Artemis’s lawyer, said outside the courtroom. “We’re confident they came to the right result.”

The case, which first went to trial in 2005, dates back to the sale of failed Executive Life, at one point the largest California life insurer, and its junk-bond portfolio to a unit of Credit Lyonnais SA and a group of French and Swiss insurers organized and secretly backed by the French bank to avoid regulatory restrictions on the bank owning an insurer.

French Investors

Artemis, the company through which Pinault controls PPR (PP) and its luxury goods brands including Gucci and Yves Saint Laurent, acquired part of the junk-bond portfolio in 1992 and a controlling stake in the rehabilitated insurance company. Artemis is the only one of the French defendants that didn’t settle with the insurance commissioner.

California claimed the profits that the French investors made from the junk bonds, which “went through the roof” after Garamendi sold them for $3.25 billion to Credit Lyonnais’s Altus unit, rightfully should have gone to Executive Life policy holders and the guaranty associations that made up shortfalls for some of the insured.

“I respect the service performed by the jury who served on this case, though I disagree with its findings,” Dave Jones, the current Insurance Commissioner, said in a statement. “We are considering all options in the wake of this disappointing decision.”

Executive Life

Lawyers for Artemis said during the trial that Garamendi never would have accepted a bid that would have kept the junk bonds, which caused Executive Life to collapse in the first place, in the rehabilitated insurer.

Garamendi in 1991 rejected the bid by the National Organization of Life and Health Insurance Guaranty Associations, or NOLHGA, because it would have left the policy holders exposed to the “toxic” junk bonds, Artemis lawyers said. The Altus bid was the only bid that offered cash for the junk bonds and took the risk out of the insurer, they said.

Lawyers representing Jones said during the trial that, had Garamendi known that Credit Lyonnais was lying to him and secretly buying the insurance company as well as the junk bonds, he would have accepted the NOLHGA bid.

Jury Instruction

Arthur Shartsis, a lawyer for insurance commissioner, said after the verdict was read that he would consider an appeal.

“The whole thing turned on the jury instructions,” Shartsis said outside the courtroom. “They were allowed to assume away the existence of the fraud.”

U.S. District Judge Gary Klausner said after the verdict was read that he was inclined to reinstate the restitution that the judge presiding over the 2005 trial had awarded the insurance commissioner and that was overturned by the court of appeals three years later.

The appeals court vacated the $241 million restitution award because it was based on a jury verdict that required a retrial. The appeals court said the trial judge could reinstate the award “if warranted” after the retrial.

Klausner ordered both sides to file briefs on the restitution including what amounts they thought were appropriate.

The case is Garamendi v. Altus Finance SA, 99-02829, U.S. District Court, Central District of California (Los Angeles).

To contact the reporter on this story: Edvard Pettersson in Los Angeles at epettersson@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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