A California lawsuit makes Paris tremble

Did the toughest corporate raider in France play the stooge for a bank gone wrong?


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Mark Hunter
February 22, 2000 10:00PM (UTC)

Some battles you lose, even if you win. For the French
co-defendants, the Executive Life case may be one of those
battles. Executive Life was a California insurance company that
bellied up and was sold in 1991 by the state insurance
commissioner to French investors, who subsequently derived
enormous profits from the company's junk-bond portfolio. Now
those investors face the possible creation of a trial record --
resulting in public disclosure that may loom as large for some of
them as the potential loss of billions of dollars.

Last year the California Insurance Commissioners office filed
suit to force a cluster of French and Swiss financial entities,
grouped around the scandal-tinged Cridit Lyonnais bank, to
cough up their estimated $2 billion gains from "a joint venture
to fraudulently and wrongfully obtain the assets" of Executive
Life. An amended complaint, filed Jan. 21 in the U.S. District
Court of Los Angeles, widened the conflict to include the rising
star of French finance, Frangois Pinault. That makes the case
what the French call "an affair of state," and not only because
investigators from the Federal Reserve Bank of New York and
the Department of Justice are also looking into it.

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The Executive Life affair crystallizes the uniquely incestuous
relationship between France and the private sector, a
relationship that is under severe pressure as globalization breaks
down the walls around protected national economies. When the
deal began, Cridit Lyonnais belonged to the state, and Pinault
was a provincial industrialist eager to break into the closed
world of Parisian finance. Cridit Lyonnais gave him the loans
necessary for his acquisitions and eventually took him onto its
board, offering him higher and wider contacts in the Parisian
elite than he could otherwise have attained.

Unlike some of the Cridit Lyonnais other raider protigis --
Giancarlo Parretti (the man who looted MGM) and Bernard
Tapie (lately recycled as an actor after serving a prison sentence
for tax fraud) -- Pinault emerged clean from the scandals that
headlined the banks crash in the mid-1990s. He is no longer on
the board, but one of his key employees is.

Pinault now ranks fifth among "the worlds working
billionaires," according to Forbes magazine, with a personal
fortune estimated at around $6 billion. His friends include
French President Jacques Chirac, who personally called on
Pinault to buy and "shelter" the prominent center-right
news weekly Le Point from a takeover by the left in 1997,
according to an unauthorized biography by Pierre-Angel Gay
and Caroline Monnot. (Their book, "Frangois Pinault,
Milliardaire," was dropped by its first publisher, ostensibly for
reasons that have nothing to do with Pinaults ownership of the
FNAC department store chain, which accounts for about
one-quarter of the retail book trade in France.)

Pinaults other assets include the auction house Christies, the
Italian luxury house Gucci (which he wrung away from
competing French finance star Bernard Arnault last fall), and a
15 percent stake in Frances dominant TV network, TF1. Those
properties -- and canny investments such as bestselling author
Bernard-Henry Livys two money-losing feature films -- place
him at the power center of French cultural life. His recent
acquisition of Aoba Life Insurance in Japan, aside
from demonstrating a sharp eye for value -- he picked up a
company with $120 billion in assets and $650 million in
turnover for about $220 million -- gives him a platform to
expand in Asia. But his declared priority for future investments
is the United States, where he already owns the Converse
sneaker company and the Samsonite luggage firm.

What, exactly, are he and the other defendants supposed to have
done? California claims that the Executive Life buyout was
secretly directed by Cridit Lyonnais, in violation of state and
federal banking and disclosure laws, which at the time forbade
ownership or control of insurance companies by banks (let alone
a bank owned by France). Moreover, as a Parisian bank analyst
who requested anonymity comments: "When you look at the
people involved in the deal, and you know the links between
them, there are grounds to suspect parking" -- an illegal
practice on both sides of the Atlantic, in which one or more
investors serve as fronts for a party who wants to avoid
disclosure of the investment. Californias lawyers claim the
French did just that.

As it happens, another co-defendant, Jean-Frangois Hinin,
formerly known around Paris as "the Mozart of finance," is
reported by Gay and Monnot to have managed the Executive
Life junk-bond portfolio for both Cridit Lyonnais investment
firm, Altus, and Pinaults holding company, Artimis. (Both
companies are named as defendants in the case.) According to
Karl Belgum, one of Californias attorneys, the Americans have
obtained "five different versions" of a parking contract between
the Cridit Lyonnais and its alleged fronts, each tailored to a
specific investor. "Theres a large number of them floating
around," he adds.

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But Californias lead attorney, Gary Fontana, admits that
Pinault's name isn't on them. "Pinault's problem was that he was
aware of the agreements and went in anyway," says Fontana.
"He made various filings with the Department of Insurance, and
failed to disclose the agreements." Maybe, but Fontana does not
yet have hard proof of that.

The Paris press has largely abstained from digging into the
affair. Pinault, however, has responded as though to a serious
threat, promising to "strike back hard" in an interview with the
Wall Street Journal. (How, he didnt say.) Artimis released a
statement refuting Californias complaint point by point:
"Artimis provided in all transparency all of the facts requested
(by Californias insurance commissioner, and thus) had no
reason to suspect irregularities could appear. ... Artimis
participated in no other agreement besides the acquisition
contracts, signed with the vendors (of the junk bonds), which
were revealed to the (California) Insurance Department."

There follows a curiously precise statement: "In fact, Artimis
didnt even exist at the moment when the agreements mentioned
in the (lawsuit) were signed." This is not a denial that there
were illegal agreements between Cridit Lyonnais and its
syndicate, only that Artimis had knowledge of them. (Pinaults
spokespeople at the Paris public relations firm Image 7 did not
return repeated calls for comment.)

And that is not exactly how Gay and Monnot reported the deal,
months before Pinault became a defendant. As they tell it, in
1992, when the bank was desperate to find investors for the
Executive Life portfolio, Pinault agreed to buy in, but only on
condition that Cridit Lyonnais loan him the $1.5 billion or so he
needed for the deal. In exchange, the bank got 25 percent -- and
no control whatsoever -- of Artimis, into which Pinault folded
his previous holding company. "It was as though the bank
agreed to throw away the power that it could legitimately
command (over Pinault)," note Gay and Monnot.

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Cridit Lyonnais is trying to deal its way out of the jam. Last
May, as France prepared to sell its controlling stake in the bank,
its directors issued a bone-dry analysis of their exposure: "This
affair principally implicates certain former managers of Altus
and the Group (Cridit Lyonnais) ... at least one current
executive of the Group knew after the fact about information
related to the practices charged in the Executive Life case."

In other words, if heads must roll -- Cridit Lyonnais warns that
there may be "penal responsibilities" to share -- that will not
interfere with the banks future development. Nor will the
financial bite of losing the case, which will be borne by the
state-engineered consortium that inherited Cridit Lyonnais
debts, and ultimately by French taxpayers. They have already
paid $20 billion to cover the dreadful investments made by the
banks managers in the recent past, and may well cough up a
billion or two more.

The greatest risk the bank faces is that investigators at the
Federal Reserve will conclude that the U.S. government should
yank Cridit Lyonnais license to operate its New York branch,
which contributes a disproportionate share of the banks
worldwide profits. (Both the Fed and the Securities and Exchange Commission refused to
comment on the case.)

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Some in the international community think that would be
overkill. "The allegations are of a serious nature, and the Fed
has wide latitude," notes a London-based bank analyst familiar
with the European banking sector. "But the bank has cooperated
with the Americans. Its strategies today are very different from
its history, and would not give rise to this kind of problem
again."

That is a major change for what investigative journalist David
McClintick once called "the dirtiest bank in the world." No one
will ever know all the malversations that went on there, because
in 1996, as French judicial investigators closed in, the banks
archives were destroyed by arson. What we do know is that
Cridit Lyonnais, and with it the French banking sector, has lost
the chance to be "one of the three or five European leaders
between now and 2005," says the London analyst.

Pinaults personal exposure in the case, according to Fontana, is
"somewhere north of $1 billion." But the greater costs to
Pinault could also include unprecedented (for him) disclosure.
Anyone who reads SEC filings regularly is struck by the paucity
of French corporate disclosure, and holdings like Artimis are
not bound even by those minimal rules.

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Unlike France, where there are no written transcriptions of trial
testimony (unless the presiding judge orders one, which has
happened three times in the past 15 years) and no guaranteed
legal access to case files for reporters, an American trial record
could provide more details on Pinaults operations and assets
than has ever been available. And California has asked for a
trial, which Fontana thinks could happen within two years,
barring a settlement.

Could the profits to be had on the Executive Life deal -- an
estimated $450 million for Pinault alone -- have sufficed to
involve him in an illegal scheme? He has played close to the
legal edge before. After minority shareholders were screwed in
one of his takeovers, and filed a highly publicized lawsuit,
French law was changed to ensure that raiders like Pinault pay
the same price per share to anyone owning a piece of the
company.

But he has never been charged with a crime. It is, likewise, very
hard to imagine that he would play the stooge in a conspiracy he
didnt control, led by a bank he treated like a lackey. But it
would have taken a true visionary to imagine back in 1992 that
an obscure California official could someday make Paris
tremble, if only in rage.


Mark Hunter

Mark Hunter has written for the New York Times Magazine, Le Monde Diplomatique and Modern Maturity, among other publications. He has won numerous awards, including the H.L. Mencken Award.

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