Credit Lyonnais, the French bank acquired earlier this year by Credit Agricole, is to pay $100 million to settle allegations surrounding its takeover of Executive Life Insurance Co. of California, which became insolvent in 1991 after its junk bond portfolio evaporated. Credit Lyonnais bought the business at a time when US law prohibited banking and insurance tie-ups, the Federal Reserve said yesterday.
The Federal Reserve announced the enforcement order a day after US prosecutors issued criminal indictments against two former chairmen of Credit Lyonnais, and four others for alleged fraud in the takeover of the failed California insurer twelve years ago. The six, including Jean Peyrelevade and Jean Yves Haberer, both former Credit Lyonnais chairmen, were indicted on a range of charges, including conspiracy, mail fraud, wire fraud and making false statements to US banking regulators, court documents showed.
The alleged fraud involved a scheme to hide the illegal involvement of Credit Lyonnais, then owned by the French government, in taking over Executive Life. At the time, US law prohibited banks from owning insurers and state law banned foreign governments from owning California insurers. unsealed criminal indictments against two former chairmen of the bank. The Credit Lyonnais fine is the second largest ever levied by the US central bank. In 1992, it fined the Bank of Credit and Commerce International (BCCI) $200 million, but the penalty was never collected. Jean Peyrelevade faces a ban from the US banking industry and a $500,000 civil penalty against him. The Fed also said it was working with French banking supervisors to require Credit Lyonnais and its parent company, Credit Agricole, to “enhance their overall compliance programs.”
The other former Credit Lyonnais officials named in the indictment were: Francois Gille, a deputy managing director; and Dominique Bazy, an executive committee member. Jean-Francois Henin, formerly managing director of Credit Lyonnais subsidiary Altus, and Eric Berloty, a partner in a French consulting firm that provided financial services for Altus, were also indicted. US Attorney Debra Yang also revealed the terms of plea agreements reached with French insurer MAAF and its chairman and managing director, Jean Claude Seys, as well as settlement agreements with billionaire Francois Pinault and his holding company, Artemis S.A.
The French Finance Ministry said earlier this week that it had ratified the $770 million settlement. Under the agreement, Credit Lyonnais and MAAF will plead guilty to three counts of making false statements to US regulators and will each be placed on three years’ probation. Credit Lyonnais and the French government agency that rescued it after it got into financial trouble agreed to pay $575 million in fines. MAAF’s Seys agreed to plead guilty to two charges of concealing information from U.S. regulators. In return, prosecutors agreed to recommend a sentence of five years probation, as well as a fine of about $250,000.
A separate settlement resolved all federal claims against Artemis, Pinault and Artemis director general Patricia Barbizet and others. Artemis agreed to pay the U.S. government $185 million and Pinault and the others pledged to cooperate in the ongoing investigations. The money will be placed in an escrow account pending resolution of a civil lawsuit filed by the California Department of Insurance. Yang and California Insurance Commissioner John Garamendi were scheduled to hold a news conference on Thursday to announce developments in a civil lawsuit that seeks about $3 billion in damages for policyholders.
U.S. and California officials say Credit Lyonnais and related entities acquired control of Executive Life and its valuable junk bond portfolio through a series complex financial maneuvers that short-changed more than 300,000 policyholders. The case turns on French “portage” agreements, under which one party agrees to temporarily hold shares of a company for the benefit of another party. Credit Lyonnais used such arrangements in violation of US law to hide its stake in Executive Life, the indictment said. Pinault’s Artemis bought the Executive Life bond portfolio in 1992 and reaped a windfall on it. Pinault, a retail magnate, later bought two-thirds of Executive Life. Peyrelevade became head of Credit Lyonnais after the Executive Life purchase but denied reading a 1993 fax that would have alerted him to the illegal nature of the deal. Bazy was his second-in-command.