No Assurances

Are California authorities giving a free pass to a former Michael Milken crony who helped to gut an insurance company, leaving thousands of policyholders to pick up the pieces?

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Sue Watson’s nightmare began in early 1982, when she took her pneumonia-stricken daughter Katie, then 20 months old, to a Phoenix, Arizona, hospital. What ensued was described by one local newspaper as a “tragedy of errors.” Hospital staff failed to give the infant oxygen for six hours and a pediatrician prescribed an overdose of the barbiturate Phenobarbital. By the end of the following day, Katie was brain dead.

Four years later, Watson, a fundraiser for a Montessori school in Phoenix, and her husband settled a lawsuit with the hospital for $4.2 million. Legal fees and expenses ate up nearly half the award, while another quarter went towards building a home in which the Watsons could care for their stricken child. The remainder was invested in a so-called structured settlement that the hospital purchased on Katie’s behalf from the Los Angeles-based Executive Life Insurance Company.

Watson said she and her husband opted to accept the structured settlement instead of a lump sum payment in hopes of establishing a reliable income for Katie as a hedge against inflation. The hope, Watson said, was that the income from the structured settlement would increase, if only slightly, year to year.

“We were told that structured settlements were very safe,” she recalls.

Not this one.


A look inside the complex deal which ultimately left so many Executive Life policyholders out in the cold.

Full Story


In 1990, Executive was sold to a French bank and its partners. The deal was orchestrated by 50-year-old New York financier Leon Black, Micheal Milken’s unofficial right-hand man as co-head of mergers and acquisitions at the now-defunct Drexel Burnham Lambert.

In October, 1993, the insurer cut Katie’s income by 54 percent. Watson, who personally cares for her stricken daughter, is still livid. And she is concerned that Katie’s future — one that will always require round-the-clock care — hangs in the balance.

“This little girl needed that money,” she says. “If I died, and my husband died today, the money she is getting from that annuity right now is not enough to take care of her.”

The Watsons are not alone. An accounting conducted by the California Attorney General’s office showed that more than 300,000 Executive Life policyholders have lost billions — $4.7 billion, according to Maureen Marr, an activist who has worked on behalf of Executive Life policyholders for the last decade.

Where did all the money go?

By 1990, Executive Life was in deep trouble. The company had purchased billions of dollars of junk bonds — high-yield, high-risk investments — from Milken. A recession, combined with bungling by US and California regulators, had hammered the bonds’ values. With the company teetering on the edge of bankruptcy, John Garamendi, California’s publicity-loving insurance commissioner, seized Executive Life and announced he would auction it to the highest bidder.

In the end, Garamendi sold Executive to an unusual partnership comprised of several French and Swiss investors and the massive French bank Credit Lyonnais. The bank, controlled by the French government, bought the bonds. Since it was illegal for the bank to control the company, the French investor group bought Executive’s insurance operations. Black was billed as the French bidders’ advisor.

The winners of the auction were the only bidders to propose splitting off the insurance company’s $6.1 billion bond portfolio. The bank and its partners paid a total of $3.5 billion — $300 million for the insurance operations and $3.2 billion for the bond portfolio. Considering that the bonds alone had a face value of $6.1 billion, it was a sweet deal — one that Milken, in a 1992 Forbes interview, called “the investment opportunity of the decade.”

Garamendi, who had called the bonds “toxic waste” because of they were so depressed in value, preferred that approach, saying at the time that it would provide some funds to shore up the struggling insurance company. But the effect of that strategy was devastating for Sue Watson and other policyholders, who otherwise may never have lost their money.

Not only had the insurer been sold for less than its market value, the company’s primary source of investment income — its bond portfolio — had been stripped off and taken by Altus. The more lucrative of the bonds gained from the Executive sale were placed in an investment fund managed and partially owned by Black and his colleagues.

In late 1993, with its investment income severely diluted, the company cut policyholders’ payments. Executive had been gutted, and those its policies were meant to protect, like Katie Watson, were left to pick up the pieces.

“Blood money,” Watson fumes. “That’s what these people took.”


Download the lawsuits as PDF files. You will need Adobe Acrobat to view them.

Attorney General’s Complaint
Insurance Department Complaint
Tolling Agreement


The complex deal in which Executive was purchased is now the focus of two lawsuits, one brought by the California Attorney General’s office and one brought by the California Department of Insurance — the same office under whose auspices the company was sold in 1990. The deal is also the target of legal action by the US Attorney, who has notified French officials that he means to seek indictments related to the case.

All of the legal action, however, focuses primarily on the actions of Credit Lyonnais and its subsidiary, Altus, in the takeover. The two existing California lawsuits argue that secret contracts between the French bank and two members of the French investor group indicate that these investors were acting as fronts for Credit Lyonnais and Altus.

Black, the financial wizard who guided Altus to the complicated takeover of Executive Life and its bond portfolio, is not named as a defendant in either case and has claimed to be “amazed” and “shocked” at allegations that Altus Finance broke the law. Now, Black and his colleagues have agreed to testify in the insurance department’s multibillion dollar lawsuit against the French bank.

In exchange, insurance authorities are essentially giving Black and his associates a free pass — releasing them from liability in relation to the Executive deal even if there is evidence that they broke a laundry list of state or federal regulations or racketeering laws. Based on the agreement, the insurance department can only sue Black or his colleagues if there is direct evidence that they knew about the bank’s secret contracts before September 1998. Even then, the agreement requires the insurance department to follow a complex and onerous process before bringing any suit against Black.

Black declined to comment on the agreement or his involvement in the Executive deal.

Why are Black and his Apollo colleagues being let off the hook?

“Their cooperation is important,” says San Francisco attorney Gary Fontana, a partner at Thelen, Reid & Priest, who is representing the insurance department in the matter. “It will expedite collection of the evidence that would take a lot longer and cost a lot more to get without their help.”

Others, however, suggest the insurance department is simply taking the easy way out — and protecting itself in the process. According to the French partners to the lawsuit, Garamendi was well aware that Credit Lyonnais, not the alleged fronts, intended to control the insurance company. As a result, they argue, the lawsuit being pursued against the French bank is itself a sham.

“It’s a sign of weakness,” says Jean-Francois Henin, former chief of Altus Finance, the subsidiary of Credit Lyonnais involved in the deal. “It means he does not have a strong case.”

In fact, a careful reading of the agreement suggests that the insurance department is well aware it may be letting Black off the hook. The release was signed on Nov. 1. But the effective date of the document, which asserts that the commissioner “has no basis” to believe that Black or his colleagues violated any laws with respect to the Executive Life transaction, is June 1.

In an interview, Fontana said that the June 1 date was chosen to ensure that lawyers for the state would have enough time under the statute of limitations to name Black as a defendant if they choose to.

“It’s a protection for us and the policyholders,” he said.

However, sources suggest that the back-date is more likely meant to protect the insurance department itself in the event that evidence implicating Black was collected after June 1.

In fact, the release even appears to address that issue, noting that “the Commissioner is aware that he may hereafter discover potential claims or facts in addition to or different from those which he now knows or believes to exist.” According to reports in the LA Business Journal last August, attorneys close to the investigation said the California Attorney General was close to naming Black as a defendant.

So far, the Attorney General’s office hasn’t named Black in its case. California Department of Justice spokeswoman Sandra Michioku declined to comment on whether they intend to do so.

The insurance department’s agreement with Black also exempts Black and his colleagues from having to disclose documents and information provided earlier to the Federal Reserve or the US Department of Justice in the course of the federal criminal investigation of the deal — including documents concerning the Appollo partnership.

Fontana says the evidence in question is a non-issue for California regulators.

“It is not important to us,” he said. “If they were to disclose what they had said in testimony for the FBI or Federal Reserve or grand jury that arguably creates issues with them for the Feds, we don’t care.”

Fontana’s lack of interest in Black’s role in the deal, while underscoring how determined the insurance department is to secure the financier’s cooperation, could be short-sighted.

Documents obtained by show that Black was more than just an advisor to the French bank, he was at the very center of the deal as an equity partner of the bank both before and after the auction. Black reached an agreement with Altus Finance, a subsidiary of Credit Lyonnais, in June of 1990 to create two investment funds. One of those funds, for which Altus would provide 88 percent of the capital while Black and his associates would provide the remaining 12 percent, would become the home of the most lucrative bonds won in the Executive auction. Black and Altus partially disclosed their 1990 relationship to the Federal Reserve in September of that year, but failed to disclose the nature of their partnership to California insurance authorities.

This would be no small infraction. The California insurance code requires the disclosure of all financial arrangements in the acquisition or ownership of an insurance company, and failure to do so constitutes not only a breach of the insurance code but also a violation of the state’s False Claims Act. While only the California Attorney General can sue a party for violating the act, insurance authorities could use evidence of such a violation to support other charges, such as fraud, conspiracy or racketeering — all charges included in the insurance department’s complaint. In addition to effectively allowing Black off the hook, the Insurance Department’s legal team appears to also be arguing that Black should not be pursued by the Attorney General.

Fontana has indicated that, as far as he is concerned, the Attorney General should have no jurisdiction in this affair. On November 6, during arguments before the Ninth Circuit Court of Appeals on a separate class action suit brought on behalf of Executive Life policyholders, Fontana went so far as to say that the Attorney General was afraid to serve his complaint because he has no standing as a policyholder and that his case was going to be dismissed, according to Marr and others who attended the session.

This would represent a remarkable about-face for Fontana, who originally filed the whistleblower complaint in 1999 which led to the Attorney General’s current case. At that time, he said the Attorney General had legal priority over the insurance commissioner’s lawsuit.

Meanwhile, Sue Watson is left to care for her crippled daughter and wonder at the legal goings-on in California. It’s been 20 years since Katie checked into a hospital a sick little girl and checked out needing 24-hour-a-day care. Watson says she has little doubt that her daughter will outlive her. The only priority now, she says, is to pursue every legal option to ensure that those responsible for the manner in which Executive was taken over and restructured are held accountable — and that Katie’s future income is protected.

“I will fight for my daughter to my death,” she says.


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