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In 1993 it was hailed as the deal of the decade. Executive Life, a defunct California insurer, sold its $6.4 billion junk-bond portfolio to Credit Lyonnais, the French bank. The bonds were so far under water that the bank got them for just $3.25 billion. The next chapter made Leon Black, who helped orchestrate the deal, a Wall Street deity. Not long after the deal closed in early 1992, the bonds soared in value. The bank, Black’s private equity firm Apollo Advisors LP, and other players wound up scoring a multibillion-dollar killing. But now, investigators who in 1998 started to look at the deal afresh have concluded that the way Credit Lyonnais captured the assets may have breached U.S. and California law. The early ’90s investment coup has evolved into legal quicksand for Credit Lyonnais. U.S. authorities now portray the deal as one of the biggest financial frauds in history. Now, Credit Lyonnais has said in Securities and Exchange Commission filings that the Federal Reserve Board could yank its U.S. banking license. In addition, the U.S. Department of Justice is investigating the deal, according to news reports. Separate civil suits lodged against the bank and affiliated parties by the California insurance commissioner’s office — and by a rival bidder for the bonds — seek $2 billion in damages. Looking for that sum are a group, led by buyout shop Hellman & Friedman LLC, that includes Chicago billionaire Sam Zell and Jack Byrne, the ex-chairman of Fireman’s Fund Insurance Co. The second suit, filed Jan. 31 in California Superior Court in Los Angeles, contends that because the Hellman & Friedman syndicate lost out to an illegal bidder, it was cheated out of the bonanza Credit Lyonnais illegally earned. Neither Black nor Apollo has been implicated in the scandal. A spokesman for Apollo said the firm knew nothing of any misdeeds by Credit Lyonnais and had “cooperated fully” in the California probe and with other investigators. The crux of the mess is the authorities’ charge that Credit Lyonnais took over not only the Executive Life bond holdings — in itself, a blameless transaction — but Executive Life’s insurance business, as well. A small French insurer called MAAF struck a deal to purchase Executive Life’s insurance operations from the state of California on Aug. 7, 1991, after the insurer went belly-up and the state’s insurance commissioner had seized it. The business was rechristened Aurora National Life. But a day earlier, authorities say, Credit Lyonnais made secret arrangements with MAAF to pull Aurora’s strings. They allege that through so-called portage agreements — parking arrangements that enabled Credit Lyonnais to buy back Aurora from the group at a fixed price — that the bank, in effect, came to own the insurer. The secrecy was necessary because of U.S. laws at the time, which barred banks from owning life insurers. What’s more, California prohibited state-owned entities such as Credit Lyonnais — which the French government controlled at the time — from owning California insurers. On both counts the bank deliberately overstepped the law and lied about it, says Gary Fontana, a San Francisco attorney whom the California insurance commissioner’s office hired to handle its case against Credit Lyonnais and the Consortium de Realisation, or CDR, the successor company to Altus Finance. Altus was the Credit Lyonnais subsidiary that, Fontana charges, engineered the fraud. Both California and Hellman & Friedman also target Francois Pinault, the well-known French financier who owns Christie’s, in their suits. According to Fontana, Pinault entered the picture in December 1992. That is when Credit Lyonnais, partly to shore up its balance sheet, sold part of the junk portfolio to Artemis, a company Pinault formed to buy the bonds. Later, Artemis went farther, buying the MAAF group’s stake in Aurora. And with that, Fontana alleges, Artemis took over the parking arrangements. Pinault was aware of the scheme and its illegality, Fontana claims. Robert Weigel, a New York lawyer representing Pinault, refuted the charge and said that his client has “cooperated fully” with investigators. According to Fontana, there is documentary evidence linking Credit Lyonnais to the parking scheme. For its part, Credit Lyonnais doesn’t deny the existence of the arrangement. But the bank casts blame outside the circle of its current executives. Neither the Justice Department nor the Fed would comment about the case. The CDR also declined to comment. Fontana, who says the evidence against Credit Lyonnais is voluminous, jokingly referred to planeloads of cooperating witnesses. “Air France has to add new flights to handle everyone who are talking to federal prosecutors,” he said with a laugh. In particular, Credit Lyonnais has recently had to cope with press inquiries about a 17-page memorandum which sketched out the parking scheme that has come to light in the past few months. Although the paper was faxed to the office of Jean Peyrelevade in December 1993, a month after he joined Credit Lyonnais as chairman, sources connected with the bank told the Financial Times that another executive, no longer with the bank, was the recipient. Peyrelevade knew nothing of the memo until 1998, when he passed it on to the authorities, the sources told the Financial Times. Bertrand Hugonet, a Credit Lyonnais spokesman, confirmed that account to The Daily Deal. But he denied a report on Feb. 2 in Le Monde, the influential French newspaper, that a Justice Department prosecutor would soon interrogate the executive. The day the Le Monde story ran, Peyrelevade fired off a letter to the paper blasting the report. It was the Fed, not Justice, that would question him, his letter said. Early last week Le Monde retracted its story. Asked to guess how the scandal will play out, Fontana said that Credit Lyonnais and CDR would probably settle. Thus far, neither has approached him about a settlement, he said, noting, “There are going to be big dollars paid sooner or later. A settlement would probably be well north of half a billion dollars. If they went to trial and lost, the outcome for them would be horrific. Two to 3 billion is a huge, huge number.” The talented Black remains untainted by the scandal. “Both Pinault and Apollo, in effect, made a portion of the [illegal] profit,” Fontana said. “The difference between them is that Pinault is in a position of offense. [It's as if someone] purchased stolen merchandise with the knowledge that it was stolen.” Copyright (c)2001 TDD, LLC. All rights reserved.

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