The 14-year-long Executive Life debacle reached a climax of sorts this week when a federal judge decreed that a French company must pay $190 million, plus interest, for its peripheral role in the clandestine purchase of the defunct California insurance company and its fat portfolio of junk bonds by a bank associated with the French government.
Insurance Commissioner John Garamendi, who approved the sale in 1991 and contends he was duped by the buyers, hailed Judge Howard Matz's verdict as confirmation of "what I have said all along - that you cannot profit from a fraud." In fact, however, the buyers will net multibillion-dollar profits even after repaying nearly a billion dollars.
Matz's damage award, which could grow to about $250 million with interest tacked on, is less than a sixth of the $1.3 billion that Garamendi claimed that the firm, Artemis, should pay.
The judgment brings the total recovery to about $900 million, but it's a fraction of the multibillion-dollar profits that were realized from the eventual resale of the junk bonds, and not all of it will go to policyholders.
In 1992, Artemis bought 21 percent of the junk bond portfolio for about $2 billion, indicating that the real value of the bonds Garamendi sold for $3.2 billion may have been $10 billion.
All in all, therefore, what may be the last legal aftershock from the Executive Life deal leaves Garamendi with some claim to vindication, but still open to allegations that he sold Executive Life's assets too cheaply, as well as to the wrong people, and therefore failed to protect the interests of the policyholders.
Garamendi's chief rival for the Democratic nomination, state Sen. Jackie Speier, has won approval for a top-to-bottom examination of the Executive Life deal by the state auditor's office - a probe that may be completed in time to become campaign fodder next year.
At one point, for instance, Matz reviews testimony by Garamendi and other Department of Insurance officials about Garamendi's contention that if he had known the French buyers were secretly backed by the French government-owned bank Credit Lyonnais, he would have sold the assets to another bidder.
"The testimony was so flatly at odds with what the commissioner and his aides did and said from 1991 to at least 1994 as to be devoid of credibility," Matz wrote. It was an oblique reference to Garamendi's repeated public assurances that the sale of the insurance company and its junk bonds had completely protected policyholders' interests, and his rejection of complaints from other bidders.
Matz notes, for example, that when Forbes magazine published a highly critical article about the transaction in 1994, titled "Smart Buyer, Dumb Seller," pointing out the involvement of Credit Lyonnais, Garamendi attacked the piece for "half-truths" and "outright falsehoods" and declared the deal to be a "home run for policyholders."
"In his letter (to Forbes) the commissioner did not even address, much less refute, the assertion that Credit Lyonnais was in control of the new insurance company," Matz wrote, adding that the Department of Insurance continued to approve the insurer's operations even after the Credit Lyonnais involvement was known.
Garamendi gave up the insurance commissioner's position to make an unsuccessful bid for the governorship in 1994, but returned to the position in 2003 with the criminal and civil investigations and court activities still pending, as well as trans-Atlantic diplomatic negotiations between the French and American governments. The federal government obtained one settlement from the company's buyers.
The lengthy trial over which Matz presided resulted in an odd jury verdict, absolving Artemis - which became involved in the transactions after Garamendi's sale - of direct damages but imposing some punitive damages, which Matz threw out.
Instead, he made his own declaration that Artemis had "played a shady game" to conceal the true buyers of the junk bonds and should be compelled to return half of its profits from its involvement.
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