States Take Up Cases of Lloyd's U.S. 'Names'
by John J. Fialka, The Wall Street Journal, March 28, 1996
After years of financial and legal setbacks, the 2,700 U.S. "names" of Lloyd's of London have a glimmer of hope.
The U.S. names, like their roughly 30,000 counterparts world-wide, have had to pay out of their own pockets to cover huge insurance clamims against the Lloyd's syndicates to which they belong. American names, who have already doled out $170 million, have asked U.S. courts to block Lloyds's from collecting more payments on the grounds of fraud. But their cases have been thrown out of court for lack of jurisdiction.
Recently, though, states in the U.S. have done what almost no American individual has been able to do: establish jurisdiction under U.S. law for allegations of securities fraud against Lloyd's. Since fall, securities officials from eight states have charged Lloyd's and its syndicates with violating securities laws by selling unregistered securities to the unwary.
Names have had trouble making cases against Lloyd's in the U.S. because of an agreement that nearly all of them have signed requiring that all lawsuits be brought in the United Kingdon. There, Lloyd's has partial immunity from legal actions, and the U.S. securities laws don't apply.
But the states never signed any such agreement. If a name was solicited in a given state, that state's laws likely would govern, says John C. Coffee, a professor of securities law at Columbia University Law School.
The state cases contend, among other things, that Lloyd's knowingly sold memberships to unsophisticated investors. Most states have "blue sky" laws, similar to that of federal Securities and Exchange Commision, which ban selling unregistered securities to anyone with less than $1 million in net worth or an annual income below $200,000 for two consecutive years.
Six of the states allege Lloyd's sold unregisterd securities while concealing knowledge of the great risks - an act that constitutes fraud. All told, arizona, colorado, California, Illinois, Ohio, Pennsylvania, Missouri and West Virgina have charged securities violations, and at least 20 other states are investigating similar complaints.
In one of the most complex cases, California securities officials say both Lloyd's and its main American law firm - LeBoef, Lamb, Leiby & Macrae of New York - participated in fraud by concealing risks and by not acting in the best interest of the names. These civil charges, if proved, could lead to heavy fines and permanent injunctions barring Lloyd's from billing names.
David Rowland, Lloyd's chairman, says there was no "wholesale misrepresentation" by Lloyd's agents to American names. "I cannot tell you if individual agents did or did not transgress local rules," he adds.
Dean Hansell, a LeBoeuf lawyer in California, says that while LeBoeuf lawyers did appear at some Lloyd's recuriting sessions, allegations of fraud are "without merit" and are a ploy by prosecutors to weaken Lloyd's defenses.
The states' legal maneuvering comes as the 300-year old British insurance market tries to stave off its own demise. After being stung by losses from huges asbestos and pollution-related insurange claims from the late 1980s, Lloyd's last spring unveiled a $4.3 billion rescue plan. The plan, however, hinges on regulatory and investor approvals.
The propsed plan would "cap" investors' liability, but it also would take their outstanding deposits with Lloyd's and an additional $150,000. The question remains whether disgruntled investors will comply. Of some 30 American names interviewed for this article, most seem inclined to fight.
"They're not getting one more ... dime of my money," says Henri Wadell, a Memphis, Tenn., stockbroker, who says he has paid $505,000 of losses and is pressing his state for a fraud inquiry.
Lloyd's officials queston the application of state securities laws to its insurance-underwriting contracts. "They're basically contorting the facts that this [insurance contract] is somehow a security," says Peter Lane, director of world-wide operations for Lloyd's.
Mr. Lane also says Lloyd's has had "extended discussions" with the SEC since first recruiting Americans in the late 1970s, and that the agency agrees federal securities laws weren't violated. But an SEC letter written for a California case says it hasn't taken a position. An agency official confirms the letter exists, but declines to comment further.
Still, Prof Coffee, of columbia University, says state securities laws are written broadly to cover all sorts of contracts make with passive investors. Hearing examiners in Ohio and Illinois concluded this month that recruiters from Lloyd's syndicates, indeed, were selling securities and that state law applies. Final rulings in both states are pending.
Lloyd's this month entered a "standstill" agreement with Lousiana: Lloyd's is freezing its collection efforts against the state's 50 names, while the state halts its fraud investigation. the objective is to encourage fair settlement negotiations with the names.
In the mid-1980s, the risks involved in becomming a name seemed small, and Lloyd's executives say most members made tidy profits on the $100,000 or so they normally put on deposit to join.
Today, a person has to show asssets of about "a quarter of a million pounds" ($380,000), says Mr. Lane, who also says the market didn't recruit members who couldn't afford to join.
But some investors say Lloyd's didn't follow its own rules. "I'm one of the stupid jerks who should not have been in it in the first place," grumbles Robert D. Flesvig, a 55-year-old insurance agent in Chicago who put up his $300,000 home as collateral to join the market in the 1980s. Mr. flesvig says he has never earned more than $100,000 a year, and by now, he has lost his house, paid Lloyd's most of his $180,000 life savings and faces claims for $2 million more. Last fall, Mr. flesvig proudly picketed a Lloyd's meeting in chicago.
Virginia Emory, an accountant for Fantastic Sam's hair salons in Baton Rouge, La., was making $18,000 a year when she became a Lloyd's name in 1984. Membership was a gift from her late father, an attorney and name who also enrolled her brother. Now, she says, her brother is bankrupt, Lloyd's has her father's estate tied up in probate, and she has paid Lloyd's some $50,000, with new claims comming in. "It just seems like Lloyd's is too powerful to fight," Ms. Emory says.
"They were conned," says Missouri's secratery of state, Rebecca Cook, describing her state's 79 names, who have paid Lloyd's claims agents $17 million and are being dunned for another $63 million.