VERBATIM EXCERPTS FROM:
SUMMARY ORDER TO CEASE AND DESIST
COMMONWEALTH OF PENNSYLVANIA
BEFORE THE
PENNSYLVANIA SECURITIES COMMISSION
PAGES 1, 14 - 28
IN THE MATTER OF : ADMINISTRATIVE PROCEEDING
: Docket No. 9412-10 :
:
LLOYD'S OF LONDON, a.k.a :
THE CORPORATION OF LLOYD'S, a.k.a. :
THE SOCIETY OF LLOYD'S, a.k.a. :
COUNCIL OF LLOYD'S :
Respondent :
:
SUMMARY ORDER TO CEASE AND DESIST
Based upon a preliminary investigation conducted by the staff of the Pennsylvania Securities Commission (Commission), the Commission has determined that evidence exists to support the following findings and conclusions:
* * *
page 14 - 28
THE FRAUDULENT LLOYD'S SCHEME
I. The Cromer Report
48. In November 1968, Lloyd's appointed Lord Cromer to chair a Working Party to recommend what should be done to encourage and maintain an efficient and profitable Lloyd's underwriters' market, including attracting additional Names and their capital, which market would be of a size to command world attention. On December 23, 1969, Lloyd Cromer submitted the Report of the Working Party to Lloyd's only ("the Cromer Report").
49. The Cromer Report made certain determinations and conclusions, including but not limited to the following:
a. In the decade between 1957 and 19766, Lloyd's had lost ground in the world insurance market. . .
b. Lloyd's had an urgent need to build up its reserves. More capital was needed to create reserves which were necessary to meet what the Cromer Report called "violent fluctuations in profitability..."
c. In 1965 and 1966, Lloyd's for the first time in its 300-year history, experienced overall deficits... these two years were £38 million and £18 million...
d. Technological advances throughout the world created new hazards which may be difficult to assess...[T]hese problems were further aggravated by devaluation of the pound and inflation...standards of underwriting at Lloyd's may have fallen in recent years...
50. In connection with the offer and sale of Lloyd's Interests to Pennsylvania names, Lloyd's directly and indirectly failed to disclose the material information discussed above contained in the Cromer Report despite the fact that Lloyd's was aware of the finding in the Report since at least 1969. The Cromer Report was not made available to Names until the mid-1980's, including the Pennsylvania Names, when it was only available upon specific request by a Name, should such Name be aware of the existence of the Cromer Report.
2. The Asbestos Fraud
51. Pennsylvania Names have suffered and will continue to suffer substantial losses as a result of the fact that Lloyd's syndicates, in which Pennsylvania Names were placed by their Members' Agents, have incurred claims related to asbestos. The Pennsylvania Names also have had to pay special levies to the Lloyd's Central Fund, which has incurred a substantial exposure to asbestos claims resulting from the Lloyd's Central Fund's financing of "Lioncover" ... Lloyd's had material information available to it concerning asbestos liability that was never disclosed to Pennsylvania Names prior to the investment in Lloyd's by the Pennsylvania Names.
52. ". . . Proof of Lloyd's knowledge of the asbestos liability and its impact is confirmed by the Lloyd's own Report of the Loss Review Committee issued in or about July 1993. . . [T]his was the first disclosure by Lloyd's of the nature and magnitude of the asbestos problem.
. . .
54. Lloyd's had been or should have been made aware in or about 1964, following publication of Dr. Irving Selikoff of the Mount Sinai Hospital in New York, of a study indicating that the inhalation of asbestos particles was linked to the development of asbestosis, mesothelioma and lung cancer in asbestos workers. Lloyd's had been writing policies in the United States which were interpreted to cover losses arising from bodily injury and property damage resulting from asbestos.
55. In or about 1980, Lloyd's established the Asbestos Working party (hereinafter "AWP") to deal with potential asbestos claims. The AWP issued and circulated throughout Lloyd's a letter dated August 5, 1980 that made certain points including the fact that Johns-Manville, a major United States manufacturer of asbestos products, estimated 2,400 to 3,000 cases would be filed within each of the next 10 years. Thereafter, throughout the early 1980's the AWP received and disseminated reports to Lloyd's insiders discussing a rapidly expanding asbestos claims crises in the United States and its adverse impact on Lloyd's syndicates. These reports were never disclosed to Pennsylvania Names.
. . .
59. Despite the widespread knowledge and concern of the growing asbestos problem by insiders at Lloyd's, Lloyd's Managing Agents and Lloyd's Members' Agents never informed Pennsylvania Names of the potential flood of claims related to asbestos. Instead, Pennsylvania Names unknowingly participated directly in the underwriting of asbestos liabilities and in reinsuring those very same asbestos liabilities for unlimited risk in money and time.
60. Lloyd's actual knowledge of the asbestos problems as outlined above in this Complaint, and its failure to disclose this material information to Names, including Pennsylvania Names, is noted in the Fifth Report of the Treasury and Civil Service Committee of the House of Commons, dated May 17, 1995. The Committee concluded at paragraph 24 of its Report that:
There is considerable evidence to suggest that there was knowledge within the market that long-tail losses existed, and that Names joining the Market from the mid-1980's onwards were not given full information on the nature of the risk they were underwriting. . .
61. Regarding the findings of the AWP in 1982, the Committee's Report of May 17, 1995, went on to state, in paragraph 25:
. . .significantly the conclusions of the Working party were not revealed to external Names;. . . the lack of knowledge over the scale of long-tail losses does not absolve an efficient regulator from insuring the disclosure of the existence of such risks and evidence suggests that such disclosure did not fully occur.
62. Many Pennsylvania Names who were solicited by employees and agents of Members' Agents expressly stated to such agents they did not want to be included in Lloyd's Syndicates which underwrote asbestos liability in any capacity. . .
63. Contrary to the assurances given by Lloyd's and its agents, many Pennsylvania Names were directly included in Syndicates underwriting asbestos liability either without the knowledge of such Pennsylvania Names or contrary to their instructions. . .
. . .
77. As part of and in furtherance of the above conduct, Lloyd's made the following misrepresentations of material facts, namely;
a. That Names could resign from a syndicate after the three year account period whereupon the investor's liability for losses on that syndicate would also end; when in fact, Syndicates with unquantifiable losses could remain open indefinitely and the Names' liability for those unquantifiable losses would continue;
b. That RITC would cover liabilities which arose after the three year accounting period had ended; when in fact, RITC was not available to certain syndicates in which Pennsylvania Names' invested because those Syndicates had unquantifiable losses;
c. That no Names had ever been called upon to put up money for a Lloyd's loss; when in fact this was not true;
d. That Names were only liable for losses incurred by Syndicates in which they invested; when in fact, the Names were liable for losses incurred by other Syndicates as a result of the investors' participation in the Central Fund;
e. That Names were only liable for losses incurred by Syndicates in which they invested; when in fact, the Names were liable for losses incurred by other Syndicates as a result of the investors' participation in Syndicates that reinsured losses in other syndicates;
and
f. That certain Names would not be placed in Syndicates which underwrote asbestos and pollution liability; when in fact, these Names were placed in such Syndicates.
78. As part of and in furtherance of the above conduct, Lloyd's omitted to state the following material facts, namely:
. . .
b. That cash calls could be made for Syndicate losses without providing a specific accounting of those losses to the Names;
c. That by becoming Names at Lloyd's, Pennsylvania residents would incur liability for asbestosis and environmental pollution claims;
. . .
f. That pursuant to the Lloyd's Act of 1982, Lloyd's was granted immunity under U.K. law from liability for damages claims by members for negligence and breach of duty;
WHEREAS, the Lloyd's Interests described above are "securities" in the form of investment contracts within the meaning of Section 102(t) of the Pennsylvania Securities Act of 1972 (1972), 70 P.S. §1-102(t); and
WHEREAS, the records of the Commission disclose that the Lloyd's Interests are not now nor have they ever been, registered under Section 201 of the 1972 Act, 70 P.S. §1-201, and no exemptions from registration are applicable; and
WHEREAS, based on the foregoing, the Commission finds that Respondent Lloyd's of London has engaged and is about to engage in acts or practices which violate Section 201 of the 1972 Act; and
WHEREAS, based on the foregoing, the Commission finds that Respondent Lloyd's of London, in connection with the offer of Lloyd's Interests in the Commonwealth of Pennsylvania, made untrue statements of material fact and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, in violation of Section 401(b) of the 1972 Act, 70 P.S. §1-401(b); and
. . .
NOW, THEREFORE, by the authority of Section 606(c.1) of the 1972 Act, 70 P.S. §1-606(c.1)
IT IS ORDERED that Respondent Lloyd's of London, and every successor, affiliate, control person, agent, servant, and employee of Lloyd's, and every entity owned, operated, or indirectly or directly controlled or hereafter organized by or on behalf of Lloyd's, including but not limited to Managing Agents and Members' Agents, shall immediately CEASE AND DESIST from offering or selling the Lloyd's Interests in the Commonwealth of Pennsylvania.
IT IS FURTHER ORDERED that Respondent Lloyd's of London, and every successor, affiliate, control person, agent, servant, and employee of Lloyd's, and every entity owned, operated, or indirectly or directly controlled or hereafter organized by or on behalf of Lloyd's, including but not limited to Managing Agents and Members' Agents, shall immediately CEASE AND DESIST from engaging in any acts in furtherance of the fraudulent and/or illegal offer and sale of securities. . .
FAILURE TO COMPLY WITH THIS ORDER MAY RESULT IN THE INITIATION OF ADDITIONAL ENFORCEMENT ACTION, INCLUDING THE IMPOSITION OF COSTS, CRIMINAL PROSECUTION, AND OTHER SANCTIONS, SUBJECT TO THE RIGHT OF HEARING AFFORDED RESPONDENTS UNDER THE 1972 ACT.
So ORDERED this 12th day of March, 1996.
BY ORDER OF THE COMMISSION:
M. Joanna Cummings, Secretary
Date issued & entered: March 12, 1996
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