COMMONWEALTH OF VIRGINIA

STATE CORPORATION COMMISSION


COMMONWEALTH OF VIRGINIA, ex rel.

STATE CORPORATION COMMISSION CASE NO. SEC960021

v.

LLOYD'S, a.k.a. THE CORPORATION

OF LLOYD'S a.k.a. THE SOCIETY OF LLOYD'S,

a.k.a. LLOYD'S OF LONDON,

Defendant

NOTICE OF MOTION FOR TEMPORARY INJUNCTION

TO: Council of Lloyd's

Lloyd's

One Lime Street

London, England

EC3M7HA

and

LeBoeuf, Lamb, Greene & MacRae

125 West 55th Street

New York, New York 10019

TAKE NOTICE that the undersigned, by counsel, will appear before the state Corporation Commission at its Courtroom, Second Floor, Tyler building, 13th and main Streets, Richmond, Virginia U.S.A. at 10:00 a.m. on April 17, 1996, and move the Commission to enter a temporary injunction in accordance with the attached Motion and Petition for Temporary and Permanent Injunction and Affidavit of John Parthum.

Respectfully,

DIVISION OF SECURITIES

AND RETAIL FRANCHISING

By: Joel H. Peck

Jonathan B. Orne

State Corporation Commission

office of General Counsel

P.O. Box 1197

Richmond, Virginia 23218

(804) 371-9671

CERTIFICATE

I hereby certify that the foregoing Notice of Motion for Temporary Injunction, with Motion and Petition for Temporary and Permanent Injunction and Affidavit of John W. Parthum attached, was filed with the Clerk of the Commission this 3rd day of April 1996, with a request that attested copies be served on Council of Lloyd's, Lloyd's, One Lime Street, London, England EC3M7HA and Leboeuf, Lamb, Greene and MacRae, L.L.P., 125 West 55th Street, New York, New 10019 in accordance with Va. Code 12.1-19.1, and that an attested copy also be served on Council of Lloyd's in accordance with Va. Code 8.01-329.

Joel H. Peck

Counsel

COMMONWEALTH OF VIRGINIA, ex rel.

STATE CORPORATION COMMISSION CASE NO. SEC960021

v.

LLOYD'S, a.k.a. THE CORPORATION

OF LLOYD'S a.k.a. THE SOCIETY OF LLOYD'S,

a.k.a. LLOYD'S OF LONDON,

Defendant

MOTION AND PETITION FOR TEMPORARY

AND PERMANENT INJUNCTION

Comes now the Division of Securities and Retail Franchising ("the Division") and petitions the Commission to temporarily and permanently enjoin and restrain the continuing violation of Virginia Code 13.1-502, 13.1-504 (B) and 13.1-507, and associated actions, by the Defendant ("Lloyd's") and its agents, employees and others. In support thereof, the Division has appended hereto and makes part hereof the Affidavit of John W. Parthum, and alleges as follows:

1. Lloyd's is a British corporation having its principal place of business or office at One Lime Street, London, England EC3M7HA.

2. The members of Lloyd's consist of individuals and corporations called "names."

3. The business of Lloyd's consists of the assumption of risks, by member groups called syndicates, which risks fall into categories refereed to as marine, non-marine, motor and aviation.

4. At all relevant times, the affairs of Lloyd's were governed by groups of members called the Council or the Committee operating in ways similar to a corporate board of directors pursuant to bylaws.

5. Members of Lloyd's fall into two categories, working names (insiders employed by Lloyd's, managing agents, and members' agents) and external names who are passive investors.

6. Members place their entire net worth at risk by becoming members and participating in Lloyd's syndicates, and can participate in such syndicates only through a members' agent they select, which is usually the member who solicited them to become a Lloyd's member.

7. The actual business of managing and selecting risks, collecting premiums and processing claims is conducted by managing agents who must be approved by, and are subject to the control of, the Council or the Committee.

8. The business of Lloyd's syndicates is conducted in calendar year increments called syndicate years of account which, however, remain "open" for at least three years for processing of premiums and claims relating to the syndicate year of account. Ordinarily, a syndicate year of account is "closed" by payment of a premium, at the end of the three-year period, for "reinsurance to close."

9. If outstanding liability cannot be accurately quantified, a syndicate year of account is left open, or "in runoff" and residual risk is referred to as "long-tail."

10. In order to become a member of Lloyd's, a person must demonstrate that he or she is of good character and has financial means acceptable to Lloyd's.

11. A prospective member must also execute a number of agreements the terms of which are non-negotiable and dictated by Lloyd's; namely, the General Undertaking Agreement, agency agreements, and the Premium Trust Deed.

12. The General Undertaking Agreement imposes obligations upon members for the duration of their membership and, among other things, requires the member to execute such other documents as Lloyd's may require at any time.

13. The agency agreements provide for the duties, powers and compensation of managing and/or members' agents, vest complete control of the member's participation in syndicates in the members' agent and empower the members' agent to borrow money in the member's name.

14. The Premium Trust Deed requires members to credit all premiums to a Premium Trust Fund out of which claims, expenses and profits are paid and which Fund is managed by, and under the exclusive control of, Lloyd's.

15. As conditions of Lloyd's membership and participation in syndicates, members must pay membership fees, entrance fees, annual subscription fees and annual contributions to the "Central Fund," and must maintain a "Lloyd's Deposit" in an amount prescribed by Lloyd's.

16. The Central Fund is held and administered by the Council and may be called upon, at the discretion of Lloyd's, if the member's funds and personal assets are insufficient to meet the member's obligations incident to syndicate participation.

17. The Lloyd's Deposit consists of members' assets deposited under Lloyd's Deposit Trust Deeds in amounts prescribed by Lloyd's and which assets, usually consisting of letters of credit in Lloyd's favor, can be accessed by Lloyd's to meet the member's liability for losses connected with syndicate participation.

18. Beginning at least as early as the late 1970's, Lloyd's, acting through its agents, began actively soliciting persons in Virginia and elsewhere in America to become members of Lloyd's subject to the aforesaid conditions, and to participate in underwriting syndicates.

19. When first discussing Lloyd's with prospective Virginia members, said agents described Lloyd's membership as exclusive, and described Lloyd's as having a successful, profitable and prestigious three hundred year history in the insurance business. Lloyd's agents also represented that membership creates high profit potential without committing substantial funds and confers social stature.

20. Lloyd's agents also downplayed the practical significance of members' potential unlimited liability, stating that only one or two members ever had a large loss of net worth in three hundred years and that spreading of risk actually exposed members to only nominal loss.

21. Lloyd's agents further represented to prospective Virginia members that their liability was limited to the losses of particular syndicate years and, therefore, was several, rather than members being liable for losses of other members.

22. In the course of soliciting Virginia members, Lloyd's agents failed to disclose large losses Lloyd's syndicates were facing, which were known to Lloyd's, attributable to asbestos and asbestosis risks and other environmental liabilities, and further failed to disclose reports on Lloyd's which were critical of its inferior underwriting standards, failure to adequately inform members of risks, and insufficient reserves.

23. Several Virginia residents became Lloyd's members during this time period relying upon Lloyd's agents' representations.

24. Virginia members also participated in underwriting syndicates during this time period, and at least one continues to do so.

25. In the course of such participations, Virginia members were provided with insufficient information by members' agents to make an informed decision in the selection of syndicates, and were forced to rely upon the apparent expertise and recommendations of the Lloyd's members' agents.

26. As a result of the foregoing, Virginia members ended up unknowingly underwriting reinsurance of asbestos and environmental liabilities. In some cases, members' agents placed Virginia members in syndicate years of account reinsuring such liabilities contrary to the instructions of Virginia members.

27. In 1985 and thereafter, Lloyd's created an insurance company to reinsure sizable asbestos and asbestosis liability of a particular prior syndicate year of account, and funded that company's liabilities through the Central Fund contributions of members including Virginia members, thereby rendering members jointly liable for said losses contrary to promised several liability only.

28. In the mid-1980's, Lloyd's created a reinsurance-of-reinsurance product which was sold to members, including Virginia members, through Lloyd's agents, which product concealed but transferred huge asbestos and environmental liabilities to members which they could be obliged to pay multiple times.

29. As a result of the foregoing, and other fraudulent and deceptive acts and practices, Lloyd's has made and will make demands upon Virginia investors for funds to defray mounting liabilities, has drawn down upon letters of credit and threatened such draw downs, and has otherwise sought to subject the property of Virginia investors/members to fraudulently- and deceptively- created liabilities incident to Lloyd's membership.

30. Both Lloyd's memberships and syndicate participations are investment contracts and, therefore, are "securities" within the meaning of that term as defined in the Virginia Securities Act ("the Act"), Virginia Code 13.1-501 et seq.

31. Neither the Lloyd's membership nor the syndicate participations offered and sold in Virginia are registered under the Act, nor are they exempt from such registration.

32. The foregoing acts of Lloyd's and its agents violate 13.1-502, 13.1-504(B) and 13.1-507 of the Act, are continuing in nature and effect, and should be enjoined pursuant to 13.1-519 of the Act.

WHEREFORE, the Division prays that Lloyd's, and its agents, employees and affiliates, and all persons acting in concert with any of them, and all persons receiving notice of the injunction entered herein, be temporarily and permanently enjoined and restrained as follows;

1. From further offer or sales of Lloyd's memberships or syndicate participations, or any other security, in Virginia, unless registered or exempted from registration;

2. From further violation of 13.1-502 and 13.1-504 (B) of the Act;

3. From drawing down upon letters of credit supplied by Virginia investors, or otherwise seeking to subject the property of Virginia investors to purported membership or syndicate participation obligations; and

4. From assisting or cooperating with Lloyd's or its agents, employees or affiliates, in efforts to draw down on letters of credit or otherwise subject the property of Virginia investors to purported membership or syndicate participation obligations.

Respectfully submitted,

DIVISION OF SECURITIES AND

RETAIL FRANCHISING

By: Joel H. Peck

Jonathan B. Orne

State Corporation Commission

office of General Counsel

P.O. Box 1197

Richmond, Virginia 23218

Excerpts from:

AFFIDAVIT OF JOHN W. PARTHUM

Commonwealth of Virginia

City of Richmond, to wit:

JOHN W. PARTHUM, having been first duly sworn, deposes and says:

1. I am John W. Parthum. I am over the age of eighteen years.

2. I am currently employed as a Senior investigator in the Division of Securities and retail Franchising ("Division") of the State Corporation Commission of Virginia ("Commission"), and have been so employed since August 1987. I have been continuously employed in an investigative capacity with the Division since September 1983.

3. During the course of my duties at the Division, I was assigned to investigate the activities, if any, that Lloyd's of London conducted in this Commonwealth. The investigation resulted in the filing with the Commission of a request for injunctive relief pursuant to 13.1-519 of the Securities Act (Va Code 13.1-501 et seq.) ("Act"), and this Affidavit is submitted in support of the request. The facts set forth in this Affidavit are based on my personal knowledge and belief as well as on face-to-face and telephonic interviews and documents obtained during the course of the Division's investigation.

***

22. The Division's investigation revealed that there is at least one Virginia resident who is presently actively underwriting in Lloyd's syndicates. With the exception of the individual who is still actively underwriting, all known Virginia Names had resigned as Lloyd's members as of the date of this Affidavit.

23. Despite the resignation by Virginia Names from active underwriting and membership in Lloyd's, they are not relieved from ongoing liability for underwriting liabilities in various syndicates in which they participated. Lloyd's, through its Members' Agents, represented to Virginia Names that the syndicates in which they participated have an annual accounting year, with the syndicate years of account running for a three year period. It was represented to the Virginia Names that, at the end of three years, they would be allowed to resign form membership in Lloyd's, with no further obligation. However, the Division's investigation has revealed that, notwithstanding resignation by Virginia Names at the end of various three-year periods, a number of the syndicates in which they participated have not been closed, which as the effect of exposing these Names to ongoing liability for indefinite periods of time, and for amounts not presently known.

24. It has been discovered that at least ten of the Virginia Names who are not actively underwriting in Lloyd's have outstanding balances on letters of credit or in reserve accounts established by Lloyd's or their members' Agents on behalf of these respective Virginia Names. As of March 1996, the present outstanding balance of these letters of credit and reserves was approximately $2.8 million.

25. Lloyd's has made and continues to make calls on Virginia Names for funds purportedly relating to underwriting losses. However, Virginia Names are not provided any explanation, other than a calculation of the amount of a cash call. Such calls have been made on not only those Virginia Names who have outstanding balances on letters of credit, but also those who have no present balance on letters of credit or in reserve accounts. In order to satisfy these cash calls, Lloyd's may seek to obtain civil judgments, or the issuance of writs, against the Virginia names who do not honor the calls, and initiate collection proceeding in Virginia or elsewhere against such Names. With respect to those Virginia names who have outstanding balances on letters of credit, the Division's investigation indicated that Lloyd's directly or through its Members' Agents will attempt to draw part or all of these balanced in the near future.

26. The Division's investigation revealed that, to date, Virginia Names have sustained losses in connection with their Lloyd's underwritings of at least $2.7 million. It is believed that such losses will increase, and Lloyd's will continue to pursue Virginia Names for additional funds and assets beyond the maximum underwriting limits its established for such names by Lloyd's.

27. I have reviewed the registration records maintained by the Division and have determined that no security issued by Lloyd's is, or ever has been, registered under the Securities Act and that no individual is, or ever has been, registered under the Act as an agent of Lloyd's.

28. I have learned from the Commission's Bureau of Insurance that Lloyd's is neither licensed to transact insurance business in this Commonwealth nor subject to the supervision or control of the Bureau of Insurance.

29. As of the date of this Affidavit, eight other states have initiated actions under their securities laws against Lloyd's. These actions are based on allegations similar to those of this Commission's proceeding and see similar relief.

And further the affiant sayeth not.

[John W. Parthum]

Subscribed and sworn to before me, a Notary Public, on this 2nd day of April 1996.

[Notary Public]


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