Excerpts from Inside Eye, April/ May 1996, "State of California Complaint Against Lloyd's," page 13

Chuck Quackenbush, the elected California Insurance Commissioner, has failed in an attempt to stop the action filed against Lloyd's by his compatriot down the corridor, California Corporations Commissioner Gary Mendoza. A federal district court in Los Angeles dismissed Quackenbush's Complaint in Intervention, first filed on 5 March and designed to "defend the critical interests of policyholders and insurers" in California.

The in-house fighting was sparked off on 21 February 1996, when Mendoza filed an action against Lloyd's in the Los Angeles Superior Court. The action included a temporary restraining order including ‘stopping unlawful offers and sales of securities', and ‘stopping draw downs of cash or letters of credit by defendants'. On 9 April, the California Department of corporations took its action a stage further by filing a First Amended Complaint, which upgraded the temporary restraining order with a request for Preliminary Injunction, seeking a freeze on draw downs of Names' funds and an ‘equitable lien' of $500m on the Lloyd's American Trust Funds: "Seeking the Preliminary Injunction against Lloyd's is the only way the Department can ensure that Lloyd's ends the fraud that it has perpetrated against California Names and stops its current violations of state securities laws", said Department General Counsel Peter Kezirian.

The First Amended Complaint alleges additional violations of California Securities Law by Citibank and by the LeBoeuf, Lamb, Greene & MacRae law firm. The original complaint, aimed specifically at Lloyd's, states;

THE PEOPLE OF THE STATE OF CALIFORNIA, by and through GARY S. MENDOZA, California corporations commissioner, allege as follows:

1) Defendant LLOYD'S has, and presently is engaged in a scheme to defraud California investors in connection with the offer and sale of unqualified securities in California, and elsewhere in the United States. LLOYD'S California investors number at least 500 and constitute the single largest group of LLOYD'S investors, both in numbers and in monies in the United States. LLOYD'S current plan is to obtain assets from current California investors in an amount in excess of $500,000,000 and to transfer those assets to other states and countries.

2) Defendant LLOYD'S has been and is offering to sell and selling securities in the form of:

  1. memberships (and the right by investors to participate through such membership);
  2. investment contracts;
  3. interests in blind trust pools;
  4. interests in debt collections pools; and
  5. interests and participations in guarantees.

Defendant LLOYD'S has offered and sold and continues to offer and sell these securities without qualification to California investors.

3) Defendant LLOYD'S purpose has been and is to obtain investors' funds purportedly for business purposes both in the State of California and elsewhere in the name of LLOYD'S.

4) LLOYD'S has been and is altering the rights, preferences and privileges of outstanding California investors without disclosing the requirement of qualification or exemption from qualification for such changes. Such changes include:

  1. a unilateral change of venue by LLOYD'S from the courts in California to the courts in England;
  2. a unilateral change of law by LLOYD'S from the California Corporate Securities law to English law;
  3. a unilateral change in contract rights by LLOYD'S of the premium trust deed between the California investors and LLOYD'S, so that if California investors and sued and won a judgment against a LLOYD'S Member Agent or LLOYD'S managing Agent, LLOYD'S can seize the amount of that judgment;
  4. a unilateral change in contract rights by LLOYD'S between the California investors and LLOYD'S Members' Agents, so that the Members' Agents can place California investors in Equitas, new security offered and sold by LLOYD'S, without the prior consent of California investors; and
  5. a unilateral change in the contract rights by LLOYD'S through a new levy against the California investors' accounts to cover losses. A similar levy is proposed as against California investors to provide monies for Equitas and for Lioncover. Equitas and Lioncover constitute new securities offered and sold by LLOYD'S as well as changes in the rights, preferences and privileges of current California investors in LLOYD'S.

5) In recruiting California investors, LLOYD'S, and its agents have also failed to disclose material information in connection with investments in LLOYD'S, including but not limited to:

  1. exposure to unquantifiable liability as a result of asbestos and pollution risks underwritten decades ago and passed on to the more recently recruited California investors without disclosure;
  2. joint liability for the underwriting losses of other investors despite representations that the California investors were only subject to several liability for those risks they agreed to underwrite;
  3. offers and sales of securities in this State without disclosing the requirement of qualification or exemption from the requirement of qualification;
  4. offers and sales of securities in this State without disclosing the payments of fees, finders fees, referral fees or commissions paid to persons who acted as unlicensed securities broker-dealers;
  5. offers and sales of securities in this State without disclosing the use of persons who acted as unlicensed securities broker-dealers in this state;
  6. placement of California investors in high-risk syndicates without their knowledge or consent;
  7. that LLOYD'S acted as a self-regulatory Society which did not require or allow "outside" regulation, including regulation by the California Corporations Code;
  8. that premium monies deposited in LLOYD'S AMERICAN TRUST DEEDS, purportedly held in trust accounts at CITIBANK in New York, were and are so thoroughly commingled that there is no thoroughly commingled that there is no way to account for the ownership or allocation of said funds, despite representations that said funds would be maintained in segregated accounts;
  9. that LLOYD'S has used monies held in the Premium Trust Accounts at CITIBANK in New York to pay for other and additional expenses without the authorization or consent of the California investors; and
  10. that the diversion of monies held in the LLOYD'S Premium Trust Accounts at CITIBANK in New York had the effect of imposing joint and several liability on the California investors without their authorization or consent, thus altering the rights, preferences and privileges of the California investors.

6) As a separate act, LLOYD'S, its employees, agents, including Members' Agents have been and are collecting funds from California investors for alleged losses which either cannot be documented, or for which LLOYD'S and its agents refuse to provide documentation.

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