Lloyd's of London Under Criminal Inquiry by U.S. Justice Dept.

Bloomberg News Service, May 11, 1998

Neil Roland

Washington May 11 (Bloomberg) Lloyd's of London faces a criminal investigation by the U.S. Justice Department involving allegations that the famed insurance market concealed the extent of its exposure to loss claims during the 1970s and 1980s, a Lloyd's spokesman said.

American investors, known as "names," have charged Lloyd's never told them about its exposure to asbestos and pollution claims that they say ultimately cost them $800 million and, in some individual cases, their life savings.

Lloyd's spokesman, William Pitt said the U.S. Attorney in White Plains New York, has started a preliminary fraud inquiry that is focusing on investor allegations about asbestos claims.

"We regard the allegations of conspiracy and fraud as being without foundation," Pitt said in an interview. "The asbestos claims weren't anticipated by Lloyd's. The situation now is quite simple: The names have come up with conspiracy theories, but haven't succeeded in proving anything of the kind."

The U.S. attorney's office, a branch of the Justice Department, first learned of investor allegations nearly two years ago, Pitt said. Lloyd's is cooperating with investigators and has provided background documents, he said.

The U.S. attorney's office declined comment. Lloyd's is a 310-year-old insurance market comprising 155 underwriting units known as "syndicates." American names, who pledge their estates to cover loss claims on Lloyd's policies, were recruited during the 1980s by member agents regulated by Lloyd's.

Prosecutors obtained hundreds of documents two months ago from the American Names Association, which represents 350 U.S. investors, said association president Jack Shettle of Beaufort, South Carolina. These documents relate to Lloyd's recruitment of investors, their contracts with the insurance market, and Lloyd's asbestos exposure. He said.

Years of Litigation

The federal investigation follows years of private lawsuits by hundreds of American names, who have largely been unsuccessful because U.S. appeals courts have held that their cases should be heard in British courts.

"These are rich people who are trying to renege on their obligations to millions of policyholders," said Lloyd's attorney, Harvey Pitt, co-chairman of the Fried, Frank, Harris, Shriver & Jacobson law firm in Washington and New York. Harvey and William Pitt aren't related.

Lloyd's lost more than $12 billion from 1988 to 1992 as a result of policyholder claims for financial losses from asbestos, pollution, and catastrophes. It initiated a $5 billion debt-relief and settlement plan in 1995 that paved the way for its reorganization and refinancing.

About 95 percent of Lloyd's 34,000 names agreed to the restructuring and dropped any lawsuits they might have filed. Some others, however, are continuing to pursue private litigation against Lloyd's.

Postal Inspectors

The U.S. Postal Service, which is assisting the Justice Department investigation, also is seeking to contact representatives of British names, according to a May 7 letter from London police to a British names' lawyer.

The London police letter asked a lawyer for hundreds of British names, Michael Freeman of London, to meet with U.S. postal inspectors.

"The government of the United States of America has received numerous complaints from U.S. citizens who invested in insurance syndicates at Lloyd's of London," said the letter, a copy of which was obtained by Bloomberg News. "Allegations of fraud have been made that are now under investigation by the U.S. Postal Service."

Neither Freeman nor the London police responded to requests for comment. The (London) Observer, without naming sources, reported last month that U.S. Justice investigators were due to interview former Lloyd's chief Ian Hay Davison along with other former syndicate employees, investors and "market professionals: -- at the end of April.

All seven U.S. appeals courts to consider various investor suits have ruled that the complaints must be heard in the United Kingdom. In the only broad U.S. case still pending, 275 American investors last week asked the Supreme Court to overturn a decision along those lines by the 9th U.S. Circuit Court of Appeals in San Francisco.

American names have won some victories.

Lloyd's agreed to a $54 million settlement with 49 states in 1996, in which the states agreed to drop their lawsuits contending that the insurance market deceived investors about their claims exposure. That settlement was folded into the $5 billion resettlement plan. One federal judge in Richmond, Virginia, who addressed the merits of the fraud allegations rule in investors' favor before he was overturned by an appeals court that said the case should be heard in Britain.

"The names are being asked to forego claims against Lloyd's insiders (for) one of the most far-reaching and serious insurance frauds of record anywhere," U.S. District Judge Robert Payne wrote in August 1996. In the alleged fraud, Lloyd's "knowingly" shifted risks from earlier policies to the new names, he said.

Shettle, a spokesman for American names, said the number of investors in this country increased from several hundred to more than 3,000 between 1977 and 1988.

"None of these people would have invested in Lloyd's if they knew of its exposure," he said.

About 8% of American names are millionaires, Shettle said, and 29% have less than $10,000 in assets. Forty have filed for bankruptcy in the last year, he said.

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