LLOYD'S FACES US SETBACK

Financial Times Monday, March 10, 1997
By: John Authers in New York

Lloyd's of London faces an embarrassing setback to its campaign to repair its reputation after a Californian appeals court ruled that U.S. Names can sue the insurance market under securities fraud and racketeering legislation.

The American Names Association, which brought the case on behalf of up to 574 Names - the wealthy individuals whose capital underpins the market - said total damages payable could be as much as £1 bn.

Lloyd's said it would appeal against the ruling which makes no judgments on the facts. Lloyd's said last year's settlement in which it transferred the bulk of its losses to a new giant reinsurer named Equitas would not be affected, and that many Names who originally brought the lawsuit had since decided to settle with Lloyd's.

The judges also used their ruling to criticise the legal redress available to the Names in England, saying "major gaps" existed in English law on securities fraud. They said: "The available English remedies are not adequate substitutes for the firm shields and finely honed swords provided by American securities law."

Mr. William Pitt, who represents Lloyd's in the U.S. said: "We think the decision is erroneous and we plan to take steps to have it reversed." He said lawyers for Lloyd's were likely to ask the appeals court to reconsider its decision, which contradicts several U.S. legal rulings that Names can seek redress only in English courts.

The ruling, made in the 9th U.S. Circuit Court of Appeals in San Francisco by judges Mr. Charles Wiggins and Mr.. John Noonan, says clauses in contracts signed by Names agreeing that complaints should be handled by English courts should be voided because they violate U.S. securities laws passed in 1933 and 1934.

Describing Lloyd's as "a business corporation so powerful that it has obtained from the British legislature substantial immunities," the judges said: A plain, speedy and adequate remedy for the wrongs alleged by the plaintiffs is not shown to exist in Britain." They reversed a southern Californian district court's decision in April 1995 to dismiss the Names' securities fraud and racketeering charges, and remanded the case to a district court in San Diego.

A third judge, Mr. Alfred Goodwin, published a strongly worded dissent. He said the same reasoning could provide protection for Americans who lost money betting on chicken fights in Mexico, and that English law provided an adequate remedy."

The Names allege they were defrauded by being placed on syndicates which reinsured asbestos and toxic waste claims, or had a heavy concentration of risks due to reinsurance. They say Lloyd's knew the syndicates carried big liabilities but did not disclose them.

Mr. Jeffrey Peterson, executive director of the association, said the ruling recognised that "when a foreign enterprise engages in widespread sales activities in the U.S., Congress prohibits that enterprise forcing the investors to waive their rights under the federal securities laws."

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