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'Little Guys' Look In on Lloyd's Case
Investors want to pursue their fraud claims in U.S. Courts, not in a British forum where the laws favor the big insurer, the 9th Circuit is told.
San Francisco Daily Journal, Friday, October 24, 1997
Robert D. Flesvig, raised on the scrappy South Side of Chicago, has been itching for a chance at a court fight with the powerful insurer Lloyd's of London over what he considers a fraudulent investment scheme that Lloyd's foisted on unsuspecting Yanks.
Flesvig few from Chicago to join dozen of other investors to watch a one-hour argument Thursday before 11 judges of the 9th U.S. Circuit Court of Appeals in Richards v. Lloyd's of London, 95-55747.
The question was whether he and nearly 300 other American investors should be able to pursue securities fraud claims against Lloyd's in the United States - or be forced to accept contract terms designating Britain as the legal forum, where English laws are more favorable to Lloyd's.
Flesvig stood in the back of the ornate courtroom packed with more than 90 mostly silver-haired investors in Lloyd's for an emotion-charged session that included some boos at the Lloyd's lawyer from the frustrated investors. (The booers were quickly graveled to silence.)
The presence of Flesvig and the others signaled the fact that many of the investors are not multimillionaires, but ordinary people who had just enough money to join in the Lloyd's operation - something that can be done with as little as $150,000 in personal worth. "Ten years ago, I put my name on a line, a letter of credit on the equity in my home," Flesvig said in a recent interview. "I'm not a rich fat cat. My home was stolen, my kids' graduation money," he said bitterly.
"People have committed suicide for the acts of these criminals. If I could go to court, I could show the world they are criminals," Flesvig said.
The 56-year-old Flesvig, who sells life insurance and says he earns less than $100,000 a year, said he was forced to sell his home and live in a one-bedroom apartment with his flight attendant wife and start over. "I drive a 1988 Honda and pulled together a $5,000 down payment for a townhouse," he said. "But I'm going to fight these guys until someone says they can't do this."
Flesvig and nearly 3,000 Americans invested in Lloyd's insurance underwriting syndicates, banking on the security of a 300-year tradition at Lloyd's as the largest insurance underwriting institution in the world.
"No one was going to make a killing; we thought we would make a 7 percent premium," he said. Instead, Flesvig got a bill from Lloyd's for $1 million to cover losses incurred from insurance claims against his syndicates.
The basic outline of the claims that have never been resolved in an American court is that Lloyd's realized in the 1970s the massive long-term liabilities for asbestos injuries and toxic pollution would mount into billions of dollars over the coming decades.
The Americans say Lloyd's recruited investors around the world to spread the risk, increasing the number of so-called names from 6,000 to 34,000 worldwide by the 1980s. They also allege that Lloyd's secretly dumped the money-losing risks, like asbestos, into the syndicates sold to Americans, among others. "They dumped asbestos losses on my syndicate, but I can't see the books," Flesvig said.
Lloyd's counters that the issue is simple. The names signed contracts acknowledging that they were joining syndicates to underwrite insurance, were assuming the financial risk that involved, and signed general obligation agreements waiving American law and agreeing to abide by English courts for any disputes. The tradition of becoming a name in the Society of Lloyd's even requires a trip to England to have the potential risks explained.
During the argument before the court Thursday, Harvey Pitt, Lloyd's attorney, said: "It is easy to lose sight of what this is about. There were two contracts. They [the names] agreed to underwrite insurance and they agreed to be bound by English law, in English courts."
In March, a three-judge panel of the 9th Circuit sided with the plaintiffs and ruled Lloyd's forum-selection contract provisions were void. In addition, the panel said U.S. securities law barred waiver of American courts as the forum for review. That decision was being reconsidered by the en banc panel.
The 11 judges of the panel took copious notes and peppered both sides with tough questions.
Judge Andrew Kleinfeld picked up on the fact that investors must make a trip to London, suggesting they were aware the transaction was conducted in the United Kingdom. "They [the investors] are not allowed to put money in unless they fly to London. It must occur to them on the plane that someone is making sure the business is conducted in England, that they are giving up U.S. law," said Kleinfeld.
Judge Alex Kozinski joined in, asking, "Were they duped into getting on the plane?"
Attorney Stephen A. Kroft, representing the American investors, responded, " No, they were duped into signing the waiver [of American law and choice of forum].
"Did they have a deal before they got on the plane?" shot back Kozinski.
Kroft argued the solicitation of the investment had been done in America and agreements had been signed based on allegedly fraudulent information given to investors. "Flying to London was a means of effectuating the fraudulent scheme,' he said.
The names had at least one powerful supporter, the Securities and Exchange Commission. SEC attorney Richard Walker said although the SEC does not take a position on the fraud claims, "It is extremely important whether we permit a foreign entity to come into the United States and widely offer an investment in the U.S., then escape the securities law."
Kleinfeld asked: "What about an English investment over the Internet?"
Walker admitted that was new technology that is "placing stress and strain on the system," and it is an "issue that has not been addressed." But he suggested such a sale of securities via the Internet would require registration in the United States.
Pitt countered that Lloyd's was not an issuer of securities in the United States.
Judge Stephen Trott asked:"Did you solicit in the United States?"
"No, we did not solicit at any time in the United States," replied Pitt.
The brought loud groans and boos from the audience, prompting Chief Judge Proctor Hug to threaten to clear the court unless they were silent.
Pitt also argued that the names had remedies in England for their claims, although he admitted that no one has succeeded in such suits against the insurance underwriter.
This brought a spate of questions from Trott about whether there was a real remedy in England.
Kozinski added there seemed to be two central questions, whether it was a truly international transaction and would the names wind up in a "kangaroo court' or a real court in a forum outside the United States.
Outside the courtroom Flesvig scoffed at the notion that Lloyd's did not recruit U.S. investors. "They had big spreads, with salmon dinners at country clubs, and encouraged people to sign up. You signed letters of credit in America, then flew to London for a 10-minute meeting. When you flew home, that's when they sent general obligation letters indicating disputes would be resolved in England. But I didn't know Lloyd's was exempt [from prosecution] in England," he said.
Flesvig summed up his grievance. "They sold us the barn that had already burned, but they are not accountable to anyone."
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