Wedell isn’t the only Lloyd’s investor with his metaphorical guns drawn. He is one of more than 2,500 American Names who are struggling with liabilities from the $8 billion in losses the troubled insurance exchange has incurred over the past three years. Together, more than 100 members of the group have sued Lloyd’s, claiming it contravened U.S. securities laws in recruiting Americans and that it failed to inform them of billions of dollars of impending losses; their petition is now before the U.S. Supreme Court. Other Names accuse Lloyd’s of fraud in seducing investors with false reports of profitability in previous years. Lloyd’s denies all charges.
The Names brouhaha is perhaps the most serious scandal the venerable British institution has encountered in its 306-year history. It’s a point of pride that Lloyd’s was one of the few insurers that paid its claims in full for the first San Francisco earthquake in 1906, then paid again 83 years later. Lloyd’s has also been hailed as a prestigious investment vehicle. Many of the Americans it recruited were members of the insurance or securities industries; those lucky enough to be tapped by the exclusive organization had only to pledge their money to the exchange–along with a one-time fee–but not surrender it to Lloyd’s. They could then invest the money elsewhere, having their investment cake and eating it too. Since there were few losses to cover, they could easily double their returns.
But in the late 1980s, Lloyd’s fortunes began to reverse. What the American Names weren’t told, say the claimants in the lawsuit, was that Lloyd’s faced billions in losses from 40-year-old asbestosis and toxic-waste-contamination problems, the health effects of which were only beginning to show up. Names who divested before the ’80s would be free of liability, as would any future Names. But the Names of the ’80s say they were trapped in a financial nightmare, saddled with full responsibility for the losses. As a result, New York thinktank executive Dale Jenkins has paid out about $750,000 in claims; investor John Roby, the lead plaintiff in the lawsuit, faces hundreds of thousands of dollars in claims. “We didn’t realize we were the suckers on the block,” says California investor George Nordhaus.
Roby and his brethren are looking to the U.S. government to redress their grievances. Their suit charges that their investments in Lloyd’s–sponsored syndicates constitute the purchase of securities and that the sale of these securities occurred without the sanction of the Securities and Exchange Commission (SEC). To add insult to injury, several Lloyd’s syndicates are now under investigation by the British Serious Fraud Office, the company admits.
Unmoved by those complaints, Lloyd’s officials are pursuing the U.S. Names with the zealousness of bounty hunters. Graeme King, the company’s chief debt collector, contends that the Americans were not actually “investing” in Lloyd’s as someone might invest in stocks, bonds or securities. Thus, he contends, they are not covered under U.S. investment law. And even if they were, he says, the complainants are “accredited” investors and exempt from SEC rules. King also dismisses the plaintiffs’ contention that they can escape their liabilities by moving to Florida, where bankruptcy laws are liberal. “Until a Name reaches a deal with Mr. Lloyd…no matter [where] he runs, a policyholder will come along and attack him.”
Will the American Names one day be vindicated? Much will depend on whether the SEC enters the fray. First, a lower court asked for its guidance, which it declined to offer. With no SEC input, the court ruled in favor of Lloyd’s. Now, in what seems a regulatory Catch-22, the SEC is simply referring investors back to the court. But all may not be lost for the beleaguered Names. Federal insiders believe the agency may be reviving an investigation it began in 1991. Politicians ranging from Tennessee Sen. Jim Sasser to Deputy Treasury Secretary Roger Altman have queried the SEC on the Names’ behalf Meanwhile, Wedell isn’t waiting for his government to step in and save the day. He’s joined with several groups of Names who vow still more litigation. “The one thing Lloyd’s might not have counted on is that Americans are prepared to fight,” he says. If necessary, it seems, right down to the last cuff link.
