Dissecting the Deal

A look inside the deal that left thousands of Executive Life policyholders out in the cold.

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The complex deal that tied Leon Black and his associates to the takeover of Executive Life began in 1990, when Black’s firm, Lion Advisors, entered into an agreement with Altus Finance, a subsidiary of Credit Lyonnais.

That June 29, 1990 agreement — filed with the Federal Reserve — set the ground rules for the development of two investment funds known as Apollo I and Apollo II. In interviews two years ago, Jean-Francois Henin, former chief of Altus Finance, described the terms of the partnership and how it worked — a description supported by the documents themselves.

Among other things, the agreement stipulates that, after meeting expenses, the two parties would evenly split profits from the Apollo Funds I and II. Altus Finance agreed to contribute 88 percent of the capital for the funds, while Black, his associates and other private investors were to contribute the remainder. Thus, not only was Black in a position to control the funds, he would also own an important share of them.

At the time, however, the funds were empty shells. The partners went looking to fill those shells with large concentrations of junk bonds issued by single companies. Specifically, Altus and Black were looking for bonds on which the companies were close to defaulting. The chief value of such junk bonds is that they can be converted to equity in the company which issued them. If any single person or group control enough bonds of this sort — or can combine them with stock — they can effectively gain control of the company.

Anticipating doing just that, the 1990 agreement also stipulated that, after meeting expenses, Altus and Black’s group would equally split not only the proceeds derived from management of the bonds in the two funds but also the profits from any restructured companies that emerged.

Altus and Black chose to go after the portfolio held by Executive Life. It was widely known in the financial community that the value of the portfolio would soar once the bond market stabilized. Executive Life owned large concentrations of bonds from valuable companies; among them Vail Ski Resorts, Samsonite, and Culligan Water Technologies.


Download the lawsuits as PDF files. You will need Adobe Acrobat to view them.

Attorney General’s Complaint
Insurance Department Complaint
Tolling Agreement


In November of 1991, Altus won Garamendi’s auction with a bid of $3.5 billion — $300 million for the insurance operations of Executive Life and $3.2 billion for the bond portfolio. It was, as junk bond king Michael Milken noted at the time, a sweet deal. The bonds alone had a face value of $6.1 billion. Within a few years, profits on the most lucrative bonds were compounded at 50 percent annually before management fees and carried interest, adding up to a net to investors of about 40 percent, according to a sales memo issued by Black’s firm, Apollo Advisors.

Federal law at the time prohibited banks from owning insurance companies and California law prohibited control of insurance companies based in the state by foreign governments. Credit Lyonnais was owned by the French government. To ensure that their bid would comply with the law, Altus arranged for a group of private French and Swiss investors to purchase the insurance operation, which was renamed Aurora National Life Assurance Co. Altus Finance purchased the junk bond portfolio.

Publicly, Black had been listed as Altus’s financial advisor during the auction. Two days after Altus paid for and took possession of the junk bond portfolio, however, about 20 percent of the bond portfolio — representing the most potentially lucrative bonds, valued at $537 million — were transferred to Apollo II, the fund which Black and his colleagues partly owned and exclusively managed. According to a sales memo for a third fund set up by Black’s group, Black and his colleagues had invested $55 million in Apollo I and II.

Although the bonds had increased in value by 25 percent in those 4 short months — and despite the fact that Executive’s policyholders had sued to recoup that gain — the bonds were transferred to Apollo II at the severely reduced cost Altus had paid at auction.

Then, a week before the bonds were actually transferred, on February 25, 1992, the parties expanded on their original agreement. The February letter between Altus and Black’s group, obtained by Motherjones.com, states that “from time to time we may identify investment opportunities…beyond the scope of those contemplated by the original agreement.”

In an interview, Henin said the basis of the letter was the purchase of Executive Life’s insurance operations, although the agreement also covered other investments in Europe. Of course, Altus was not supposed to control Executive Life at the time, something Black was fully aware of. Henin also said that the investment opportunities referred to in the letter were tantamount to 15 percent of the insurance company’s dividends. In the end, the rights to that 15 percent was given to one of Black’s partners, with whom Black had split.

Finally, in September 1993, ownership of Executive Life, in receivership since the Insurance Department claimed control of it, was transferred to the French investor group recruited by Henin and Altus as well as Sun America, a Los Angeles insurer pulled into the deal by Garamendi at the last minute.

On its face, there was nothing legally wrong with the deal. But, according to separate complaints filed by the California Department of Insurance and California Attorney General, documents disclosed by a French whistleblower indicate that part of the transaction were a “sham.” The complaints argue that secret contracts between Credit Lyonnais and two members of the French investor group indicate that the investors were acting as fronts for the French bank. The idea, the complaints allege, was that the private investors would buy Aurora with the understanding that they would later sell it back to the bank or the bank’s designees at a predetermined price.

The California authorities’ allegations are supported by the sudden involvement in the deal of Francois Pinault, the principal in a French holding company called Artemis. At the time, Pinault’s principal banker, Credit Lyonnais, owned about 25 percent of Artemis. In December, 1992, a year after Garamendi’s auction, Artemis bought $2 billion of the junk bonds then held by the French bank. As a part of the transaction, Pinault purchased an option to buy Aurora from Credit Lyonnais.

How could Credit Lyonnais proffer that option? Good question. The French investors, not the bank, were supposed to own Aurora. California’s insurance commissioner and attorney general have included Pinault in their lawsuits against the French bank, alleging fraud and conspiracy in the takeover of Executive Life.

The allegation that the French bank hid the manner in which they were to gain control of Aurora–called portage agreements–forms the basis of both the insurance department’s and California Attorney General’s lawsuits against Credit Lyonnais.


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