by John J. Fialka, The Wall Street Journal, May 8, 1996
WASHINGTON - In a move likely to encourage further legal actions against Lloyd's of London, the Securities and Exchange Commission said that U.S. members of Lloyd's underwriting syndicates never gave up their right to sue in U.S. courts.
Ending a long silence over Lloyd's recruitment operations in the U.S., the SEC filed an amicus brief partly supporting 600 disgruntled American "names" who had sued Lloyd's. The case is now before the U.S. Court of Appeals in Los Angeles. The agency said a lower court was wrong when it ruled that Lloyd's members waived their rights to sue the huge insurance market in the U.S. by signing a "forum selection" agreement with Lloyd's.
In the brief, SEC General Counsel Richard H. Walker called the issue an "important one" because federal laws enacted in the 1930s don't permit U.S. citizens to waive their rights to be protected against fraud and other securities law violations.
To rule otherwise, Mr. Walker argued, would encourage "foreign promoters" of securities to avoid liability by requiring American investors to "resolve disputes in a foreign jurisdiction under foreign law." That would undermine the "deterrent function" of federal laws by discouraging private lawsuits, he said. Since 1986, Lloyd's has required its U.S. names to agree to settle disputes in English courts.
Eugene I. Goldman, a Washington lawyer who represents the names suing in california, said the SEC's opinion "will encourage the filing of additional claims" against Lloyd's, including claims by state securities commissioners. So far, 11 states have sued Lloyd's, charging stock fraud and state securites-registration viloations, and more are considering such a move.
Mr. Goldman said his clients face claims from Lloyd's for $800 milllion in insurance losses sustained by their syndicates. Part of the ritual of becoming the name is the acceptance of unlimited liability for such losses.
In its brief, the SEC took no position on whether Lloyd's has violated federal security laws. Spokesmen for Lloyd's have said for years that the SEC found no fault with the recruiting efforts of Lloyd's syndicates. A spokesman for Lloyd's said it was "surprised" by the SEC's brief. "For almost 20 years the SEC has been aware of the procedures by which U.S. residents become names."
The SEC's move comes at a delicate time for the 300-year-old Lloyd's, which is trying to line up support from some 3,000 U.S. names for a $4.3 billion "reconstruction" plan to rescue it from huge losses. World-wide, there are some 30,000 names in Lloyd's underwriting syndicates, but a revolt by Americans could spur disgruntled names in Canada, south Africa and elsewhere to reject the plan, which is to be put to a vote this summer.
David Newton, a South African consultant to Lloyd's members, said there is growing concern about the "backwash" of America's legal challenges because a substantial percentage of Lloyd's membership must agree to give up legal claims against Lloyd's for the massive rescue plan to go forward.
In recent letters to its American names, Lloyd's has indicated that their rejection of the rescue scheme could endanger Lloyd's continuing operations. Lloyd's included the opinion of a London law firm, Slaughter & May, warning that in the event of Lloyd's failure, U.S. state insurance commissioners would seize Lloyd's trust funds in the U.S. and use them to pay off policy holders. "Names would be the target of litigation from any U.S. insurance company driven into insolvency" by a Lloyd's failure, states the letter.
In a separate court acton yersterday, a judge in federal district court in Los Angeles dismissed a suit against Lloyd's brought by California's Department of Corporations. The dismissal came on a technicality: The state agency viloated the court's rules by presenting a brief longer than 35 pages arguing that Lloyd's committed securites fraud against California names. The judge's dismissal doesn't bar a reinstatement of the suit, and a spokesman for the state agency said it was planning to do that.
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