TIME EUROPE
FEBRUARY 21, 2000 VOL. 155 NO. 7
SPECIAL REPORT
The Decline and Fall of Lloyd's of London
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Back in his December 1969 report to Lloyd's, Lord Cromer had warned of the inherent conflicts of interest in a system which allowed underwriters, brokers and agents to form limited liability companies and charge exorbitant fees and commissions to Names whose liability remained unlimited. Lloyd's had buried the warning and allowed the conflicts to flourish. In some cases, underwriters were fattening their companies in order to sell stock to the public.
One of the fattest such companies was Sturge Holdings, which was owned and controlled by Coleridge and Rokeby-Johnson and which Dona Evans was later to join. Having known of the asbestos problem since the '70s, Sturge had been selling Lloyd's investments around the U.S. and placing investors on syndicates it knew would be hit with asbestos claims, according to allegations in lawsuits in the U. S. and Britain and an American law enforcement memorandum. The Sturge Names included American stockbroker Charles Schwab, as well as two investors who had been put on the similarly infected Merrett syndicates, Dan Lufkin and Bruce Sundlun.
Charles Parnell, representing Sturge, also lured investors of much lesser means such as Shirley Cook, a third grade teacher from Texas, and Elizabeth Bencsics, the wife of an electrician in New Mexico. "At school, we were taught that there was nothing more honorable than Lloyd's of London," Bencsics says. "I was thrilled to be part of it."
In 1984, when it is said they knew that the market was in for a drubbing, Coleridge and Rokeby-Johnson sold Sturge stock to the public. Both men made millions of dollars, while allegedly continuing, along with others, to foster the cover-up of the coming debacle. "Both of them were clearly aware by then of the likely scale of forthcoming losses which were to swamp the market--in particular, the Sturge Names--a few years later," asserts Coleridge's cousin, Priscilla Stewart-Smith, in a confidential report to Sturge Names on her Lloyd's investment (see separate story).
In 1985, Coleridge was named deputy chairman of Lloyd's. That same year, a U.S. law firm warned a leading Lloyd's underwriter that the asbestos matter couldn't be kept "low key" much longer. By 1986, according to a later finding by a federal judge in Texas, "if any reasonable outside Name had known what insiders at Lloyd's knew, that Name most certainly would have preferred to terminate or suspend his or her underwriting activity with Lloyd's."
In 1986, Lloyd's quietly added a clause to its contract with investors. Any legal dispute over the investment would have to be resolved in England under English law. Investors were not told that Parliament four years earlier had effectively inoculated Lloyd's from lawsuits in England.
By the late '80s there were sufficient signs of trouble at Lloyd's to alert investors. On Nov. 26, 1986, the Economist warned that a rising number of Lloyd's Names were quitting and that new investors had "the dice loaded against them." In 1987, Ian Hay Davison, whom Lloyd's had made chief executive four years earlier to appease the Bank of England and then disgorged in 1985 after concealing its worst scandals from him, published a book about his experience. "When I joined Lloyd's," he wrote, "I had announced my determination to pick out the rotten apples. I then thought that to exclude the wrongdoers would solve the problem. But it was not as simple as that. Many of the apples were to some extent tacky, and the barrel itself appeared ... to be infected."
Yet the allure of Lloyd's was still strong. It signed up Robert Novak, the cnn political commentator whose nationally syndicated column, written in Washington with Rowland Evans, appeared in newspapers all over the U.S. In England that same year, Lloyd's recruited the Earl of Airlie, a distinguished banker and member of the House of Lords, who served as the Lord Chamberlain, the Queen's chief executive officer at Buckingham Palace. Lloyd's also lured several more Members of Parliament, bringing the contingent of Names in the House of Commons to around 50 and in the House of Lords into the hundreds.
As the crisis intensified inside Lloyd's, its underwriters and agents pushed outside Names to increase their financial stakes. The number of syndicates in which Dan Lufkin invested rose from four to 52. Charles Schwab raised his commitment from five syndicates to 41, Robert Novak from seven to 20. Lloyd's sales commissions leveraged the process: the riskier the syndicate an investor was induced to join, the higher the commission the salesman was paid.
The first unmistakable sign of serious trouble at Lloyd's came in June 1991, when Lloyd's reported a loss of $980 million for 1988 (remember the three-year lag in reporting underwriting results). There had been major disasters that year like the Piper Alpha oil rig explosion, but it was clear that the claims from asbestos and pollution were finally hitting the market with a vengeance. What Rokeby-Johnson had confided to Bradley on the Walton Heath golf course in 1973 was coming true.
The losses sent many Names into a panic. Those who had taken heed of the small print in their contracts knew that their liability was unlimited. But most, like Evans, remembered the joking assurances of those who had recruited them that Lloyd's was as "safe as houses." Others recalled more enticing blandishments. "Lloyd's is a license to steal--it's a legal way to steal," Sturge's Parnell told California Name Verne Ballard, who wound up living in a trailer after losing his $1 million house.
And still the red ink flowed. Lloyd's declared a loss of $3.85 billion for '89, partly as a result of disasters ranging from the Exxon Valdez oil spill to Hurricane Hugo and the San Francisco earthquake. Names hit by the '88-89 losses received cash calls averaging $600,000. 1990 was even worse with a loss totaling $4.4 billion. Contributing to all those losses were the unrelenting asbestos claims.
Angry Names began lawsuits alleging fraud against Lloyd's and its principal officers, underwriters, brokers and agents. Suits brought in California and New York accused not only Lloyd's but more than 100 individuals and dozens of their companies. There were efforts to compute the magnitude of the alleged swindle. John Rew, a British investment analyst, chartered accountant and former Lloyd's Name with considerable insurance expertise, examined Lloyd's own figures and estimated that external Names were bilked of at least $23.8 billion for just the years 1988 through 1992. That figure included $15 billion in losses from asbestos and other liabilities that allegedly were concealed from them, and $8.8 billion from fraudulent sales commissions generated by so-called churning--the repeated charging of both premiums and sales commissions for insurance written to give the illusion of business growing faster than it was. This allegedly involved the excessive, repeated, widespread and unnecessary reinsuring of certain risks within the Lloyd's market with commissions and premiums collected at each step along the way by agents, brokers and Lloyd's.
One particularly outraged Name hired a firm of German private detectives to secretly break into Coleridge's residence in Switzerland to search for evidence against him. It found none. American Names complained to the U.S. Securities and Exchange Commission, which is supposed to police securities fraud in America. The sec's enforcement division and general counsel began separate inquiries into Lloyd's in 1991.
The British police--the fraud squads of Scotland Yard and the City of London police--were swamped with reports of fraud at Lloyd's. "We were hearing the same thing from every direction," a senior law enforcement source told Time. "There was worry that the whole insurance business of the U.K. could collapse." Attempting to investigate, the police got little cooperation from Lloyd's top brass. "Usually the ceo of a company with a fraud problem will fall over backward to assist the police," the source says. "Here they weren't committed to cleansing, only to concealing."
Eventually the flood of reports about fraud at Lloyd's overwhelmed the police, which turned them over to the Serious Fraud Office, a unit of the British government that had been created in 1987 to prosecute major financial crimes. The SFO, which reports to the Attorney General of Britain, assigned its own investigators to the Lloyd's case.
Across the Atlantic, as the losses at Lloyd's mounted in the '90s, a host of judges and law enforcement officials investigated Lloyd's and found serious wrong-doing. In Texas, Federal District Judge John D. Rainey determined that Lloyd's and Sturge, the company belonging to Coleridge, Rokeby-Johnson and Parnell, had defrauded a Lloyd's Name by "misrepresentations, misleading partial disclosures, and nondisclosures of material facts." But the judgment was overturned on appeal on non-evidentiary grounds, and the Name, forced to take the case to England, chose not to pursue.
Enforcement officials in 11 states charged Lloyd's and some of its associates with various wrongs such as fraud and selling unregistered securities. The Pennsylvania Securities commissioner determined that Lloyd's had begun defrauding investors as early as 1969. In New York, Assistant Attorney General Mohr asserted in a memorandum to officials in other states that the Names' contracts with Lloyd's should be voided. In a separate enquiry at the New York State insurance department, supervising examiner Paul Cohen determined that $12 billion in Lloyd's reserves on deposit at Citibank (the amount had grown from $4 billion in the late '70s) were "seriously deficient" and "unlikely to cover all losses" at Lloyd's. Reporting in May, 1995, Cohen stated that Lloyd's in effect had borrowed from Peter to pay Paul in administering Names' liabilities. With Citibank's knowledge, Cohen said, Lloyd's had "borrowed" from the assets of Names who owed nothing to pay the obligations of Names who did, all in violation of the Names' contracts with Lloyd's and trust agreements with Citibank. Citibank declined comment because of pending litigation.
In Britain, in 1995, a parliamentary committee that was investigating how the government regulated financial services decided to include Lloyd's in its inquiry. The committee allowed a group of Names to assail Lloyd's publicly for creating false profits, lying to Parliament in 1982 and cloaking itself in a "culture of secrecy." The committee even got Lloyd's officials to acknowledge fraud at Lloyd's. "You have quoted me as saying there was fraud in Lloyd's," former chairman Peter Middleton said. "There was. Also, that there were some terrible things that happened. I believe that." Labour M.P. Brian Sedgemore assailed the incumbent Lloyd's chairman David Rowland to his face. "It looks like bluntly from all the documentation I have got here and from listening to you that either you were behaving with culpable negligence or you were being dishonest ... This documentation seems to me in all fairness to point a very strong accusatory finger at you ..."
Rowland denied any wrongdoing, saying he had always fully disclosed his personal financial interests and had himself suffered "very substantial losses" from his Lloyd's investments. He didn't say how much.
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