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Judge Blocks Lloyd’s from Imposing Settlement on U.S. Investors

August 24, 1996

RICHMOND, Va. (AP) _ A federal judge on Friday night forbid Lloyd’s of London from imposing its $4.7 billion rescue plan on dissident American investors who want more financial details about the insurance market’s settlement.

U.S. District Judge Robert E. Payne extended the deadline for skeptical investors until Oct. 30 to review new information from Lloyd’s and decide whether to accept the plan. But Payne did not block U.S. investors from accepting the deal if they so choose.

Payne issued a preliminary injunction and lengthy opinion, which denied Lloyd’s attempt to throw out the investors’ case. The judge wasn’t swayed by Lloyd’s dramatic claims that such an order would gravely endanger the intricate restructuring plan.

The possible harm American investors face from entering the Lloyd’s plan ``significantly outweighs any demonstrated harm to Lloyd’s of complying with its obligations″ under U.S. securities laws, Payne wrote.

``We’re applying for an immediate appeal,″ said a Lloyd’s spokeswoman in London. She could not elaborate but said the market was preparing a statement. Lloyd’s attorneys declined comment, but were sober following the order.

Significantly, Payne’s preliminary order found Lloyd’s in violation of U.S. securities laws by recruiting American investors through the mail for the elaborate restructuring plan. A Nov. 4 trial was scheduled.

In an attempt to strike a balance with Lloyd’s interests, Payne said the insurer ``is entitled to as much latitude in continuing with its reconstruction and renewal plan″ so long as its actions abide by U.S. securities laws.

After Payne issued his 148-page order, a brief hearing was held in which he denied Lloyd’s request to delay imposition of his order.

``I’m very pleased,″ said Susan Cahoon, an investors’ attorney with the Atlanta law firm Kilpatrick & Cody.

The settlement, three years in the making, must be approved by Lloyd’s 34,000 investors worldwide by Aug. 28. Payne’s order would allow Lloyd’s to proceed as planned with most of its investors, while granting the extension to those Americans who contested the plan. There are about 3,000 U.S. investors in Lloyd’s, but some support the restructuring and are unlikely to seek a delay.

Failure of the settlement would leave Lloyd’s insolvent, likely ending a legend in the world’s financial system. Over three centuries, Lloyd’s has been insuring everything from airports and oil rigs to college football players and Bruce Springsteen’s voice.

Payne held a two-day hearing earlier this week on the suit by the Lloyd’s investors, who are known as ``names.″

The suit, backed by about 450 American investors, sought to force Lloyd’s to provide more details about investors’ financial obligations under the settlement. Investors want documentation for the insurance losses Lloyd’s claims they have incurred.

Payne gave Lloyd’s until Sept. 23 to disclose additional information about the settlement plan, as required by the Securities Exchange Act of 1934.

He said any American investors can review that new information without adversely affecting their ultimate decision to accept or reject the plan. But to do so, the investors have to pay into a special escrow fund the amount asked by Lloyd’s to participate in its settlement.

The escrow fund, to be opened in Richmond, will hold the funds until the investors inform Lloyd’s by Oct. 30 whether they will accept the settlement. If they accept, Lloyd’s will receive the investors’ money from the fund, but investors who reject the plan will have their money held in the fund until completion of the Richmond court case.

Lloyd’s is prevented from taking any action to seize investors assets until it completes the new disclosures spelled out in Payne’s order.

Lloyd’s lost more than $12 billion between 1988-1992 from pollution and asbestos claims, as well as natural disasters, leaving thousands of investors in desperate shape. The plan would put their money-losing policies into a new reinsurance company, thereby allowing investors to exit Lloyd’s and limit their losses.

In contrast, anyone who becomes a Lloyd’s name pledges their entire net worth to make good on the insurance polices they agree to underwrite.

There’s a price to getting into the new reinsurance venture, a premium of up to $150,000. In addition, names have to agree not to sue Lloyd’s or its agents for policies covered in the settlement.

Investors fear they may be shut out of court if they sign on for the settlement.

The settlement documents contain broad legal disclaimers in which Lloyd’s and various committees that prepared the report deny responsibility for ``any loss occasioned by any person″ who relies on financial information or statements within the thick, densely worded plan.

The hearing featured testimony from two American investors in Lloyd’s, as well as the insurance market’s chief executive, Ronald Sandler, who predicted dire consequences if investors won the suit.

``Plaintiffs’ requested injunction would mean the end of the Lloyd’s market,″ Sandler said in court papers filed late Thursday. However, no one representing Lloyd’s would make a similar comment Friday night following Payne’s order.

A Lloyd’s attorney argued the suit was based on a fundamental misunderstanding of Lloyd’s role.

``This case has no business in this court,″ said Harvey Pitt, the lawyer for Lloyd’s.

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