Missouri Regulators Seek $3 Billion in Damages From General American's Law Firm

By Fran Lysiak, senior associate editor, BestWeek
A. M. Best
June 3, 2009

ST. LOUIS, Jun 03, 2009 (A. M. Best via COMTEX) -- Missouri insurance regulators and liquidators of General American Mutual Holding Co. are seeking $3 billion dollars in punitive damages from the law firm that represented the life insurer, which collapsed a decade ago. The suit alleges the law firm's advice led the company to be sold for a discounted sum to an insurer which the firm later represented.

According to the suit, General American owned GenAmerica, which in turn, owned General American Life Insurance Co. Once the largest life insurer based in Missouri, General American employed 4,000 people and had more than 300,000 policyholders.

After facing a short-term cash problem, General American went under the supervision of Missouri's insurance department in August 1999. Earlier that month, General American suffered a liquidity crisis after a massive run on the assets of its subsidiary, General American Life. Holders of $6.5 billion in General American "guaranteed investment contracts," which are insurance-backed contracts that offer guaranteed rates of return, exercised put options that required the life insurer to repay all of the principal and interest in seven days (BestWire, Nov. 22, 2006).

Named as defendant in the suit is Dewey & LeBoeuf, the law firm that served as counsel to General American.

In August 1999, the suit alleges, at the recommendation of a LeBoeuf partner and Richard Liddy, also a defendant and General American's former president and chief executive officer, General American sought protection in the form of administrative supervision from the Missouri insurance department in order to protect General American policyholders.

However, "contrary to representations from LeBoeuf that administrative supervision was a temporary measure, once General American was taken into administrative supervision, it was a foregone conclusion, known to LeBoeuf, that General American could not survive as a stand-alone company," the complaint alleges.

After General American entered into administrative supervision, a LeBoeuf partner and other advisers recommended that General American be sold to Metropolitan Life Insurance Co. "for the substantially discounted sum of $1.2 billion dollars," the suit charges. After the sale, "if not even prior to the closing of the sale," the firm represented MetLife, the suit says.

MetLife bought General American in January 2000. General American's policyholders were to receive the $1.2 billion that MetLife paid for the sale (BestWire, Oct. 16, 2000).

In a statement, Dewey & LeBoeuf said it "categorically rejects the unfounded allegations in the complaint, which was given to the press before service on Dewey, involving its representation of General American in corporate matters some 10 years ago.

"The complaint makes profoundly erroneous misstatements of fact and is little more than a misguided attempt by a liquidator to attract media attention," the firm said. "Dewey & LeBoeuf acted at all times in accordance with the highest professional standards and intends vigorously to defend these baseless and irresponsible claims."

The suit also alleges negligence against Liddy, saying he didn't tell General American's outside board of the potential liquidity risks of the guaranteed investment contracts.

Filing the legal malpractice suit in Cole County Circuit Court were John Huff, director of the Missouri Department of Insurance, Financial Institutions and Professional Registration as liquidator of General American Mutual, and Albert Reiderer, as special deputy liquidator for General American Mutual, on behalf of General American policyholders.

In November 2006, Morgan Stanley agreed to pay $95 million to settle fraud charges and other allegations stemming from its role in the General American's collapse. The liquidator alleged that investment banker breached its fiduciary duty by encouraging the mutual company to sell the guaranteed investment contracts, which Morgan Stanley allegedly knew could cause General American to suffer liquidity problems (BestWire, Nov. 22, 2006).

General American Life Insurance Co. currently has a Best's Financial Strength Rating of A+ (Superior).

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