The Humbling Of France's Top Tycoon

The Executive Life scandal casts a pall on François Pinault's fortune

Once again, France and America are snarled in a thorny dispute. For weeks, negotiators have shuttled back and forth across the Atlantic. Three French Cabinet ministers have raised the issue in tête-à-têtes with U.S. counterparts. President Jacques Chirac has weighed in, too. But this time, the problem isn't Iraq or foreign trade. It's a decade-old criminal investigation involving allegations that formerly state-owned bank Crédit Lyonnais illegally acquired a California insurer, Executive Life.

Twice this fall, negotiators have come close to a settlement that would protect French taxpayers from a trial that could lead to billions in penalties. Each time, the talks have snagged over France's insistence that a deal include protections for tycoon François Pinault.

To outsiders, it might seem amazing that France would go to such lengths for a businessman. But Pinault is not just any businessman. The 67-year-old is one of the three richest people in France, a billionaire whose empire ranges from luxury goods to electrical equipment. He's also one of Chirac's best friends. Despite the risk for taxpayers, French officials appear sympathetic to Pinault's argument that, as he wrote recently in a page one piece in Le Monde, "the American justice system is holding us hostage."


Talks with the U.S. Attorney in California were continuing as BusinessWeek went to press on Nov. 25, even though the deadline for an out-of-court settlement theoretically expired at the end of the day on Nov. 24. That means Pinault's holding company, Artémis, could still secure a deal to make a modest cash settlement, without admitting any wrongdoing that could put the company at risk in future proceedings.

Yet the Executive Life scandal poses other risks for Pinault. It's through Artémis that the Pinault family holds a controlling 42.4% stake of Pinault-Printemps-Redoute, the $32 billion publicly traded retail and luxury group at the heart of the Pinault empire. Although Artémis doesn't divulge its finances, bankers familiar with the group say that for several years, the annual dividend it received from PPR, roughly $140 million, has been less than the debt service on Artémis' estimated $5.3 billion debt. Until now, Artémis' bankers have allowed it to roll over a portion of debt each year. But a stiff fine in the Executive Life case -- $500 million or more -- could prompt them to press Artémis for extra cash.

Artémis could tap PPR for a higher dividend, since it controls 57.3% of PPR voting rights. But PPR has its own problems. Having paid dearly for luxury house Gucci after a bruising battle with rival Bernard Arnault, PPR was jolted in November by the news that Gucci CEO Domenico de Sole and star designer Tom Ford were quitting after failing to agree on a new contract. The duo, who masterminded Gucci's makeover in the 1990s, will be leaving in the spring, just as PPR will have to fork over a final $2.5 billion or so to buy out Gucci's minority shareholders. It'll be tough to find a designer and chief executive who can match their performance.

The Executive Life case also raises the question of whether Pinault, who has long relished his reputation as a self-made man, partly financed the expansion of his empire with profits reaped from an illegal scheme. To be sure, no one accuses him of masterminding the takeover of Executive Life. U.S. authorities say the culprit was Crédit Lyonnais, which in 1991 approached California regulators with a rescue plan for the insurer after the collapse of its junk-bond portfolio pushed it into insolvency. A Crédit Lyonnais unit negotiated to sell the bonds to Artémis in late 1992 while arranging for a new company called Aurora, ostensibly controlled by a group of outside investors, to take over the insurance business.


The problem, U.S. law enforcement officials have said, is that Aurora was controlled by Crédit Lyonnais, in violation of U.S. laws prohibiting banks from owning insurers. Although Aurora told California regulators it was independent of the bank, the regulators say a whistle-blower later turned over secret agreements detailing Crédit Lyonnais' role. Pinault has said he knew nothing about the agreements. "We acted in good faith," says an Artémis spokeswoman. But Gary Fontana, a lawyer representing the California Insurance Dept., which is pursuing a civil suit stemming from the same allegations, told BusinessWeek: "What [Pinault] says is contradicted by documents." Pinault declined to comment for this article.

The Executive Life deal, in any event, benefited Artémis immensely. The junk-bond portfolio soon rebounded, generating an $872 million gain, says the California Insurance Dept. Artémis also gradually got control of Aurora. Profits from the deal helped Pinault -- who until the early 1990s had mostly been in the lumber business -- embark on a string of acquisitions.

Chirac has been a key player in the Executive Life negotiations. He and Pinault have been friends since the 1980s, when Pinault agreed to rescue a bankrupt state-owned sawmill in Chirac's parliamentary district. By 1995, when Chirac was elected President, the two were so close that Pinault and his wife hosted a dinner for Chirac on election night.

Earlier this fall, U.S. prosecutors and French Finance Minister Francis Mer had hammered out a proposed $585 million settlement of the Executive Life case, with the French government agreeing to pay $485 million to compensate for the actions of the former state-owned bank, and the now-privatized Crédit Lyonnais ponying up another $100 million. Such a deal would not only protect tax payers from further liability but also be a relief to French bank Crédit Agricole, which recently acquired Crédit Lyonnais and fears that a criminal proceeding could endanger its U.S. banking licenses.

But the proposed deal offered no protection to Pinault and to former Crédit Lyonnais Chairman Jean Peyrelevade, who took over the bank shortly after the Executive Life deal and has said he knew nothing about the scheme. On Oct. 14, Chirac blocked the agreement.

Surprisingly, there has been little public protest over Chirac's action. That may be partly because Pinault has contacts with the Socialist opposition, too. But, says Sophie Coignard, a journalist who has written about France's elite: "There is a cultural aspect to this also. In France, it is considered legitimate for the state to go to the rescue of private interests."

In recent weeks, Pinault has proclaimed his innocence in interviews and opinion articles. To admit guilt "for an infraction that I did not commit, is unacceptable," he wrote in Le Monde. "It is a question of dignity." Certainly, Pinault isn't one to give up easily. For five years, he has fought to win reimbursement for the nearly $900,000 he and his wife paid for an Egyptian statue that experts later ruled a fake. On Oct. 13, he lost the latest round in a Paris court. He has promised to appeal. If that case is any guide, the fight over Executive Life is far from over.

By Carol Matlack in Paris

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