The US financial authorities are considering prosecuting French bank Credit Lyonnais for conspiracy and money laundering, according to a report in the Wall Street Journal.

Prosecutors allege that when the French bank bought a defunct California insurance company's junk bond portfolio in 1991, it was effectively taking control of the company with the help of clients and allies.

At the time, foreign banks were banned from buying into US insurance companies.

The French finance ministry has however denied covering up a possible fraud relating to the deal, as the report alleged it had.

"The Ministry of Finance categorically denies having covered up, or sought to cover up possible fraud relating to the purchase of Executive Life or to hide this from the law," the ministry said in a statement.

The French government still holds a 10% stake in the bank, while the finance ministry is is responsible for overseeing its regulation.

If Credit Lyonnais is convicted of fraud in the US, it could lose its banking licence there.

Ongoing saga

News of a possible US prosecution is the latest twist in the saga of the French bank.

Once one of the world's largest banks, Credit Lyonnais fell from grace when it sought to cover up massive losses.

It has since been bailed out by the government at a cost of $15bn (�10.5bn) to the taxpayer and was privatised in 1999.

An investigation, headed by a Paris magistrate, was launched in late 1996.

So far, the investigations - in France and US - could implicate senior French bankers and regulators.

Earlier this year, the bank reported bumper profits, but the report in the Wall Street Journal suggests that the bank has not yet successfully buried its troubled past.

Interest to buy

Altus, the Credit Lyonnais subsidiary that bought Executive Life junk bond portfolio, was prohibited from buying a stake in the US insurer.

However, the sale of the bond portfolio hinged on a sale of the underwriting business.

French insurer Maaf bought the underwriting business and Altus promised to buy out Maaf's stake at a future date, ultimately guaranteeing it against any future losses, the report alleges.

Their lawyers argue that since Credit Lyonnais was bailed out in 1995, it would be futile to bring charges now.

"Prosecuting a rehabilitated financial institution is beating the proverbial dead horse," a Credit Lyonnais lawyer George Terwilliger told the Wall Street Journal.