Conseco Agrees to Settle In Securities Trading Case
By JOSEPH B. TREASTER
The New York Times
August 10, 2004
In one of the first settlements in a broad investigation into improper securities trading in the insurance industry, Eliot Spitzer, the New York attorney general, and the Securities and Exchange Commission said yesterday that Conseco, a once-high-flying Indiana insurer, and a successor company had agreed to pay $20 million in restitution and fines.
While the penalties were small in comparison to the hundreds of millions that regulators have imposed on mutual fund companies in recent months, officials in New York and Washington suggested there was much more to come in their investigation of variable annuities, the insurance industry's version of mutual funds.
"There is enough evidence here to generate substantial concern on the part of regulators that there is a serious problem in the industry," Mr. Spitzer said. Mark K. Schonfeld, a regional director for the S.E.C. in New York, said he agreed and both said they were pressing ahead with their inquiries.
Mr. Spitzer's office and the S.E.C., as well as NASD, the regulatory arm of the brokerage industry, are also investigating improper sales of variable annuities, which are the fastest growing product in the insurance business and are generally sold to older Americans of modest means.
Conseco, which emerged from bankruptcy protection last September, was accused of letting hedge funds and other big investors move millions of dollars quickly in and out of variable annuities, a type of investment intended for long-term investing for retirement. In a technique known as market-timing, the hedge fund investors traded in response to market-moving events, while most investors were restricted or discouraged from doing so. The big investors were often able to score huge profits, while the insurance company increased its income from fees, and the earnings of smaller investors declined.
The regulators said that while market-timing is not strictly illegal, Conseco engaged in fraud, from late 1999 to October 2002, by stating in the prospectuses for its Monument and Advantage Plus variable annuities that the annuities were not intended for use by "professional market timing organizations," even as it campaigned to attract those very market timers.
As part of the fraud, the regulators said, Conseco did not tell other investors that it was recruiting market timers or that market timing could diminish their own profits.
Conseco acknowledged the settlement in a statement and said it was "pleased to have resolved this legacy issue." The company said it had previously set aside money to settle the case and that its share of the settlement, $15 million, was expected to have no impact on current earnings.
Conseco sold the unit that offered the Monument and Advantage Plus variable annuities to Inviva Inc., a holding company with headquarters in New York, in late 2002, but continued to operate it through May 2003, said David D. Brown IV, the chief of Mr. Spitzer's investment protection bureau. Then, he said, Inviva, continued the fraudulent practices until September of last year, about the time that Mr. Spitzer announced the first case of improper trading in mutual funds against a hedge fund.
Inviva, which sells life insurance and annuities through its two subsidiaries, the Jefferson National Life Insurance Company and the American Life Insurance Company of New York, acknowledged that it would pay $5 million.
David Smilow, Inviva's chief executive, said his company had agreed to the settlement "to put the issues we inherited with the acquisition of the Conseco Variable Annuity Insurance Company squarely behind us and to concentrate on our continued strong growth."
In June, NASD reached the first settlement in a variable annuities securities trading case with Davenport & Company, a regional broker in Richmond, Va., which agreed to pay $738,800 in a fine and restitution. Davenport was accused of market timing and also late trading, in which some investors were permitted to make transactions after the close of the market.
Regulators say that market timing began in mutual funds and later spread to variable annuities as some mutual fund operators began discouraging the practice because it created volatility that made management of the funds more difficult and sometimes hurt their overall performance, which in turn threatened the bonuses of the fund managers.