Conseco, Inviva Settle With SEC Over Market Timing Charges

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Conseco Inc. and Inviva Inc. agreed to pay $20 million to settle regulators charges that they helped market timers make big profits on their variable annuities at the expense of individual investors.

Neither company admitted any guilt in the matter but acknowledged agreeing to settle.

The 2 companies were the first insurers to be charged by the Securities and Exchange Commission in the recent market timing scandal.

New York Attorney General Eliot Spitzer was also involved in the settlement.

The SEC charged both companies with securities fraud for facilitating market timing of mutual funds through the sale of their variable annuities.

The charges covered Conseco subsidiaries CIHC Inc., Conseco Services LLC and Conseco Equity Sales Inc. as well as Inviva and its subsidiary, Jefferson National Life Insurance Company.

Inviva, New York, is the company to which Carmel, Ind.-based Conseco sold its VA business in 2002, shortly before it filed for bankruptcy. Conseco emerged from bankruptcy in September 2003.

In market timing, large investors such as hedge funds buy and sell shares of the same funds frequently to exploit lags in price movements in the market.

While not illegal in itself, market timing can cause other shareholders to bear the costs of the timers price juggling and thus can dilute the value of their shares, the SEC argued.

The question of fraud arose because the 2 VA carriers never discussed these arrangements with the underlying funds nor to individuals buying their annuities, the SEC charged.

“Eventually, market timing assets constituted the majority of assets invested in the variable annuity products” sold by the 2 firms, the SEC said in a statement. “The insurance companies profited by the fees earned from the sales of the annuities to the market timers.”

Conseco sold shares to market timers from 1999 through 2002, while Invivas trades took place from 2002 though 2003, the SEC said.

Conseco says it is pleased to have resolved the issue.

“Because Conseco had previously established a reserve for potential liabilities in this matter, the settlement is expected to have no impact on the earnings guidance Conseco provided in its second-quarter 2004 earnings release,” the company says.

David Smilow, chairman and CEO of Inviva, says his company agreed to the settlement “to put the issues we inherited with the acquisition of the Conseco Variable Insurance Company squarely behind us.”

Smilow added that Inviva has “taken major steps” to monitor trades to avoid further timing activities in meeting the demands of what it called “an evolving regulatory environment.”

Conseco agreed to pay $15 million, including disgorgement of $7.5 million and civil penalties of $7.5 million. Inviva and Jefferson National will pay $5 million, including disgorgement of $3.5 million and a civil penalty of $1.5 million.

Those payments will be distributed to shareholders of mutual funds affected by the market timing, the SEC says.

In an unrelated matter, Conseco confirmed last week that it had settled a lawsuit it had filed against a former president and chief operating officer whom it had charged with failing to repay a loan to buy the companys stock.

An Associated Press report said the executive, Thomas J. Kilian, agreed to repay the company more than $25 million. Kilian, who resigned in 2002, was one of 11 executives who borrowed money from the company to buy its stock, the AP said.

Conseco declined to comment further on that settlement.


Reproduced from National Underwriter Edition, August 12, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.