N.Y. A.G. Reports Settlement with Pair of Insurers

New York Attorney General Eliot Spitzer announced a settlement with two insurance companies alleged to have allowed improper trading of variable annuities sold as retirement products.

The agreement, negotiated jointly with the SEC, requires subsidiaries of Conseco Inc. and its successor in the variable annuities business, Inviva Inc., to pay $20 million to resolve allegations that the two companies allowed certain favored investors to engage in rapid trading of mutual funds linked to variable annuity products.

The case marks the first time regulators have linked insurance companies to “market timing,” a practice that harms small investors.

“The conduct identified in this case is particularly troubling because it involves investments marketed to people of modest means for retirement planning,” Spitzer said. “Instead of looking out for retirees as they were supposed to, these companies allowed a favored few to take advantage of everyone else.”

According to a complaint filed by Spitzer’s office in connection with the settlement, Indiana-based Conseco allowed certain hedge fund managers to engage in rapid short-term trading of its mutual fund sub-accounts from 2000 through April 2003. New York-based Inviva Inc., which purchased Conseco’s variable annuities business in October 2002, continued this practice until the fall of 2003.

Spitzer noted that prospectuses from both Conseco and Inviva stated that variable annuities were for long-term investors and not for professional market timers. The prospectuses implied that company officials would diligently monitor trading to prevent market timing. But evidence uncovered by Spitzer’s office revealed that Conseco officials actually welcomed the timers and sanctioned their activities over the protests of certain mutual fund portfolio managers.

Investigators found that hedge fund managers bought variable annuities even though they had no interest in them as insurance products. Instead, they paid for unwanted insurance features solely as an “admission charge” for timing activity. This was evident from the terms of the annuities.

For example, a 32-year-old hedge fund manager from Florida entered into a contract with Conseco for terms that made him eligible for annuity payments in the year 2075, when he would be 105 years old.

Both companies concealed the timing arrangements and activities from their legitimate investors.

Under the terms of the settlement, Conseco has agreed to pay $15 million in restitution, disgorgement and civil penalties ($10 million of which will be in the form of a bankruptcy claim) and Inviva has agreed to pay $5 million. In addition, Inviva will retain an independent consultant to monitor compliance with new procedures to prevent and detect market timing.

Spitzer thanked the SEC for its cooperation in jointly investigating and negotiating a settlement with the companies.