Conseco, Inviva Settle Fund Trading Charges

The mutual fund trading scandal spread Monday to insurance companies and their annuity products, in what may be the first of a round of regulatory cases against the industry.

Conseco Inc. and its successor in the variable annuities business, Inviva Inc., agreed to pay a total of $20 million to settle allegations by federal and state regulators that the companies allowed favored investors to improperly trade mutual funds linked to annuities.

The Securities and Exchange Commission and New York Atty. Gen. Eliot Spitzer said Conseco and Inviva misled investors by marketing the annuities, a type of retirement savings contract, to professional market timers who traded in and out of the funds at the expense of long-term investors.

“The variable annuity products at issue here became vehicles for market timing in mutual funds,” said SEC Enforcement Director Stephen Cutler. “The insurance company sponsors were well aware of this -- indeed, they encouraged it, but left their retail investors and the mutual funds themselves in the dark.”

Market timing isn’t illegal, but mutual fund operators can be accused of fraud if they permit it for some investors while banning the practice for others.

The case marks the first time that insurers have been linked to market timing since regulators began a probe into improper trading in the mutual fund industry more than a year ago.

Probes into annuities and variable life insurance, a related product, also are underway at insurers such as Hartford Financial Services Group Inc., Prudential Financial Inc. and MetLife Inc.

“We still intend to make a number of cases,” said David Brown, Spitzer’s chief of investor protection.

Inviva bought Conseco’s annuity business in 2002.

Carmel, Ind.-based Conseco, which emerged from bankruptcy protection in September, will pay $5 million, and regulators will file in Bankruptcy Court a claim against the estate of one of its subsidiaries seeking an additional $10 million.

Inviva, based in New York, will pay the remaining $5 million.

The money will be distributed to mutual fund shareholders affected by the market timing.

The companies agreed to the settlement without admitting or denying the findings.

Conseco allowed market timing by hedge fund managers between 2000 and April 2003, Spitzer said. Inviva allegedly continued the practice until late 2003.

Conseco sought out the market timers while the underlying mutual funds and other buyers of the annuities were unaware, the SEC said.

Hedge funds and other timers invested about $120 million in the companies’ Monument and Advantage Plus variable annuities, the SEC said.

In the Monument product line, the market-timing assets allegedly dwarfed the assets of other variable annuity buyers.

The insurers profited by the fees earned from the sale of the annuities, while the value of the underlying mutual funds was diluted and the funds incurred additional costs, regulators said.

“This case is particularly important because even more than mutual funds, variable annuities are marketed to small investors and designed for long-term investments for retirement,” said Mark Schonfeld, head of the SEC’s office in New York.

Shares of Conseco rose 11 cents to $17.05 in New York Stock Exchange trading. Inviva is privately held.