Investors v Conseco Variable Annuity Companies, Inviva, Inc., and Jefferson National Life Insurance Company
Conseco Variable Annuity Companies Settle Market Timing Allegations for $20 Million
The parties have reached a $20 million settlement in an administrative proceeding filed by the SEC against subsidiaries of Conseco, Inc. (CIHC, Inc., Conseco Services, LLC, and Conseco Equity Sales, Inc.), and the company to which Conseco sold its variable annuity business in 2002, Inviva, Inc., and its subsidiary Jefferson National Life Insurance Company. The action alleged that the insurance companies facilitated market timing of mutual funds through the sale of variable annuities, harming investors who purchased variable annuity products from the companies. Persons eligible to take part in the settlement should contact the attorneys who prosecuted the case for more information.
Variable annuities are combined securities and insurance products designed primarily for individual retirement and tax purposes. Nevertheless, from late 1999 through October 2002, Conseco Variable Insurance Company (CVIC), Conseco Services, and Conseco Equity Sales, Inc. (CES), sold Monument and Advantage Plus variable annuity products to hedge funds and other individuals and entities to "market time" the mutual fund portfolios offered through the variable annuities. Conseco Services employees were aware that the market timers, in contrast to the typical variable annuity customer, had no interest in the tax deferral or retirement features of variable annuities.
The Monument and Advantage Plus prospectuses stated that these products were "not designed for professional market timing organizations" and indicated that CVIC in its "sole discretion" could restrict exchanges "that we consider disadvantageous" to other annuity contract holders. The prospectuses failed to disclose that CVIC was marketing and selling the products to market timers. In addition, the prospectuses failed to disclose the risk that market timing might have a negative impact on other variable annuity purchasers' investment returns.
In October 2002, Inviva purchased CVIC and later renamed it Jefferson National. Inviva and Jefferson National continued to allow a group of hedge funds and other select customers to engage in market timing through the Monument and Advantage Plus variable annuity products.
The Jefferson National prospectuses repeated the misleading language from the CVIC prospectuses. Additionally, the Jefferson National prospectus reserved the right to limit any "substantive" transfers that it determined "in its sole discretion, could adversely affect the management of the investment portfolio." However, as at CVIC, Inviva and Jefferson National failed to disclose that Jefferson National was selling the products to market timing customers, and was facilitating the market timers in carrying out a market timing strategy.
In some cases, mutual fund advisers were aware of and permitted the market timing of the mutual funds. In other cases, the defendants did not inform the underlying fund complexes that Conseco Services and Inviva employees tolerated and actively solicited market timers. Many of these complexes prohibited market timing or did not tolerate timers.
Ultimately, hedge funds and other market timers invested approximately $120 million in Monument and Advantage Plus variable annuities. In the Monument product, the market timing assets dwarfed the assets of other variable annuity purchasers. Through their frequent trading, the market timers diluted the value of the underlying mutual funds that were timed, and caused the funds to incur additional costs.
Under the settlements, CIHC, Conseco Services, and CES have 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. These amounts will be distributed to shareholders of mutual funds affected by the market timing. Inviva and Jefferson National will also undertake compliance measures to protect against future violations. These measures include retaining an independent consultant to review compliance procedures designed to prevent and detect market timing.
