In a long-awaited move, the Securities and Exchange Commission and New York Attorney General Eliot Spitzer have settled their first variable annuity market timing case. The agency has charged subsidiaries of Conseco and Inviva, which bought Consecos variable annuity business, with securities fraud.
Both companies knowingly sold its Monument and Advantage Plus variable annuities to hedge funds intent on market timing despite the fact that the prospectuses stated that the annuities were not for timers. Furthermore, the companies also offered a separate product explicitly designed for market timing but did not insist that the hedge funds invest in that product.
In some cases, the mutual fund companies that managed the money did not allow timing but the companies allowed or encouraged trading in those funds. Also, in some cases they allowed the carriers a certain dollar volume for market timing that they did not allow other investors and that may have contradicted the terms of their prospectuses.
The Monument variable annuity was a middle market product intended for individual investors between the ages of 51 and 70, and the average investor placed $50,000 in the product. However, assets from market timers dominated the product, and at times constituting over 90% of the assets, according to an official at the SEC.
Conseco is responsible for $7.5 million in disgorgement and $7.5 million in civil penalties, but $10 million of that amount is subject to bankruptcy proceedings. Inviva is paying $3.5 in disgorgement and a $1.5 million civil penalty.
Neither company has admitted to the allegations. Inviva characterized the problem as one inherited from Conseco when it bought the book of business.
"While not admitting to the allegations put forth in the settlement documents, Inviva entered into this settlement to put the issues we inherited with the acquisition of the Conseco Variable Insurance Company squarely behind us and to concentrate on our continued strong growth," said David Smilow, chairman and CEO of Inviva.
However, the SEC documents state that Inviva facilitated market timing activities after the acquisition and that it misled a mutual fund complex into believing that it had a "zero-tolerance" policy against market timing.
Inviva has agreed to put an independent compliance consultant in place to monitor ongoing activities.