Two Funds Allege Conseco Fraud

July 21, 2000 ( - Sixteen asset management professionals have departed embattled Indiana-based Conseco for Philadelphia, as Delaware Investments ramps up its fixed-income asset management unit.

The two funds – the Anchorage Police & Fire Retirement System and the State of Louisiana Firefighters’ Retirement System – contend in a potential class action lawsuit that  top company executives made monthly trips to a company facility which monitored collections to falsify documents, according to the Wall Street Journal. 

At least 10 former company employees, including a senior vice president, made separate allegations about the potential fraud. The alleged fraud occurred between April 28, 1999 and April 14, 2000.

The two pension funds brought the suit on behalf of “thousands” of investors who purchased Conseco securities and seek unspecified damages.

The suit charges that the primary architect of the plan was Conseco co-founder Stephen Hilbert, who left in April, along with his chief financial officer, Rollin Dick, when the company’s stock began to slide. During the past two years, Conseco stock tumbled from more than $50 a share in 1998 to less than $5 a share last year.  An earnings  restatement eliminated more than a third of the company’s 1999 profit.

Since the departures, the delinquency rate on manufactured-home loans, a large portion of the loan portfolio of Conseco’s finance unit, has jumped 50%. Conseco says the jump only reflects a broader trend in the industry, the Journal reported.

“Orchestrated Scheme”

The suit charges that Conseco’s collections department “engaged in a regularly orchestrated scheme to fraudulently manipulate the delinquency reports of its underlying loans.” It did this by erasing past due accounts in an effort to “re-age” the accounts to reduce the number of delinquencies.

The suit contends that Hilbert and other top Conseco employees “stood to profit handsomely from their fraud.” The allegedly artificially low delinquency rate boosted the market value for the securities, ultimately increasing Conseco’s net income. Top-officer bonuses were based on net income, according to the Wall Street Journal  report.

On April 14, the company filed an annual 10-K report with the Securities and Exchange Commission that disclosed its net for 1999 was overstated by more than $367 million.

Within two weeks of the filing, Hilbert and another executive were forced to resign.

– Chuck Epstein