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News August 16, 2004 Issue

Insurance Companies Hit for Market Timing

"The hedge funds did not need life insurance."

Thatís perhaps the most memorable line in New York attorney general Eliot Spitzerís complaint against insurance companies Conseco and Inviva.

On August 9, Spitzer and the SEC announced that they had settled with the two companies for allegedly facilitating undisclosed market timing of mutual funds through the sale of variable annuities. Conseco and Inviva agreed to pay a total of $20 million in disgorgement and penalties and to be subject to an SEC cease and desist order. Inviva, which acquired Consecoís variable annuities business in October 2002, will retain an independent consultant to monitor market timing compliance. The $20 million settlement is relatively light, compared to the amounts recently paid by mutual fund complexes charged with accommodating market timers.

Back in February 2004, David Brown, who heads up the New York Attorney Generalís Investment Protection Bureau, announced in a speech that his office was investigating the insurance industry for market timing improprieties. To date, however, the Conseco/Inviva case is the first publicly-announced settlement.

The SEC alleged that the companies represented that their annuities were not designed for professional market timing organizations while at the same time marketing and selling the annuities to professional market timers, including hedge funds.

Spitzerís office claimed that hedge fund managers viewed payment for the annuitiesí unwanted insurance features as an "admission charge" for timing capacity. For example, noted Spitzer, one 32-year-old hedge fund manager bought a Conseco contract that would have made him eligible for annuity payments when he would be 105 years old.

Both regulators alleged that the companies concealed the timing arrangements and activities from other investors.

Interestingly, Spitzerís complaint noted that after the Canary Capital Partners complaint was announced on September 3, 2003, Invivaís fund timing business collapsed. "Following a two-month period of rapid-fire redemptions" by fund timers in one of Invivaís variable annuity products, assets in the product plummeted from approximately $135 million to $10 million, said Spitzer.