Insurance

BEHIND THE NEWS: Investors face long odds in latest Conseco class action

September 26, 2005

Class-action attorneys hit the jackpot three years ago when Conseco Inc. agreed to settle securitiesfraud litigation for $120 million. At the time, it was the 10thbiggest settlement for a case of its kind.

This time around, attorneys, and the investors they represent, appear likely to go home empty-handed.

Indianapolis federal Judge David Hamilton in July quietly dismissed a securitiesfraud case filed three years ago on behalf of investors who held Conseco stock between April 2001 and August 2002, a span when then-CEO Gary Wendt was trying to right the troubled company.

During that time, the suit notes, Wendt made a series of upbeat pronouncements, including stating in May 2002 that "we are confident about liquidity in 2003." The company filed for bankruptcy protection in December 2002, ultimately leaving Conseco shares worthless.

In his 14-page ruling, however, Hamilton sounded unimpressed. He said attorneys for investors failed to show "loss causation"-that the company's stock price fell when the truth was exposed-as required under a U.S. Supreme Court ruling earlier this year.

Conseco's stock already had shed most of its value, he wrote, and "all of plaintiffs' investments during the class period can fairly be described as speculative investments in a company in deep trouble."

In light of the shifting legal landscape, Hamilton gave the attorneys the opportunity to rework and refile their complaint-which they did late last month-but he suggested they were unlikely to prevail.

"In light of the many and daunting problems Conseco faced, the problem of loss causation may pose a major challenge," he wrote.

Other parts of Hamilton's ruling hit on similar themes. "This is not so much a case where plaintiffs are alleging that defendants painted a falsely rosy picture," he wrote. "It is more as if plaintiffs allege that defendants painted with shades of gray that were not quite dark and gloomy enough."

Avi Wagner, a Los Angeles attorney representing investors, said he's hopeful the new version of the suit will sway Hamilton to reconsider. It alleges that "the truth leaked into the market" over a period of months, as rating agencies and a Wall Street analyst cast doubt on company statements. As a result, the stock price declined steadily rather than plunging dramatically.

Attorneys for the defendants-Wendt and three other former executives-could not be reached for comment.

Ex-Conseco directors appeal

Conseco's tailspin began when it bought the Minnesota-based mobile home lender Green Tree Financial Corp. for $6 billion in 1998. The company's adviser in the purchase was Merrill Lynch, which opined at the time that the terms were fair from a financial perspective.

Its fee for providing that advice: a sweet $22 million, all but $2.5 million contingent on closing the deal.

Former Conseco directors James Massey and Dennis Murray Sr. aren't letting the incongruity go. More than a year ago, they sued Merrill Lynch in federal court here, blaming the investment firm for their personal losses on Conseco stock and accusing it of fraud.

According to the suit, Green Tree was really worth just $650 million. It charges the investment firm painted an overly rosy picture of Green Tree's health because it wanted to collect the fee. The suit also charges Merrill Lynch had an undisclosed conflict of interest because Green Tree owed it more than $500 million.

Indianapolis federal Judge Richard Young in late July dismissed the suit, saying such a case would have had to be brought by Conseco, not former directors. Massey, a former executive with Merchants National Bank, and Murray, an Ohio attorney, have filed papers to appeal to the U.S. Court of Appeals in Chicago.

Investment guru gets new job

Greg Hahn, former chief investment officer for Conseco's money-management business, has joined Toronto-based Oppenheimer Holdings Inc. as a managing director and chief investment officer of fixedincome investments.

Hahn had been with Conseco 15 years. He quit this summer after the unit, 40/86 Advisors, decided to stop managing money for companies outside the insurance industry. 40/86 manages $26 billion, most from Conseco's insurance subsidiaries.
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