Conseco brass agree to settle 8-year-old suit for $41.5M

January 1, 2011

 

Gary Wendt Wendt

Conseco Inc. shareholders—who were wiped out when the company slid into bankruptcy in 2002—are poised to settle an eight-year legal brawl with four former executives for $41.5 million.

Though the sum might sound substantial, it’s a pittance compared with the billions in losses investors suffered when Conseco’s stock plunged in value, and the shares were canceled in the company’s bankruptcy reorganization. It’s also not yet clear how large a chunk will go to lead counsel—Los Angeles-based Glancy Binkow & Goldberg—to cover fees and expenses.

The suit accused CEO Gary Wendt, President Bill Shea, Chief Financial Officer Charles Chokel and Chief Accounting Officer Jim Adams of engaging in a “massive and systematic coverup of ... actual debts and losses through complex accounting, misleading disclosures, and irregular accounting practices.”

For their part, the former executives denied doing anything improper and blamed the company’s problems on weak business conditions in the wake of 9/11 and a recession.

The company—rechristened CNO Financial Group last May—is not a party to the suit. It’s not clear whether any of the settlement would come out of the former executives’ pockets, or whether the entire sum would be paid by insurers providing directors-and-officers liability coverage. The 49-page settlement specifies that the insurers “will cause to be deposited” $41.5 million into a settlement fund.

A federal judge in Indianapolis granted preliminary approval to the deal in late October. A hearing on whether to grant final approval is scheduled for Feb. 17.

The case affects only investors who purchased Conseco common stock between April 2001 and August 2002, a stretch when the company’s prospects took a dramatic turn for the worse.

Shares traded as high as $17 in April 2001, partly on optimism that Wendt, a former GE Capital executive who succeeded company co-founder Stephen Hilbert, had stabilized the business.

Conseco shares had soared through much of the 1990s. But the stock fell sharply after the company’s $6 billion purchase of Minnesota-based mobile home lender Green Tree Financial Corp. in 1998. Analysts questioned the wisdom of the purchase, and the company’s customers soon began defaulting in larger-than-expected numbers.

In August 2002, Wendt surprised Wall Street by announcing Conseco had failed to make bond interest payments and was pursuing a “radical change” in its capital structure. Previously, in periodic “turnaround memos,” Wendt generally had struck a reassuring tone, and as late as May 2002 he told investors that “we are not spending our days worrying about whether or not we will remain a going concern.”

According to the lawsuit, the subsequent bankruptcy revealed the underlying weakness of Conseco and Green Tree, including hundreds of millions of dollars in liabilities and losses the company had failed to disclose.

In a filing, attorneys for the plaintiffs said that, while they still believe their allegations “have substantial merit, they recognize the significant risks, expense and delay that would be involved in continuing to prosecute claims that already are eight years old.”

In particular, the plaintiffs acknowledged that “significant aspects of the case would likely have come down to a battle of competing experts concerning highly technical [accounting] matters.”

Peter Binkow, a partner with Glancy Binkow & Goldberg, told IBJ: “We do believe it is a significant settlement—a good recovery for the class. The alternative was very uncertain.”

Court filings suggest that only large shareholders have the potential to pocket substantial sums. The company had 476 million shares outstanding during the period at issue in the case, making the average recovery per share before fees and expenses a mere 8.7 cents.

Though Glancy Binkow hasn’t said how much it will ask the court to approve in fees, it promised in a filing that it would collect no more than one-third of the $41.5 million. It said expenses would be no more than $2.3 million. If the attorneys sought those maximums, the average recovery per share would fall to 5.3 cents.

Attorneys for the defendants did not return calls or declined to comment.

Since working for Conseco, the defendants have spread far and wide. Wendt is a private investor in Greenwich, Conn., while Shea is executive chairman of Lucid Inc., a maker of non-invasive biopsy equipment based in Rochester, N.Y. Adams works with Hilbert at the local private equity firm MH Equity. Chokel, meanwhile, retired two years ago as chief financial officer of Bermuda-based White Mountains Re Ltd., an insurance firm.•

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