Skip to Content, Navigation, or Footer.
Support the IDS in College Media Madness! Donate here March 24 - April 8.
Thursday, March 28
The Indiana Daily Student

Lawsuit details explicit allegations of fraud against Conseco

INDIANAPOLIS -- Two former Conseco Inc. board members are using a novel approach to try to avoid repaying $115 million in company-backed loans they took out to buy stock in the insurer before it slid into bankruptcy.\nDennis E. Murray Sr. and James Massey filed a lawsuit saying Conseco executives and outside advisers hid cash flow and other financial problems which -- had the two known about the troubles -- would have caused them to decline the loans.\nConseco became the third-largest company ever to seek Chapter 11 protection, behind WorldCom and Enron, when it filed for bankruptcy in December. The company emerged from bankruptcy last month, but faces shareholder lawsuits alleging that it presented a rosy picture of its finances that later proved disastrously wrong.\nMurray and Massey's suit, filed this month in federal court in Indianapolis, is unusual in that fraud claims are coming from former board members whom shareholders had entrusted to scrutinize company finances, said Peter Romeo, a securities law specialist and a former Securities and Exchange Commission lawyer. Even more unique is that Murray and Massey were members of the board's audit committee.\n"The audit committee members would be presumed to be more knowledgeable about financial statements, which is not to say they couldn't be duped just like any other director," Romeo said. "It would be a little more surprising if they were led down the garden path."\nIndustry analysts Ray Dirks and Colin Devine raised questions about Conseco's cash flow in late 1997 -- questions that should have served as alarms to company directors, said Todd Saxton, an IU assistant business professor.\n"When you have a huge red flag raised like that, you simply have to do your homework," Saxton said. "They didn't, and they're suffering the consequences now."\nThe lawsuit says Massey and Murray asked Conseco about the reports "and were told that these reports were false and that Conseco had a positive operational cash flow of $800 million to $1 billion." Cash flow "was in fact negative by hundreds of millions of dollars," the lawsuit says.\nAn attorney for the pair, Henry J. Price, declined to comment.\nReed Oslan, a Conseco lawyer trying to recover debts from the loan program Murray and Massey participated in, said the lawsuit is "without merit." The two "are clearly responsible for full repayment of their loans and interest," he said.\nConseco's loan program enabled company insiders to buy more stock in the company. More than 150 executives, directors and key employees bought 19 million shares in the $31-$49 range. Murray was the No. 2 borrower, with $100 million in principal. Massey took out $15 million.\nConseco's shares plunged to less than a nickel apiece before the company filed for bankruptcy.\nThe lawsuit also says Conseco misrepresented the value of investments tied to its mobile home lending business acquired through the 1998 purchase of Green Tree Financial Corp. -- a deal that saddled Conseco with much of the $6 billion in debt that forced it into bankruptcy.\nConseco put the value of the investments at $1 billion -- more than twice their actual value, the lawsuit says.\nThose investments have come under scrutiny in a civil probe by the SEC and a criminal investigation by the Justice Department in which Conseco was subpoenaed last month. Conseco said it is not a target of the criminal case.\nThe lawsuit says Conseco was aided in the alleged financial misrepresentations by accountant PricewaterhouseCoopers and Merrill Lynch, which provided investment banking advice.\nMerrill Lynch spokesman Bill Halldin called the claims "absolutely false." John Quinn, head of PricewaterhouseCoopers' Indianapolis operations, declined to comment.

Get stories like this in your inbox
Subscribe