SEC: Fraud hid souring loans

The Securities and Exchange Commission's fraud lawsuit against former Conseco Inc. executives Rollin M. Dick and James S. Adams focuses largely on how the company valued Byzantine financial instruments known as "interest-only securities" throughout 1999.

The SEC, though, is trying to cast its case as straightforward, a simple matter of financial skull-duggery by Chief Financial Officer Dick and his top lieutenant that allowed Conseco to overstate profits by $367 million in a year the company was under extraordinary pressure to reverse its plunging stock price.

Conseco in 1998 had spent $6 billion to buy Minnesota-based Green Tree Financial Corp., the nation's biggest mobile-home lender, and was trying to silence naysayers who thought it paid way too much for a business where borrowers were at great risk of default. The value of the interest-only securities was tied to the performance of the Green Tree loans.

"The complexity of the security in this case is a red herring, because of the simplicity of the manipulation," Daniel Gregus, assistant regional director of the SEC's Chicago office, told IBJ. His agency alleges the two men ordered the value of the securities changed in company records to wipe away the need to take massive charges to earnings.