Two of the top former executives at Indianapolis-based Conseco Inc. have been accused of inflating earnings at its former mobile home lending unit by nearly $400 million. During the year of the alleged fraud, the combined bonuses of two were in excess of $5 million.
The Securities and Exchange Commission has filed a federal lawsuit against Rollin Dick, former chief financial officer of Conseco Finance Corp., and James Adams, the unit’s former chief accounting officer.
The suit, filed in an Indiana federal court, accuses the pair of a “massive overstatement” of earnings to avoid huge write-downs at Conseco Finance, the SEC said in a written statement.
Conseco Finance dealt mostly in subprime mobile home loans. It is no longer owned by Conseco, which is primarily and insurance and finance company.
According to the lawsuit, Dick and Adams, “improperly ordered” the company’s accounting staff to adjust the performance of interest-only securities held by Conseco Finance.
“Dick and Adams conducted a fraudulent scheme to avoid huge write downs,” the SEC said. “Dick and Adams also made a number of unsupported and improper adjustments to the books and records of (Conseco) to increase earnings.”
Fourth quarter and year end earnings in 1999 were “inflated” by $378.3 million, according to the lawsuit.
The SEC alleges that both men violated securities laws. There was no indication that criminal charges will be filed.
Adams, Dick or their lawyers could be reached to comment.
Joe Goldstein, a lawyer representing both men, told Dow Jones News Service that the government’s claims are “unfounded.”
“We look forward to litigating the allegations that the SEC has asserted,” Goldstein reportedly said.
Conseco issued a statement saying it has “entered into a settlement” with the SEC and has “consented to the entry of a cease and desist order requiring future compliance with certain periodic reporting, record keeping, internal control and other provisions of the securities laws.”
Conseco said the alleged actions of Adams and Dick forced it to reduce 1999 earnings by $367.7 million.
The alleged scheme was uncovered by PricewatershouseCoopers LLP, Conseco’s auditor, in March of 2000 during a 1999 year-end audit, according to the lawsuit.
The SEC alleges that at end of the first three quarters of 1999, the company’s accountants determined that some of its interest-only securities were “impaired.”
“Instead of writing down the value of these securities and taking the impairment charges … Dick and Adams instructed (accountants) to go back and change the historical basis of each (security) in order to make it falsely appear that non of the securities were impaired,” the lawsuit states.
Dick and Adams are both being sued by Conseco to repay loans. Dick owes nearly $100 million.
Both men were also well paid, according to the lawsuit.
During 1999 Dick, now 72, was paid a salary of $250,000 and received a bonus of $3.8 million. Adams, now 43, had a salary of $218,750 and was paid a bonus of $1.375 million.
“Dick and Adams received these salaries and bonuses, and in order to benefit themselves, they knowingly or recklessly caused Conseco and Conseco Finance’s earnings, net income and operating income to be materially overstated and … (filed) materially false and misleading financial statements with the” SEC, the lawsuit states.
