UNITED STATES OF AMERICA 

Before the 

SECURITIES AND EXCHANGE COMMISSION
 

ADMINISTRATIVE PROCEEDING 

File No. 3-11578 

In the Matter of 

CIHC, INC., CONSECO SERVICES, 

LLC, and CONSECO EQUITY 

SALES, INC., 

Respondents. 

PROPOSED PLAN OF DISTRIBUTION 

TABLE OF CONTENTS 

SECTION 1.0 INTRODUCTION AND BACKGROUND ..............................................................................1
 

1.1 OVERVIEW ..............................................................................................................................................1
 

1.2 THE ORDER .............................................................................................................................................1
 

1.3 ESTABLISHMENT OF CONSECO FAIR FUND ...................................................................................4
 

1.4 INDEPENDENT DISTRIBUTION CONSULTANT................................................................................4
 

SECTION 2.0	 ESTABLISHMENT AND ADMINISTRATION OF CONSECO FAIR FUND AND PLAN
 

OF DISTRIBUTION .................................................................................................................5
 

2.1 CUSTODY AND DEPOSIT OF CONSECO FAIR FUND ......................................................................5
 

2.2 FUND ADMINISTRATOR.......................................................................................................................5
 

2.3 ADMINISTRATION OF THE PLAN OF DISTRIBUTION....................................................................7
 

SECTION 3.0 OMNIBUS VARIABLE ANNUITY ACCOUNTS..................................................................7
 

3.1 CONSECO VARIABLE ANNUITY PRODUCTS...................................................................................7
 

3.2 UNRELATED INSURANCE COMPANIES’ PRODUCTS.....................................................................8
 

SECTION 4.0 ANALYSIS OF CONSECO DATA BY THE IDC ..................................................................9
 

4.1 INDIVIDUAL INVESTOR LEVEL DATA FOR CONSECO INVESTORS...........................................9
 

4.2 ANALYSIS OF IDENTIFIED MARKET TIMER TRANSACTIONS ....................................................9
 

4.3 ANALYSIS OF NON-MARKET-TIMING INVESTOR TRANSACTIONS ........................................10
 

SECTION 5.0	 CALCULATION OF MARKET TIMING DAMAGE AND MARKET TIMING
 

BENEFIT..................................................................................................................................11
 

5.1 INVESTMENT SCHEDULE APPROACH ............................................................................................11
 

5.2 STALE PRICE ARBITRAGE DAMAGE...............................................................................................11
 

5.3 HOLDING PERIOD RETURN DAMAGE.............................................................................................12
 

5.4 OFFSETTING DAMAGE AND BENEFIT ............................................................................................12
 

5.5 NET DILUTION DAMAGE; POSITIVE AND NEGATIVE NET DILUTION DAMAGE..................13
 
5.6 TOTAL NET DILUTION DAMAGE .....................................................................................................13
 

5.7 POSITIVE AND NEGATIVE NET DILUTION DAMAGE SUFFERED BY VAFS ...........................13
 

5.8 DAMAGE FORMULAE.........................................................................................................................15
 

SECTION 6.0 IMPLEMENTATION OF PLAN ...........................................................................................15
 

6.1 DISTRIBUTION PER THE COMMISSION RULES.............................................................................15
 

6.2 TAX ADMINISTRATION......................................................................................................................15
 

6.3 IDENTIFICATION OF NON-MARKET-TIMING INVESTORS .........................................................16
 

6.4 DISTRIBUTION OPTIONS....................................................................................................................17
 

6.5 CALCULATION OF DISTRIBUTION PAYMENTS............................................................................20
 

6.6 DE MINIMIS PAYMENT CONSTRAINT.............................................................................................21
 

6.7 DISTRIBUTION PAYMENTS ...............................................................................................................22
 

6.8 RESERVE................................................................................................................................................23
 

6.9 NOTIFICATION AND PAYMENT MECHANICS ...............................................................................23
 

6.10 COMMUNICATION WITH INVESTORS AND PUBLIC....................................................................25
 

6.11 TERMINATION OF CONSECO FAIR FUND ......................................................................................26
 

6.12 REPORTING ...........................................................................................................................................26
 

SECTION 7.0 APPEALS, BAR DATE AND DISQUALIFICATION .........................................................26
 

7.1 APPEALS AND BAR DATE..................................................................................................................26
 

7.2	 DISQUALIFIED INVESTORS...............................................................................................................27
 

7.3	 ALLEGEDLY DISQUALIFIED INVESTORS ......................................................................................28
 

7.4	 STATUS OF AN OMNIBUS ACCOUNT AS A DISQUALIFIED INVESTOR OR ALLEGEDLY
 

DISQUALIFIED INVESTOR .................................................................................................................29
 

APPENDICES 31
 
 

PLAN OF DISTRIBUTION 

FOR CONSECO FAIR FUND 

SECTION 1.0 INTRODUCTION AND BACKGROUND 

1.1	 OVERVIEW 

1.1.1	 The Conseco Fair Fund was established to provide restitution for losses 

caused by "market timing"1 in certain variable annuity funds (“VAFs”) held 

by the Respondents.2 Any parties that were invested in such VAFs from 

December 1, 1999 to October 22, 2002 and are not “Identified Market 

Timers”3 may receive restitution. The following VAFs were substantially 

affected during this time period: 

• Alger American Small Capitalization Portfolio 

• American Century VP International Fund 

• Dreyfus International Value Portfolio 

• Federated International Equity Fund II 

• Janus Aspen Series Worldwide Growth Portfolio 

• Pioneer Europe 

• Van Eck Worldwide Bond Fund 

• Van Eck Worldwide Emerging Markets Fund 

• Van Eck Worldwide Hard Assets Fund 

• Van Eck Worldwide Real Estate Fund 

1.1.2	 The Conseco Fair Fund will only provide compensation for losses caused by 

the market timing in this case, not for losses caused by market fluctuations. 

1.1.3	 The entire Conseco Fair Fund in the approximate amount of $15 million will 

be distributed except for a Reserve as discussed in Section 6.8 below. 

Approximately 150,000 to 250,000 accounts are expected to be compensated 

by the end of the distributions. 

1.2 THE ORDER 

1.2.1	 This Plan of Distribution (the “Plan”) has been developed pursuant to an order 

of the Securities and Exchange Commission (the “Commission”) titled “Order 

1 As defined in Section 1.2.8 below. 

2 As defined in Section 1.2.2 below. 

3 As defined in Section 4.1.2 below. 

1
 
 

Instituting Administrative And Cease-And-Desist Proceedings, Making 

Findings, and Imposing Remedial Sanctions and A Cease-And-Desist Order 

Pursuant to Section 8A of the Securities Act of 1933, Sections 15(b) and 21C 

of the Securities Exchange Act of 1934, and Sections 9(b) And 9(f) Of the 

Investment Company Act of 1940,” dated August 9, 2004 (the “Order”). The 

Order provides in the Undertakings section that the Plan be submitted for the 

administration and distribution of disgorgement and penalty funds pursuant to 

Rule 1101 of the Commission’s Rules of Practice and Rules on Fair Fund 

Disgorgement Plans (the “Rules”) and approved by the Commission pursuant 

to Rule 1104. The Plan is subject to approval by the Commission, and the 

Commission retains jurisdiction over the implementation of the Plan. 

1.2.2	 Respondents are CIHC, Inc. (“CIHC”), Conseco Services, LLC (“Conseco 

Services”) and Conseco Equity Sales, Inc. (“CES”), and are sometimes 

collectively referred to as “Respondents.” 

1.2.3	 The Commission found that from late 1999 through at least September 2002, 

Conseco Variable Insurance Company (“CVIC”), CES, and Conseco Services 

issued, underwrote, marketed and sold variable annuity products to hedge 

funds and other individuals and entities that wanted to market time the mutual 

funds offered through these variable annuity products. 

1.2.4	 The Commission found that CVIC’s immediate parent was Conseco Life 

Insurance Company of Texas (“Conseco Life”), which in turn was a wholly 

owned subsidiary of CIHC, the general holding company for the insurance 

businesses of Conseco, Inc. 

1.2.5	 The Commission found that CVIC issued, and CES underwrote the sale of, the 

Conseco Monument Series Fixed and Variable Annuity (“Monument”), and 

the Conseco Advantage Plus Fixed and Variable Annuity (“Advantage Plus”) 

products, and that through these products, purchasers could invest in mutual 

funds managed by various fund companies. The Commission also found that 

the prospectuses for the Monument and Advantage Plus variable annuity 

products falsely indicated that CVIC sought to prevent market timing. 

1.2.6	 The Commission found that CES, Conseco Services, and CIHC (through 

CVIC), willfully violated Section 17(a) of the Securities Act and Section 

10(b) of the Exchange Act and Rule 10b-5 thereunder, in that CVIC, CES and 

Conseco Services made untrue statements of material fact, omitted to state 

material facts necessary in order to make statements made, in light of the 

circumstances under which they were made, not misleading; and/or engaged 

in transactions, acts, practices and courses of business which operated or 

would have operated as a fraud or deceit. Specifically, CVIC’s prospectuses 

falsely stated that these products were not designed for professional market 

timing organizations, and gave the misleading impression that CVIC and 

Conseco Services would act independently to monitor or block detrimental 

2
 
trades. CES underwrote and distributed every annuity contract sold, including 

the contracts sold to market timers. Further, the Monument and Advantage 

Plus prospectuses failed to disclose that CVIC was marketing and selling, and 

that CES was underwriting and distributing, the products to market timers, 

that CVIC and Conseco Services were facilitating the market timing 

customers in carrying out a market timing strategy, and the risk that the 

market timers’ rapid trading might have a negative impact on the other 

variable annuity purchasers’ investment returns. 

1.2.7	 The Commission found that CES, Conseco Services, and CIHC (through 

CVIC), willfully violated Section 34(b) of the Investment Company Act in 

that they made an untrue statement of material fact in a registration statement, 

application, report, account, record, or other document filed or transmitted 

pursuant to the Investment Company Act, or omitted to state therein any fact 

necessary in order to prevent the statements made therein, in the light of the 

circumstances under which they were made, from being materially 

misleading. 

1.2.8	 The Order defined “market timing” as follows: “Market timing includes (a) 

frequent buying and selling of shares of the same mutual fund or (b) buying or 

selling mutual fund shares in order to exploit inefficiencies in mutual fund 

pricing.” 

1.2.9	 Respondents submitted to the Commission an Offer of Settlement (the 

“Offer”) dated July 27, 2004 that the Commission accepted. The Offer 

proposed and the Order provided that Respondents would pay disgorgement in 

the amount of $7,500,000 and civil money penalties in the additional amount 

of $7,500,000, for a total of $15,000,000. Respondents placed this amount in 

an escrow account subject to an escrow agreement that was deemed not 

unacceptable by the staff of the Commission. The Order provided that the 

escrowed funds constitute a Fair Fund pursuant to Section 308(a) of the 

Sarbanes-Oxley Act of 2002 (the “Conseco Fair Fund”). 

1.2.10	 The Order provided that the Plan of Distribution shall provide for investors to 

receive, from the monies available for distribution, their proportionate share of 

losses suffered by virtue of the market timing through variable annuity 

products. 

1.2.11	 On October 23, 2002, CVIC, through which Conseco conducted its variable 

annuity business, was sold to Inviva, Inc. (“Inviva”). There is a separate 

Commission order (the “Inviva Order”) that governs a separate settlement 

with Inviva concerning dilution losses after the sale to Inviva. 

3
 
 

 

 

 

1.3 ESTABLISHMENT OF CONSECO FAIR FUND 

1.3.1	 Conseco Services and CES paid, on a joint and several basis, $2.5 million in 

disgorgement; CES also paid a $2.5 million penalty. CIHC paid $5 million in 

disgorgement and a $5 million penalty. The funds were placed in escrow by 

JPMorgan Chase & Co. on September 30, 2004 and invested in short-term 

U.S. Treasury securities. 

1.3.2	 In October 2005, the funds were transferred to the U.S. Treasury Bureau of 

Public Dept (“BPD”). The Conseco Fair Fund is currently deposited at BPD 

for investment in government obligations. Other than interest from these 

investments, it is not anticipated that the Conseco Fair Fund will receive 

additional funds. 

1.4	 INDEPENDENT DISTRIBUTION CONSULTANT 

1.4.1	 The Order required Respondents to retain an Independent Distribution 

Consultant (“IDC”) to develop a Plan of Distribution for the Conseco Fair 

Fund according to a methodology developed in consultation with Respondents 

and acceptable to the staff of the Commission. 

1.4.2	 Pursuant to the Order, the Respondents retained Kormendi \ Gardner Partners 

(“KGP”), Dr. Roger Kormendi, and Mr. Cyrus Gardner as the IDC.4 

Respondents have agreed to pay all costs associated with the engagement of 

the IDC. 

4

 Mr. Gardner and the late Dr. Kormendi are the founding principals of Kormendi \ Gardner Partners (“KGP”) in 

Washington, D.C. KGP is a financial engineering, investment banking and economic research firm with expertise in 

economics, finance, capital markets, data analysis, law and public policy. Ten years before forming KGP, Dr. 

Kormendi founded the MidAmerica Institute for Public Policy Research (“MAI”) in Chicago. As the Managing 

Director of MAI, he directed numerous public policy and financial advisory projects related to financial assets, 

institutions and markets. 

Dr. Kormendi taught and researched at the university level at leading academic institutions for over 25 years. From 

1975 to 1985, he was an Associate Professor of Business Economics at the Graduate School of Business and the 

Committee on Public Policy Studies at the University of Chicago. From 1985 to 1998, he was a tenured full 

Professor of Business Economics and Public Policy at the University of Michigan Graduate Business School, and he 

later became an Adjunct Professor of Business Administration at the University of Michigan Graduate Business 

School. Dr. Kormendi passed away during the pendency of this proceeding. 

Mr. Gardner is an attorney and economist with over 30 years of experience in private law practice and financial 

advisory services. With Dr. Kormendi he led many MAI advisory projects and is presently responsible for all of 

KGP’s advisory assignments and investment projects. 

4
 
SECTION 2.0 ESTABLISHMENT AND ADMINISTRATION OF 

CONSECO FAIR FUND AND PLAN OF DISTRIBUTION 

2.1	 CUSTODY AND DEPOSIT OF CONSECO FAIR FUND 

2.1.1	 The Conseco Fair Fund constitutes a Qualified Settlement Fund (“QSF”) 

under Section 468B(g) of the Internal Revenue Code, 26 U.S.C. §468B(g), 

and related regulations, 26 C.F.R. §§1.468B-1 through 1.468B-5. 

2.1.2	 The assets of the Conseco Fair Fund are subject to the continuing jurisdiction 

and control of the Commission. Upon approval of the Plan, the Fund 

Administrator shall establish an account at U.S. Bank, a subsidiary of U.S. 

Bancorp, in the name of and bearing the Taxpayer Identification Number of 

the QSF. Following approval of the Plan, and submission by the IDC of a list 

of payees and amounts to the Commission staff and all information necessary 

to make disbursement to each distributee, and unless otherwise directed by the 

Commission, the Commission staff shall cause the balance in the Conseco 

Fair Fund to be deposited in the account established by the Fund 

Administrator in the name of and bearing the Taxpayer Identification Number 

of the Qualified Settlement Fund (“QSF account”). The Fund Administrator 

shall be the signer on the QSF account, subject to the continuing jurisdiction 

and control of the Commission. The Fund Administrator shall authorize U.S. 

Bank to provide account information to the Tax Administrator (as defined in 

Section 6.2.1 below), including providing duplicate statements for the QSF 

account. The Fund Administrator shall use the assets and earnings of the 

Conseco Fair Fund to provide payments to investors and to provide the Tax 

Administrator with assets to pay tax liabilities and tax compliance fees and 

costs. The QSF account shall be invested in short-term U.S. Treasury 

securities all backed by the full faith and credit of the U.S. Government of a 

type and term necessary to meet the cash requirements of the payments to 

investors, tax obligations and fees; provided however, that investments in the 

U.S. Treasury securities will not be made through repurchase agreements or 

other derivative products. 

2.1.3	 U.S. Bank will hold Conseco Fair Fund assets during the check-cashing 

period. U.S. Bank maintains a Financial Institutions (FI) Bond, plus errors 

and omissions coverage and excess professional liability coverage, with an 

aggregate limit of $175 million. The primary insurer is Indian Harbor 

Insurance Company, a company which, as of its most recent renewal, was 

rated A by A.M. Best. 

2.2	 FUND ADMINISTRATOR 

2.2.1	 Rust Consulting, Inc. (“Rust”) is proposed to serve as the administrator of the 

Conseco Fair Fund (“Fund Administrator”) and will be compensated by the 

5
 
Respondents. Rust, founded in 1976, is a third-party service provider of claim 

and fund administration services, and has overseen more than 500 settlement 

cases involving billions of dollars. In coordination with the IDC, Rust will be 

responsible for, among other things: overseeing the administration of the 

Conseco Fair Fund, obtaining accurate mailing information for 

accountholders, preparing accountings, cooperating with the Tax 

Administrator in providing the information necessary to accomplish the 

income tax compliance, distributing money from the Conseco Fair Fund to 

accountholders in accordance with this Plan, and setting up and staffing a call 

center to address accountholder questions or concerns regarding the 

distribution. The IDC and Rust currently have an agreement in place 

requiring Rust to perform certain tasks in preparation for the forthcoming 

distribution of the Conseco Fair Fund. To date, Rust has successfully met its 

obligations under the agreement and the IDC believes that Rust will perform 

satisfactorily as the Fund Administrator. 

2.2.2	 Good cause exists to waive the bond required of the Fund Administrator. Rust 

maintains and will continue to maintain until termination of the Conseco Fair 

Fund, a Crime Protection Policy. As of this date, the primary insurer, Zurich 

American Insurance Company, is a company which, as of its most recent 

renewal, was rated A XV by A.M. Best. The Crime Protection Policy is in the 

amount of $5 million in aggregate and provides protection against employee 

dishonesty, forgery or fraudulent alteration of securities, and electronic and 

computer crime exposures, which include losses due to transfer, payment or 

delivery of funds as a result of fraudulent input, preparation or modification of 

computer instructions, data or fraudulent electronic transmissions or 

communications. Rust maintains, and will continue to maintain until 

termination of the Conseco Fair Fund, a Professional Liability insurance 

policy in the amount of $10 million per occurrence from Illinois Union 

Insurance Co, rated A+ XV by A.M. Best. Rust maintains, and will continue 

to maintain until termination of the Conseco Fair Fund, an Excess 

Professional Liability insurance policy in the amount of $10 million aggregate 

from Lloyd’s of London, rated A XV by A.M. Best. These Professional 

Liability policies protect against errors and omissions committed by 

employees of Rust in the course of their performance of professional services. 

Under the Plan of Distribution, at no time will there be funds under the 

custody and control of Rust that exceed the amount covered by insurance. 

Documentation (including an affidavit) of this insurance coverage has been 

provided to the assigned SEC staff for review and the coverage has been 

deemed “not unacceptable.” 

2.2.3	 The Fund Administrator will have no custody, and only limited control, of the 

Conseco Fair Fund; the Conseco Fair Fund will be held by Treasury until 

immediately before transmittal of checks or electronic transfers to eligible 

investors; upon transfer from Treasury, funds will be held in an escrow 

account, separate from U.S. Bank assets, until presentation of a check or 

6
 
electronic transfer, at which time funds will be transferred to a controlled 

distribution account; presented checks or electronic transfers will be subject to 

“positive pay” controls before honored by the bank; and both U.S. Bank and 

the Fund Administrator will maintain, throughout the process, insurance 

and/or a financial institution bond that covers errors and omissions, 

misfeasance, and fraud as set forth in Sections 2.1.3 and 2.2.2 above. 

2.3	 ADMINISTRATION OF THE PLAN OF DISTRIBUTION 

2.3.1	 The Fund Administrator will use its best efforts to begin issuing payments 

from the Conseco Fair Fund to harmed investors (“Distribution Payments”) 

within 30 days of issuance of an Order to Disburse and to substantially 

complete issuance of Distribution Payments within one year of receiving all 

insurance company investment data. 

2.3.2	 As provided in the Order, Respondents will pay all fees and costs of the IDC, 

as well as all fees and costs associated with the administration of the Plan. 

2.3.3	 The IDC will inform the Commission staff of any changes in the Plan, and 

will obtain approval from the Commission prior to the implementation of 

material changes. If material changes are required, this Plan may be amended 

by the Commission upon the motion of the Respondents, the Fund 

Administrator or upon the Commission’s own motion. 

2.3.4	 For good cause, the staff of the Commission is authorized to extend any 

procedural deadline set forth in this Plan.
 

SECTION 3.0 OMNIBUS VARIABLE ANNUITY ACCOUNTS 

3.1	 CONSECO VARIABLE ANNUITY PRODUCTS 

3.1.1	 The Respondents offered to individual investors the opportunity to invest in 

seven different variable annuity products. The Respondents placed the 

investors’ investment monies as directed by the investors into VAFs. Some 

VAFs were sponsored by the Respondents, others by other financial services 

firms. 

3.1.2	 The Respondents placed their investors’ funds into a particular VAF with 

Conseco named as the accountholder without identifying its individual 

investors, their Conseco account numbers, or their individual investment 

amounts. This arrangement wherein individual investor data are not available 

to the VAF is termed an “Omnibus Account.” 

7
 
3.1.3	 Although the VAFs into which the Respondents placed their investors’ funds 

do not have access to those investors’ transactional, balance or identifying 

data, the Respondents have all of this information. The Respondents have 

already provided certain transactional and balance data to the IDC, and the 

Respondents have committed to providing such additional information as the 

IDC requests to implement the Plan. 

3.2	 UNRELATED INSURANCE COMPANIES’ PRODUCTS 

3.2.1	 Firms other than Conseco offering variable annuity products (“Unrelated 

Insurance Companies” or “UICs”) also placed their individual investors’ 

funds into VAFs through Omnibus Accounts under the name of the UIC. 

3.2.2	 Accordingly neither the Respondents nor the VAFs have transactional, 

balance or identifying data for the UICs’ individual investors. Only the UICs 

have this information. 

3.2.3	 The IDC has determined that some of the UICs’ individual investor accounts 

may be “Group Accounts.” A Group Account contains aggregated balances 

of multiple individual investors and may be registered in the name of another 

financial services company. These accounts represent a second layer of 

Omnibus Accounts and the UICs may not have contact information for the 

underlying individual investors. In the case that UICs are able to access 

underlying individual investor data, the group is called a “Transparent Group 

Account.” In the case that UICs are unable to access underlying individual 

investor data, the group is called an “Opaque Group Account.” Additionally, 

most Group Accounts are “Retirement Plans,” which are further described in 

Section 6.4.2 below. 

3.2.4	 The IDC requires balance information for individual UIC investors to estimate 

the harm each suffered from market timing. The IDC requires identifying 

information for those investors and for Conseco investors to enable notifying 

them of the Order and issuing payments to them from the Conseco Fair Fund. 

The IDC, in conjunction with the Fund Administrator, will obtain this 

information from UICs as set forth in Section 6.3. 

3.2.5	 Respondents and the Fund Administrator will maintain records of efforts 

made to obtain the cooperation of UICs and of the responses to these efforts. 

3.3	 CONFIDENTIALITY 

3.3.1	 The Fund Administrator shall maintain in confidence accountholder 

identifying information including names, addresses, Social Security numbers, 

Tax IDs, and any other information relating to sub-accountholders obtained 

from any UIC pursuant to this Distribution Plan, and shall not share such 

information with Respondents; the Fund Administrator, however, may share 

8
 
such information with its service providers or other parties to the extent 

necessary to perform its duties under this Distribution Plan, and the Fund 

Administrator shall require that such service providers and other parties 

maintain such information in confidence. 

SECTION 4.0 ANALYSIS OF CONSECO DATA BY THE IDC 

4.1	 INDIVIDUAL INVESTOR LEVEL DATA FOR CONSECO 

INVESTORS 

4.1.1	 The IDC has received full cooperation from the management of Respondents 

including access to data and individuals as requested. 

4.1.2	 The Respondents provided to the IDC a list of approximately 100 account 

numbers for entities identified by either the Commission or by the 

Respondents as market timers (“Identified Market Timers”). Identified 

Market Timers executed trades in the Respondents’ “Monument” and 

“Advantage Plus” variable annuity products for the period of December 1, 

1999 to October 30, 2003. From this list of account numbers, 81 were found 

to have trading activity during the period from December 1, 1999 (the earliest 

trade by an Identified Market Timer) through October 22, 2002 (the “Damage 

Period”), the day before the sale of CVIC to Inviva. Multiple account 

numbers were used by individual timers. 

4.1.3	 The Respondents provided transactional data for the period December 1, 1999 

to April 30, 2003 for these Identified Market Timer accounts and all other 

accounts in the Monument and Advantage Plus variable annuity products. 

The Respondents also provided periodic balance data for the period December 

1, 1999 to April 30, 2003 for all accounts in the seven Conseco variable 

annuity products (including Monument and Advantage Plus) that had 

exposure to the same set of VAFs as the Monument and Advantage Plus 

products, i.e., VAFs that were potentially affected by market timing. 

4.1.4	 The IDC performed a variety of checks on the integrity and consistency of the 

Conseco data and concluded that these data have the requisite integrity, 

consistency and accuracy to use in the IDC’s analysis. 

4.2	 ANALYSIS OF IDENTIFIED MARKET TIMER TRANSACTIONS 

4.2.1	 Based on a variety of analyses of the Identified Market Timer data, the IDC 

concluded as follows with respect to Identified Market Timer transactions: 

4.2.1.1	 The number of Identified Market Timer transactions and the 

associated dollar volume of trades increased significantly over the 

Damage Period. 

9
 
4.2.1.2	 Identified Market Timer transactions spanned short holding periods, 

typically one or two days. 

4.2.1.3	 Although Identified Market Timers sometimes entered and exited 

VAFs in phases, they generally did not leave investment positions 

open for more than a week and often executed a single purchase with 

a corresponding single sale of an equal number of units. 

4.3	 ANALYSIS OF NON-MARKET-TIMING INVESTOR 

TRANSACTIONS 

4.3.1	 Excluding the Identified Market Timers, the IDC determined that there were a 

total of 19,998 seemingly Non-Market-Timing Investors in Conseco accounts 

with balances in at least one of the affected VAFs during the Damage Period. 

These investors had access to the VAFs through the seven Conseco annuity 

products including the Monument and Advantage Plus products used by 

Identified Market Timers. The IDC concluded that nine of these accounts 

exhibit transactional patterns consistent with market timing. Their data were 

excluded from the IDC’s analysis of Non-Market-Timing Investor data and 

were included with and deemed by the IDC to be a part of the Identified 

Market Timer data. 

4.3.2	 Based on a variety of analyses of the transactional and balance data for the 

Non-Market-Timing Investor accounts the IDC concluded as follows: 

4.3.2.1	 Most Non-Market-Timing Investors made regular investments into 

variable annuity products and drew down balances completely only 

upon permanent exit. 

4.3.2.2	 Some Non-Market-Timing Investors traded in and out of funds over 

the course of several weeks. 

4.3.2.3	 The average transactional dollar amount for Non-Market-Timing 

Investors was a tiny fraction, just one-half of one percent, of that for 

Identified Market Timers. 

4.3.2.4	 The turnover of Non-Market-Timing Investors with balances in any 

particular VAF is relatively high over extended time periods. Thus, 

over the course of two years or more, so many Non-Market-Timing 

Investors exit a particular VAF that half or less remain at the end of 

the period, and those who have exited have been replaced by new 

investors over the course of that time period. 

10
 
SECTION 5.0 CALCULATION OF MARKET TIMING DAMAGE 

AND MARKET TIMING BENEFIT 

5.1	 INVESTMENT SCHEDULE APPROACH 

5.1.1	 Based upon the IDC’s analysis of Conseco data alone, the IDC determined 

that a fair and reasonable method for determining the amount of harm suffered 

(“Total Net Dilution Damage” as defined in Section 5.6 below) by a particular 

Non-Market-Timing Investor as a result of market timing is to utilize an 

“Investment Schedule” approach. This term refers to the rate over time at 

which cash newly supplied by market timers is typically invested in 

underlying fund assets by VAF portfolio managers. This rate affects how 

dilution is allocated between the two fund damage components: (i) “Stale 

Price Arbitrage” and (ii) “Holding Period Return.” 

5.2	 STALE PRICE ARBITRAGE DAMAGE 

5.2.1	 “Stale Price Arbitrage” refers to the ability of a market timer to purchase fund 

shares at a discounted net asset value (“NAV”) relative to what the market 

timer believes the unrecognized market NAV to be (based on market indices, 

international financial market relationships or other factors) or to sell shares at 

a premium to their unrecognized market NAV. When this “true” value is 

recognized in the market by a delayed uptick in NAV on the day following a 

market timer inflow, thus generating a profit for the market timer, or a 

downtick in the NAV following a market timer outflow, thus allowing the 

market timer to avoid a loss, the timer has effectively generated arbitrage 

profits for itself that reduce accountholder value for Non-Market-Timing 

Investors. In this case Non-Market-Timing Investors suffer “Stale Price 

Arbitrage Damage” in the amount of the difference between the lower NAV 

and what it would have otherwise been excluding market timer transactions. 

5.2.2	 In cases in which the market timer is incorrect in forecasting the direction of 

the following day’s change in NAV when making a transaction, the timer has 

either paid more for shares than their “true” value or has sold shares at less 

than their “true” value. In either case, Non-Market-Timing Investors’ total net 

assets are higher than what they would be but for the market timer 

transactions and Non-Market-Timing Investors are benefited by the market 

timing trade. The amount of this “Stale Price Arbitrage Benefit” is the 

difference between the higher NAV and what it would have otherwise been 

excluding market timer transactions. 

5.2.3	 The IDC determined that Stale Price Arbitrage Damage or Benefit always 

exists on market timer fund inflow transactions and can be calculated as the 

percentage change in NAV (from inflow day to the following day) applied to 

the dollar amount of the inflow. The IDC determined that Stale Price 

Arbitrage Damage or Benefit exists on market timer fund outflow transactions 

11
 
only when at least some portion of the prior inflow has been used to purchase 

underlying fund assets by the VAF portfolio management team, and that the 

amount of this dilution can be fairly and reasonably estimated as the 

percentage change in NAV (from outflow day to the following day) applied to 

an estimate of the portion of inflow that is invested in underlying fund assets 

on that day. 

5.3	 HOLDING PERIOD RETURN DAMAGE 

5.3.1	 “Holding Period Return Damage” refers to the reduction in fund performance 

(as represented by NAV appreciation) in cases where market timer dollars are 

held in cash. An increased percentage of a VAF’s total net assets held in cash 

(resulting from market timer inflows) rather than being invested in return 

generating instruments reduces the overall return for total net assets when 

returns from those instruments are positive and consequently reduces NonMarket-Timing Investors’ returns. 

5.3.2	 In the alternative, a relatively cash-intense asset allocation benefits NonMarket-Timing Investors when underlying assets are declining in value 

(“Holding Period Return Benefit”). The IDC determined that Holding Period 

Return Damage or Benefit can be fairly and reasonably estimated on a daily 

basis as the percentage change in NAV applied to an estimate of the portion of 

market timer inflow held in cash on that day by the VAF. 

5.3.3	 The Investment Schedule parameterization reflects the estimate of the rate at 

which market timer inflows are invested in underlying assets by VAF 

portfolio management. Empirical research performed by the IDC suggests 

that this rate is generally on the order of 0 to 20 percent per day. Thus, the 

IDC has determined that it is fair and reasonable to use 0, 10 and 20 percent 

(i.e., ∞, 10-day and 5-day investment schedules) as parameters in the damage 

estimation model calculation. 

5.4	 OFFSETTING DAMAGE AND BENEFIT 

5.4.1	 A particular Non-Market-Timing Investor can suffer Stale Price Arbitrage 

Damage on a given day in one VAF but may receive Stale Price Arbitrage 

Benefit on another day or in another VAF, or may receive offsetting Holding 

Period Return Benefit on the same day, on another day or in another VAF. 

Holding Period Return Damage may similarly be offset or reduced from one 

day to another, across VAFs, or by Stale Price Arbitrage Benefit. 

12
 
5.5	 NET DILUTION DAMAGE; POSITIVE AND NEGATIVE NET 

DILUTION DAMAGE 

5.5.1	 Based upon analyses of Conseco data alone, the IDC determined that it is 

likely that a substantial proportion of Non-Market-Timing Investors received 

both harm and benefit from market timing during the Damage Period. 

5.5.2	 The IDC determined that it is fair and reasonable to define the amount of “Net 

Dilution Damage” suffered by a particular Non-Market-Timing Investor in a 

particular VAF over the Damage Period as the positive or negative excess of 

(i) the sum of Stale Price Arbitrage Damage plus Holding Period Return 

Damage, less (ii) the sum of Stale Price Arbitrage Benefit plus Holding Period 

Return Benefit. 

5.5.3	 If for a particular Non-Market-Timing Investor in a given VAF the result of 

this calculation exceeds zero, such Non-Market-Timing Investor is termed to 

have suffered “Positive Net Dilution Damage” in the VAF; if the result of this 

calculation is less than zero, such Non-Market-Timing Investor is termed to 

have received “Negative Net Dilution Damage” in the VAF. 

5.6	 TOTAL NET DILUTION DAMAGE 

5.6.1	 The IDC determined that it is fair and reasonable to define the “Total Net 

Dilution Damage” suffered by a particular Non-Market-Timing Investor with 

respect to its investment in all VAFs and over the entire Damage Period as the 

sum of the Positive Net Dilution Damage across the VAFs in which it is 

invested. 

5.7	 POSITIVE AND NEGATIVE NET DILUTION DAMAGE SUFFERED 

BY VAFS 

5.7.1	 If the sum across all Non-Market-Timing Investors of their Net Dilution 

Damage in a particular VAF exceeds zero, the VAF suffered “Positive Net 

Dilution Damage.” 

5.7.2	 If the sum across all Non-Market-Timing Investors of their Net Dilution 

Damage in a particular VAF is less than zero, the VAF suffered “Negative Net 

Dilution Damage.” 

5.7.3	 Based upon analysis of Conseco data alone, the IDC has calculated that there 

are ten VAFs with Positive Net Dilution Damage totaled across all NonMarket-Timing Investors in excess of $100,000 in total for the Damage Period 

or in excess of $100,000 for at least one calendar month during the Damage 

Period. The IDC determined that lesser amounts of Positive Net Dilution 

Damage will not result in sufficient Distribution Payments to justify the cost 

of obtaining the data, and that it is fair and reasonable to limit application of 

13
 
 

 xyz xyz xy

 xyz xyz xx

 xyz xyz xx

 xyz xyz xx

 xyz xyz xx

 xyz xyz xx

 xyz xyz xx

 xyz xyz x

 

the provisions of the Plan initially to Non-Market-Timing Investors in those 

VAFs with material amounts of estimated Positive Net Dilution Damage. 

5.7.3.1	 Based upon analysis of Conseco data alone, the IDC estimated that 

of the 46 VAFs used by Conseco market timers during the Damage 

Period, seven had sufficient amounts of Positive Net Dilution 

Damage for the Damage Period as a whole. These are defined as the 

“Primary Damaged VAFs.” A summary of damages and benefits for 

the Primary Damaged VAFs is found in Table 1 below. 

Table 1: Dilution Damage (Benefit) to Primary Damaged VAFs 

VAF 

Stale Price 

Arbitrage 

Damage 

Stale Price 

Arbitrage 

Benefit 

Holding Period 

Return Damage 

Holding Period 

Return Benefit 

Net Dilution 

Damage 

American Century VP 

International Fund 

$1,401,391 $(311,930) $893,383 $(263,069) $1,719,775 

Janus Aspen Series 

Worldwide Growth 

Portfolio

 2,381,960 (1,276,668) 938,078 (531,772) 1,511,598 

Federated International 

Equity Fund II

 1,641,610 (613,087) 515,526 (174,673) 1,369,376 

Van Eck Worldwide 

Hard Assets Fund

 1,495,450 (1,155,476) 612,259 (429,738) 522,495 

Dreyfus International 

Value Portfolio

 255,378 (54,036) 39,022 (8,855) 231,509 

Van Eck Worldwide 

Real Estate Fund

 509,506 (352,786) 70,003 (92,083) 134,640 

Pioneer Europe 128,360 (17,551) 10,057 (8,235) 112,631 

Total 7,813,655 (3,781,534) 3,078,328 (1,508,425) 5,602,024 

Note: Dilution is calculated using the Investment Schedule approach detailed in Section 5. Stale Price Arbitrage 

Damage is discussed in Section 5.2. Holding Period Return Damage is discussed in Section 5.3. 

5.7.3.2	 The IDC further estimated from Conseco data alone that there were 

three additional VAFs with at least one calendar month of sufficient 

Positive Net Dilution Damage but with substantial Negative Net 

Dilution Damage for the Damage Period overall. Due to the high 

transactions volumes and volatility of the resulting dilution, the IDC 

concluded that it is possible that some of the Non-Market-Timing 

Investors in those VAFs suffered Positive Net Dilution Damage on 

balance and that the amounts may be material. These are defined as 

the “Secondary Damaged VAFs.” A summary of damages for the 

Secondary Damaged VAFs is found in Table 2 below. 

14
 
 

xyz xyz

 xyz xyz

 xyz xyz

 xyz xyz

 

 

 

 

Table 2: Dilution Damage (Benefit) to Secondary Damaged VAFs 

VAF 

Stale Price 

Arbitrage 

Damage 

Stale Price 

Arbitrage 

Benefit 

Holding Period 

Return Damage 

Holding Period 

Return Benefit 

Net 

Dilution 

Damage 

Van Eck Worldwide 

Bond Fund 

$720,575 $(674,085) $188,045 $(381,928) $(147,393) 

Alger American Small 

Capitalization Portfolio 

3,048,405 (4,410,894) 550,950 (861,710) (1,673,248) 

Van Eck Worldwide 

Emerging Markets Fund 

15,100,929 (17,336,452) 3,818,151 (3,948,718) (2,366,090) 

Total 18,869,909 (22,421,431) 4,557,145 (5,192,356) (4,186,732) 

Note: Dilution is calculated using the Investment Schedule approach detailed in Section 5. Stale Price Arbitrage 

Damage is discussed in Section 5.2. Holding Period Return Damage is discussed in Section 5.3. The Secondary 

Damaged VAFs earned a net benefit but had periods of heavy dilution. 

5.8	 DAMAGE FORMULAE 

5.8.1	 The formulae used by the IDC to estimate Net Dilution Damage for each 

VAF, from which Net Dilution Damage and Total Net Dilution Damage for 

each Non-Market-Timing Investor are estimated, are fully set forth in 

Appendix A. 

SECTION 6.0 IMPLEMENTATION OF PLAN 

6.1	 DISTRIBUTION PER THE COMMISSION RULES 

6.1.1	 This Section details implementation mechanics that will be used to calculate 

and generate Distribution Payments. 

6.1.2	 This Conseco Fair Fund is not being distributed according to a claims-made 

process. As a result, the Commission’s Rule 1101(b)(4) for procedures for 

making and approving claims is not applicable. The Plan provides an Appeal 

process, described in Section 7 below. 

6.2 TAX ADMINISTRATION 

6.2.1	 The Commission has appointed Damasco & Associates as the Tax 

Administrator (“Tax Administrator”) of the Conseco Fair Fund. The IDC, 

Fund Administrator and Respondents will cooperate with the Tax 

Administrator in providing information necessary to accomplish the income 

tax compliance, ruling and advice work assigned to the Tax Administrator by 

the Commission. The Tax Administrator shall be compensated by the 

Respondents. 

15
 
6.2.2	 All tax liabilities of the Conseco Fair Fund will be paid from the Conseco Fair 

Fund pursuant to the provisions of Rule 1105(e). 

6.2.3	 The Tax Administrator has obtained a Private Letter Ruling (“PLR”) 

regarding the tax information reporting and withholding obligations of the 

QSF. A communication summarizing the PLR will be made available to 

distributees. 

6.3	 IDENTIFICATION OF NON-MARKET-TIMING INVESTORS 

6.3.1	 The Plan is designed to allocate the Conseco Fair Fund among Non-MarketTiming Investors who, through the Respondents’ and UICs’ variable annuity 

products, invested in VAFs that incurred Positive Net Dilution Damage in 

amounts identified as material by the IDC from market timing through 

Conseco investment products during the Damage Period. 

6.3.1.1	 The Fund Administrator under the direction of the IDC will seek to 

collect the information necessary to calculate and distribute the 

appropriate Distribution Payments and measure the associated 

distribution costs of providing individual payments to Non-MarketTiming Investors in each UIC that had a material ownership stake in 

the VAFs that were materially diluted by market timer transactions. 

The Fund Administrator will maintain records of efforts made to 

obtain the cooperation of UICs and of the responses to these efforts. 

6.3.1.2	 As data are received from VAFs and UICs, the IDC will update his 

projections of the allocation of Dilution Damage and will request 

data from additional UICs if it appears that they also have material 

amounts of Positive Net Dilution Damage. 

6.3.1.3	 The IDC has requested ownership data from the ten materially 

affected VAFs to identify the UICs that were Omnibus 

Accountholders during the Damage Period. In total, 97 UICs were 

identified as Omnibus Accountholders in this analysis. The IDC will 

seek data from only those UICs for which the IDC projects total 

Distribution Payments in amounts that exceed double the respective 

amounts of the costs of obtaining the data. The IDC will not request 

data from UICs whose individual investors are expected to receive 

less than $100,000 in aggregate from the Conseco Fair Fund. 

Sixteen of the 97 UICs were deemed to meet these cost/benefit 

criteria. 

6.3.1.4	 The IDC will undertake commercially reasonable efforts to obtain 

VAF and UIC data. The IDC will initiate contact with each such 

firm through the office of its general counsel. 

16
 
6.3.1.5	 The IDC will provide to each such firm copies of (i) the Order, (ii) 

the IDC’s documentation of the Commission’s approval of 

appointment and (iii) the IDC’s request for particular data with a 

specification of the desired format for the requested data. 

6.3.1.6	 Pursuant to Section 3.3 above, the IDC will enter into a nondisclosure agreement with each VAF and UIC, to which the Fund 

Administrator is also a party, which obligates the IDC and Fund 

Administrator to keep VAF and UIC information confidential. 

6.3.1.7	 If requested by a UIC, the IDC may approve reimbursement of the 

UIC’s reasonable costs of retrieving, formatting and delivering the 

requested data as part of the Fund Administrator’s efforts. 

6.3.1.8	 The Non-Market-Timing Investors ultimately identified by the IDC 

as having Total Net Dilution Damage suffered during the Damage 

Period are the “Potentially Eligible Investors” who may receive 

Distribution Payments from the Conseco Fair Fund. The VAFs in 

which such Total Net Dilution Damage was suffered are the 

“Eligible Funds.” 

6.3.1.9	 All Potentially Eligible Investors other than “Allegedly Disqualified 

Investors” and “Disqualified Investors” (as such terms are defined in 

Section 7.0) shall be deemed “Eligible Investors” who, subject to the 

provisions of Section 6.6, may receive Distribution Payments. 

6.3.1.10	 Procedures concerning Allegedly Disqualified Investors and 

Disqualified Investors are set forth in Section 7.0. 

6.4 DISTRIBUTION OPTIONS 

6.4.1 UIC 

6.4.1.1	 A UIC shall be offered two options for the calculation, issuance and 

delivery of Distribution Payments and for the issuance and delivery 

of “Notices” (see Section 6.9). The IDC may require such UIC to 

enter into a written agreement with the Fund Administrator and the 

IDC that, at minimum, governs the UIC’s provision of data to the 

Fund Administrator, the calculation, issuance and delivery of 

Distribution Payments and Notices, documentation of such issuance 

and delivery, and confidentiality. 

6.4.1.1.1	 Option 1: The IDC will calculate in accordance with the 

methodology of the Plan the Distribution Payment to each 

Eligible Investor of such UIC. The IDC will cause the 

17
 
Fund Administrator to issue and deliver such Distribution 

Payments to such Eligible Investors. The UIC shall 

provide the Fund Administrator with such data regarding 

each Eligible Investor as the IDC determines to be 

necessary to permit calculation of the amount of the 

Distribution Payment to each Eligible Investor and to 

enable issuance and delivery of the Distribution Payment 

and Notice to each Eligible Investor. 

6.4.1.1.2	 Option 2: The IDC will calculate in accordance with the 

methodology of the Plan the Distribution Payment to each 

Eligible Investor of such UIC, but the UIC shall issue and 

deliver the Distribution Payments to Eligible Investors 

itself. The IDC will cause the Fund Administrator to issue 

to such UIC a single payment in the amount of the total of 

the Distribution Payments to such UIC’s Eligible Investors. 

The UIC shall provide the IDC with such data regarding 

each Eligible Investor as the IDC determines to be 

necessary to permit calculation of the amount of the 

Distribution Payment to each Eligible Investor. Each UIC 

selecting Option 2 shall provide to the Fund Administrator 

such documentation of the issuance and delivery of the 

Distribution Payment to each Eligible Investor, and of the 

delivery of the Notice to each Eligible Investor, as the IDC 

determines is appropriate. 

6.4.1.2	 The IDC may consider an alternate or compromise proposal by a 

UIC for the calculation, issuance and delivery of distribution 

payments. 

6.4.1.3	 UICs may (1) fail within a reasonable time to respond to the Fund 

Administrator’s request for information identifying accountholders 

or (2) refuse to provide the Fund Administrator with the requested 

information. In those instances, the IDC will proceed as follows: the 

IDC will ask the UIC to certify that the UIC will make commercially 

reasonable efforts consistent with its legal, fiduciary, and contractual 

duties, as applicable, to disburse the Conseco Fair Fund payment to 

its affected Non-Market-Timing Investors in accordance with the 

methodology and the deadlines set forth in this Distribution Plan, 

and that the UIC will return any undistributed money to an account 

that has been established to hold otherwise undistributed funds for 

ultimate disposition in accordance with this Distribution Plan. After 

each such UIC has provided its certification to the IDC, which the 

Fund Administrator will make commercially reasonable efforts to 

obtain under the direction of the IDC, the IDC will instruct the Fair 

Fund’s custodian to disburse the portion of the Fair Fund allocated to 

18
 
the UIC so that it can distribute the funds to its affected Non-MarketTiming Investors. In the event such UIC refuses or fails to provide 

such certification, the amount of Fair Fund allocated to such UIC 

shall be treated as “undistributed” for purposes of this Distribution 

Plan, and processed pursuant to Section 6.7.4, below. After the UIC 

has distributed the funds in this fashion, the UIC will be required to 

provide the IDC with a certification that it has complied with these 

terms and conditions. 

6.4.1.4	 The IDC will offer to pay the reasonable costs of gathering 

accountholder/demographic information from UICs which elect to 

have the Fund Administrator/IDC do the distribution. 

6.4.2 Retirement Plan 

6.4.2.1	 “Retirement Plan” as used in this Plan means an employee benefit 

plan, as such plans are defined in Section 3(3) of ERISA, 29 U.S.C. 

§ 1002(3), which is not an Individual Retirement Account (IRA), 

whether or not the plan is subject to Title I of ERISA. Distributions 

to IRAs will be made in accordance with Section 6.5 of this Plan. 

6.4.2.2	 Assets of Retirement Plans are held in trust by a trustee, and the trust 

is the legal owner of the assets. This Plan requires the plan 

fiduciaries and intermediaries, as defined in Department of Labor 

Field Assistance Bulletin No. 2006-01, April 19, 2006 (the “Field 

Assistance Bulletin”), of Retirement Plans to distribute the monies 

received in accordance with their legal, fiduciary, and contractual 

obligations and consistent with guidance issued by the Department 

of Labor, including, but not limited to, the Field Assistance Bulletin. 

6.4.2.3	 An intermediary to one or more Retirement Plans may allocate the 

distribution it receives pursuant to this Plan among eligible 

Retirement Plans participating in an omnibus account administered 

by such intermediary according to the procedures set forth in Section 

6.5 below or according to the average share or dollar balances of the 

Retirement Plans’ investment in the 10 VAFs between December 1, 

1999 and October 31, 2002, provided, however, that for the purposes 

of such allocation each Retirement Plan itself (and not the individual 

plan participants) shall be treated as the beneficial owner. 

6.4.2.4	 The fiduciary of a Retirement Plan receiving a distribution may 

distribute it pursuant to one of the following four alternatives: 

6.4.2.4.1	 Retirement Plan fiduciaries may allocate the distribution to 

current and former participants in the Retirement Plan 

using the Investment Schedule approach referenced in 

19
 
Section 5.0. The IDC will make this Investment Schedule 

approach available to Retirement Plan fiduciaries. 

6.4.2.4.2	 Retirement Plan fiduciaries may allocate the distribution 

pro rata (based on total account balance) among the 

accounts of all persons who are currently participants in the 

Retirement Plan (whether or not they are currently 

employees). 

6.4.2.4.3	 Retirement Plan fiduciaries may allocate the distribution 

per capita among the accounts of all persons who are 

currently participants in the Retirement Plan (whether or 

not they are currently employees). 

6.4.2.4.4	 To the extent that none of the three preceding alternatives is 

administratively feasible because the costs of effecting the 

allocation exceed the amount of the distribution, 

Retirement Plan fiduciaries may, to the extent permitted by 

the Retirement Plan, use the distribution amount to pay the 

reasonable expenses of administering the plan. 

6.4.2.5	 In view of, among other things, alternative distribution 

methodologies available to Retirement Plans, plan fiduciaries and/or 

intermediaries will not be reimbursed the costs and expenses 

associated with administering the distribution received pursuant to 

this Plan. 

6.5	 CALCULATION OF DISTRIBUTION PAYMENTS 

6.5.1	 The portion of the Conseco Fair Fund allocated to each Eligible Investor shall 

be set equal to that investor’s share of the losses from market timing 

normalized to the end of the Damage Period, plus that investor’s proportionate 

share of the interest earned on the Fair Fund through June 30, 2009. The 

investor’s losses (which do not include fees paid by investors) shall be 

calculated with the Investment Schedule approach. The Investment Schedule 

approach is fully described in Section 5.0. In the view of the IDC, it 

constitutes a fair and reasonable allocation of the Conseco Fair Fund. 

6.5.2	 The methods of calculation of each Eligible Investor’s share of the Conseco 

Fair Fund are intended to result in a Distribution Payment to each Eligible 

Investor, or in the case of IRAs, to the IRA of each Eligible Investor, which 

restores the impaired value of the Eligible Investor’s investment in the 

Eligible Funds. Some of this impaired value is susceptible to calculation, 

while some of this impaired value is not. The methods of calculation are 

intended by the Commission to estimate fairly and reasonably the loss that 

20
 
 

 

 

 

each Eligible Investor has suffered and, subject to a de minimis payment 

constraint as follows in Section 6.6, make a Distribution Payment in that 

amount. 

6.5.3	 Based on the data the IDC has received to date, Table 3 below is an estimation 

of the final account dilution statistics for the Primary Damaged VAFs, 

segmented by dollar amount. Secondary Damaged VAF dilution is not 

estimated here due to a lack of UIC data. 

Table 3: Projected Dilution Damage Allocation Summary for 

Primary Damaged VAFs by Dollar Amount 

Average 

Projected 

Total % of Total Dilution 

Projected Projected Damage 

Number of % of Total Dilution Dilution per 

Dilution Damage Range Accounts Accounts Damage Damage Account 

Between $0 and $2 1,966,364 87.9% $576,129.07 10.3% $0.29 

Between $2 and $4 120,594 5.4% $338,601.17 6.0% $2.81 

Between $4 and $6 43,812 2.0% $213,174.69 3.8% $4.87 

Between $6 and $8 21,933 1.0% $151,369.61 2.7% $6.90 

Between $8 and $10 13,707 0.6% $122,497.93 2.2% $8.94 

Between $10 and $20 27,205 1.2% $379,949.44 6.8% $13.97 

Between $20 and $40 17,694 0.8% $498,670.33 8.9% $28.18 

Between $40 and $60 7,828 0.3% $384,263.45 6.9% $49.09 

Between $60 and $80 4,856 0.2% $337,011.78 6.0% $69.40 

Between $80 and $100 3,065 0.1% $273,148.48 4.9% $89.12 

Between $100 and $1000 10,136 0.5% $2,102,811.01 37.5% $207.47 

Between $1000 and $100,000 133 0.0% $224,396.66 4.0% $1,689.77 

Total	 2,237,327 100.0% $5,602,023.62 100.0% $2.50 

Note: Projections in this table are based on the 28% of all expected balance data that has been received and 

processed to date. 

6.6 DE MINIMIS PAYMENT CONSTRAINT 

6.6.1 The IDC has projected that a substantial majority of the Non-Market-Timing 

Investors in the subject VAFs suffered very small amounts of Total Net 

Dilution Damage from the activity of Identified Market Timers. 

6.6.2 In view of the cost of preparing and issuing distributions from the Conseco 

Fair Fund to a particular Non-Market-Timing Investor, the IDC has 

determined that it is fair and reasonable to impose a fifty dollar ($50) de 

minimis constraint on such payments. Thus, only those Persons entitled to 

receive at least $50 from the Conseco Fair Fund will be issued checks in the 

distribution rounds prior to the “Closing Round,” as further set forth in 

21
 
Section 6.7 below. A de minimis constraint is also applied to each Opaque 

Group Account in the amount of $1,000; this de minimis constraint shall be 

adjustable by the IDC as more Group Account data become available. The 

IDC anticipates that approximately two million accounts will be excluded 

from the distribution as a result of the de minimis constraint. 

6.6.3	 The prospective Distribution Payment for each individual account number in 

each UIC’s data shall be subjected to the de minimis constraint. Netting or 

accumulating damage and benefit for a particular individual investor across 

UICs and account types is not feasible because of differing tax account types 

and data privacy issues. 

6.7	 DISTRIBUTION PAYMENTS 

6.7.1	 The Fund Administrator will undertake issuance of Distribution Payments in 

two or more rounds and will use its best efforts to begin and complete 

issuance of Distribution Payments on the schedule set forth in Section 2.3.1 

above. 

6.7.2	 In the “Initial Round,” Distribution Payments will only be issued to those 

Eligible Investors whose Distribution Payments are at least $50, and only for 

those UICs whose data sets the IDC deems complete prior to such issuance. 

The IDC expects a majority of UIC data sets to be complete in time for the 

Initial Round. 

6.7.3	 The IDC expects one or more additional rounds to be carried out once the 

remaining UIC data are received and found to be complete. The Distribution 

Payments in these rounds will only be issued to Eligible Investors whose 

Distribution Payments are at least $50. 

6.7.4	 Once all checks of at least $50 have been issued and the ninety day stale date 

has passed (see Section 6.9.1.5), the IDC expects that there will remain a 

material balance in the Fair Fund. The IDC will therefore direct the Fund 

Administrator to issue $50 checks (“Residual Distributions”) to Eligible 

Investors whose Distribution Payment in any earlier round would have been 

below the de minimis amount, starting with those with the largest calculated 

amounts (i.e., those just below the $50 constraint) and continuing in 

descending order of Net Dilution Damage until the entire Conseco Fair Fund 

less the Reserve (see Section 6.8 below) is disbursed. This is termed the 

“Closing Round.” At the election of the IDC, the IDC may cause the Fund 

Administrator to begin issuing Residual Distributions before all checks of at 

least $50 have been issued. 

6.7.5	 Beginning ninety days after issuance of the last Distribution Payments in the 

Closing Round, the IDC will estimate the portion of the then remaining 

22
 
amount in the Conseco Fair Fund that can be distributed due to un-cashed 

checks or other circumstances, taking into account the Reserve. The IDC may 

cause the Fund Administrator to expend this amount through further Residual 

Distributions to additional Eligible Investors in a continuation of the method 

described in Section 6.7.4 above. 

6.8	 RESERVE 

6.8.1	 In allocating the Residual Distributions, the IDC will take into account the 

total remaining amount in the Conseco Fair Fund including interest earned, 

taxes payable, and appeals such that a “Reserve” remains for these expenses. 

6.8.2	 The Tax Administrator will determine the amount to be reserved so that all 

taxes can be paid before the Conseco Fair Fund is reconciled and terminated. 

6.9	 NOTIFICATION AND PAYMENT MECHANICS 

6.9.1	 Mailed Notice/Check Plan 

6.9.1.1	 All payments shall be preceded or accompanied by a communication 

(“Notice”) that includes, as appropriate: (i) a statement 

characterizing the distribution; (ii) a description of the tax 

information reporting required of the QSF and related tax 

consequences; (iii) a statement that checks will be void after ninety 

days; and (iv) the name of a person to contact, to be used in the event 

of any questions regarding the distribution. Any such information 

letter or other communication to recipients characterizing their 

distributions shall be submitted to the assigned Commission staff for 

review and approval. Distribution checks, on their face, or in the 

accompanying communication will clearly indicate that the money is 

being distributed from a Fair Fund established by the SEC. 

6.9.1.2	 Prior to distribution, in coordination with the IDC, the Fund 

Administrator will compile a database (the “Eligible Investor 

Database”) of name and address information for Eligible Investors. 

These data will be provided by the Respondents and UICs. As part 

of this process the Fund Administrator will determine the sources of 

this information, obtain records from those sources, verify the 

integrity of the data and reconcile the record counts. 

6.9.1.3	 The Fund Administrator will then process the Eligible Investor 

Database to prepare a U.S. Postal Service mailing database (the 

“Distribution List”). 

6.9.1.4	 A Notice and check will then be mailed to each individual on the 

Distribution List. For IRAs, the check will be made out to the IRA 

23
 
of the individual. For annuities, the check will be made out to the 

annuity of the individual. 

6.9.1.5	 All checks shall bear a stale date of ninety days. Checks that are not 

negotiated within the stale date shall be voided and the issuing 

financial institution shall be instructed to stop payment on those 

checks. Electronic credits will be made only to cash equivalent 

accounts (e.g., money market accounts). 

6.9.1.6	 At the election of the IDC, returned mail will be processed and remailed or documented in the databases. At the election of the IDC, 

misdirected or undelivered electronic transfers will be processed and 

re-sent or documented in the databases. 

6.9.2 Payment Mechanics 

6.9.2.1	 Consistent with Rule 1101(b)(1), an escrow account will be 

established by the IDC at U.S. Bank for managing Conseco Fair 

Fund proceeds. An additional account at U.S. Bank will be 

established to issue payments. Funds will be transferred from the 

escrow account to the payment account as checks are presented. 

6.9.2.2	 In order to distribute funds, the IDC will submit a validated 

Distribution List of payees and the payment amounts to the assigned 

Commission staff, who will obtain authorization from the 

Commission to disburse pursuant to Rule 1101(b)(6). The payees 

and amounts will be validated at the IDC’s direction by the Fund 

Administrator. The validation will state that the list was compiled in 

accordance with the Plan and provides all information necessary to 

make disbursement to each distributee. To the extent necessary to 

ensure confidentiality of information of Eligible Investors, the 

Distribution List will identify accounts by number only; however, 

the Fund Administrator will maintain, for a period of time not to 

exceed 40 months (unless otherwise directed by the Commission), a 

version of the Distribution List which includes the names, addresses 

and tax identification numbers of the Eligible Investors receiving 

settlement payments. Unless otherwise directed by the Commission, 

the Commission staff will obtain an Order Directing Disbursement 

that releases funds to the bank account established by the Fund 

Administrator based upon the validated list and representation by the 

Fund Administrator that the checks or electronic transfers will be 

issued within the next 5 business days. 

6.9.2.3	 The Fund Administrator will prepare a positive pay file for U.S. 

Bank for fraud prevention. Only checks matching payments in the 

pay file will be paid. As checks issued to individual investors are 

24
 
presented to U.S Bank for payment, they will be subject to positive 

pay controls before being honored by the bank. Funds from the 

escrow account will be transferred to the distribution account daily 

to cover the amount of the checks presented. Any checks not 

meeting the positive pay controls will be reported to the Fund 

Administrator for review. 

6.10 COMMUNICATION WITH INVESTORS AND PUBLIC 

6.10.1 Published Plan Notice and Commentary 

6.10.1.1	 Notice of this Plan shall be published in the SEC Docket, on the 

Commission website [http://www.sec.gov], and on the Respondents’ 

website [http://www.conseco.com]. Any person or entity wishing to 

comment on the Plan must do so in writing by submitting their 

comments within thirty days of the date of the notice (i) by sending a 

letter to the Office of the Secretary, United States Securities and 

Exchange Commission, 100 F Street, N.E., Washington, D.C. 

20549-1090; (ii) by using the Commission’s Internet comment form 

(http://www.sec.gov/litigation/admin.shtml); or (iii) by sending an email to rule-comments@sec.gov. Comments submitted by e-mail or 

via the Commission’s website should include the Administrative 

Proceeding File Number (Admin. Proc. File No. 3-11578) in the 

subject line. Comments received will be available to the public. 

Commenters should only submit information that they wish to make 

publicly available. 

6.10.2 Website & Call Center 

6.10.2.1	 The Fund Administrator will provide customer support and 

communications programs that will become active at least by the 

time the first distribution occurs. These services will include a toll 

free number and a website to the public. The Commission retains 

the right to review and approve any material posted on the website. 

6.10.3 Frequently Asked Questions 

6.10.3.1	 The Fund Administrator will make a FAQ page available by 

referencing (in the Notice or check stub) its location on a website 

and providing a phone number through which a written copy can be 

obtained. It will also establish a FAQ voicemail message on the 

telephone support system. Live service representatives will also be 

trained to answer the phones with scripted answers to FAQs. 

25
 
7.1 

6.11	 TERMINATION OF CONSECO FAIR FUND 

6.11.1 The Fair Fund shall be eligible for termination, and the Fund Administrator 

shall be discharged, after all of the following have occurred: (1) a final 

accounting, in an SEC standard accounting format provided by the staff, has 

been submitted by the Fund Administrator for approval of, and has been 

approved by, the Commission, (2) all taxes, fees and expenses have been paid, 

and (3) any amount remaining in the Fair Fund has been received by the 

Commission. When the Commission has approved the final accounting, the 

staff shall seek an order from the Commission to approve the transfer of any 

amount remaining in the Fair Fund to the U.S. Treasury, and shall arrange for 

the termination of the Fair Fund and discharge of the Fund Administrator. 

6.12	 REPORTING 

6.12.1	 Once the Conseco Fair Fund is transferred to the escrow account at U.S. Bank, 

the Fund Administrator will file an accounting during the first ten days of 

each calendar quarter and will submit a final accounting for the approval of 

the Commission prior to termination of the Conseco Fair Fund and discharge 

of the IDC and Fund Administrator. The Fund Administrator will prepare and 

deliver to the Respondents and the Commission any other reports that the IDC 

may request during implementation of the Plan. 

SECTION 7.0 APPEALS, BAR DATE AND DISQUALIFICATION 

APPEALS AND BAR DATE 

7.1.1	 No Eligible Investor will be eligible to receive an amount in excess of the 

Distribution Payment calculated by the IDC unless the Eligible Investor files 

an “Appeal” in accordance with the provisions of this Section 7.0. 

7.1.2	 Any Person that believes that it is eligible to receive a portion of the Conseco 

Fair Fund because such Person was incorrectly excluded from the list of 

Eligible Investors, or that believes it is entitled to a Distribution Payment 

other than specified in its Notice, may submit an Appeal to that effect. To be 

valid, an Appeal must be postmarked on or before the 90th day after issuance 

of the last Distribution Payments in the Closing Round and mailed to the Fund 

Administrator. 

7.1.3	 Each Appeal must be supported by documents specified in the Appeal form, 

as applicable, and such other documents as may be reasonably requested by 

the IDC. 

26
 
7.1.4	 The IDC, in his sole discretion, shall determine whether a Person is entitled to 

be treated as an Eligible Investor or to have a different Distribution Payment. 

The IDC shall provide any Eligible Investor with information reasonably 

requested in connection with the submission of an Appeal regarding the 

dilution damage calculated for such VAFs and such days as are relevant to 

such Appeal. 

7.1.5	 Any Person (a) that is not an Eligible Investor that believes it is entitled to be 

an Eligible Investor, or (b) that is an Eligible Investor that disputes the amount 

of its Distribution Payment, but fails to submit a valid Appeal that is 

postmarked on or before the 90th day after issuance of the last Distribution 

Payments in the Closing Round, shall be forever barred from receiving any 

distributions pursuant to the Plan, or disputing the amount of its Distribution 

Payment, as applicable. 

7.1.6	 If any Appeal resolved by the IDC results in a determination that the Person 

that submitted the Appeal is entitled to be treated as an Eligible Investor or to 

have a different Distribution Payment, as applicable, the IDC shall cause an 

amount to be distributed to any Person whose Appeal is accepted by the IDC 

equal to the Distribution Payment that would have been allocated to such 

Person in accordance with Section 6.5 (and such Person shall be treated as an 

Eligible Investor for purposes of this Plan), that distribution shall be made 

from amounts that would otherwise constitute Residual Distributions. 

7.1.7	 In the event that the funds available for Residual Distributions are not 

sufficient to satisfy all accepted Appeals (as well as other approved uses of the 

Residual Distributions), the amount otherwise distributable to the holder of 

such Appeal shall be reduced pro rata, based upon the value of the respective 

claims, with other obligations payable from Residual Distributions. 

7.1.8	 The IDC shall resolve all Appeals reasonably soon after the 90th day after 

issuance of the last Distribution Payments in the Closing Round and the 

determination of the IDC shall be controlling for purposes of establishing the 

Persons who are entitled to a distribution from the Conseco Fair Fund and the 

amounts of such distributions. The IDC shall notify each Person that 

submitted an Appeal as to the IDC’s determination with respect to such 

Appeal but the IDC shall not be required to state in such notice any basis of 

his determination. 

7.2	 DISQUALIFIED INVESTORS 

7.2.1	 Concurrently with the determination of the amounts of the Distribution 

Payments, the IDC shall inquire of the Respondents and the Commission staff 

which if any of the Persons on the list of Potentially Eligible Investors are 

Persons that have either (a) been found in a final and non-appealable order of 

a court or regulatory body to have engaged in unlawful behavior affecting one 

27
 
 

or more VAFs during the Period, (b) have entered into a settlement of any 

proceeding before a court or regulatory body in which such unlawful behavior 

has been alleged, unless the IDC determines that the settlement should not be 

deemed an admission of such unlawful behavior, or (c) admitted in writing to 

such behavior. 

7.2.2	 Based upon any information provided in response to such inquiries, the IDC 

shall determine which if any of the Potentially Eligible Investors are 

“Disqualified Investors.” In making any such determination, the IDC may 

rely on documents and other information provided by the Respondents, the 

Commission, regulatory bodies or courts. 

7.2.3	 Any Potentially Eligible Investor determined by the IDC to be a Disqualified 

Investor shall be sent a written notice from the IDC of such determination. A 

Disqualified Investor shall not receive a Distribution Payment. 

7.3	 ALLEGEDLY DISQUALIFIED INVESTORS 

7.3.1	 If the IDC becomes aware of any pending proceeding before a court or 

regulatory body in which any Potentially Eligible Investor is alleged by the 

Commission or any other party to have engaged in behavior affecting a VAF 

during the Damage Period that would constitute unlawful behavior if such 

allegations were true, and the IDC determines that such alleged behavior is 

likely to have caused harm to other investors if such allegations are true, each 

such Potentially Eligible Investor shall be deemed an “Allegedly Disqualified 

Investor” without any independent assessment by the Commission or any 

other party as to the truth of the allegations. 

7.3.2	 Any Potentially Eligible Investor determined by the IDC to be an Allegedly 

Disqualified Investor and otherwise entitled to a Distribution Payment equal 

to or in excess of the fifty dollar de minimis payment constraint shall be sent a 

written notice from the IDC of such determination. 

7.3.3	 Any distribution that would otherwise be made to each Allegedly Disqualified 

Investor shall instead be reserved in an escrow account pending resolution of 

the proceedings regarding such Allegedly Disqualified Investor. Upon 

resolution of each such proceeding, including resolution of any available 

appeals, the escrowed payment shall be disbursed as follows: (a) if the 

Allegedly Disqualified Investor is specifically found in such proceeding to 

have engaged in unlawful behavior (or if the proceeding is settled, the 

Allegedly Disqualified Investor shall be deemed to have engaged in unlawful 

behavior unless the IDC determines that the settlement should not be deemed 

an admission of such unlawful behavior) and the IDC determines that such 

behavior is likely to have caused harm to other investors, such Allegedly 

Disqualified Investor shall be deemed a Disqualified Investor and the 

escrowed payments that would otherwise have been paid to such Disqualified 

28
 
Investor (including interest accrued on such escrowed payment) shall be 

returned to the Conseco Fair Fund and applied as provided in Section 6.7 

above; or (b) if the proceeding is resolved and the Allegedly Disqualified 

Investor is either not found to have engaged in unlawful behavior relating to 

the VAFs or the IDC determines that such behavior is not likely to have 

caused harm to other investors, then the escrowed payment shall be paid to 

such Allegedly Disqualified Investor (including interest accrued on such 

escrowed payment). No payment shall be made to an Allegedly Disqualified 

Investor pursuant to clause (b) in the preceding sentence until the Allegedly 

Disqualified Investor has provided a written certification, in a form approved 

by the IDC, that the Allegedly Disqualified Investor did not engage in any 

unlawful activity in connection with its investments in VAFs during the 

Damage Period. If such certification is not provided to the IDC within eight 

months after the Publication Date, the Allegedly Disqualified Investor shall no 

longer be entitled to any distribution under this Plan. 

7.4	 STATUS OF AN OMNIBUS ACCOUNT AS A DISQUALIFIED 

INVESTOR OR ALLEGEDLY DISQUALIFIED INVESTOR 

7.4.1	 “Indirect Disqualified Investors” are Persons that had an interest during the 

Damage Period in a Potentially Eligible Investor that is an Omnibus Account 

and have either (a) been found in a final and non-appealable order of a court 

or regulatory body to have engaged in unlawful behavior affecting the VAFs 

during the Period, (b) have entered into a settlement of any proceeding before 

a court or regulatory body in which such unlawful behavior has been alleged, 

unless the IDC determines that the settlement should not be deemed an 

admission of such unlawful behavior, or (c) admitted in writing to such 

behavior. 

7.4.2	 To the extent that the IDC is aware that a Potentially Eligible Investor is an 

Omnibus Account and the IDC determines that, or the Respondents in good 

faith allege that, any Indirect Disqualified Investors had an interest during the 

Damage Period in such Omnibus Account, the Omnibus Account shall be 

deemed to consist of two accounts, one representing the interests of such 

Indirect Disqualified Investors, which account shall be deemed for purposes 

of this Plan to be a Disqualified Investor pursuant to the provisions of Section 

7.2, and the other representing the interests of Non-Market-Timing Investors 

in such account. To the extent that the IDC cannot determine with certainty 

the allocation of the Omnibus Account between Disqualified Investors and 

Non-Market-Timing Investors, the IDC shall estimate such amount in good 

faith and the IDC’s determination shall be conclusive and binding. 

7.4.3	 “Indirect Allegedly Disqualified Investors” are Persons that had an interest 

during the Damage Period in a Potentially Eligible Investor that is an 

Omnibus Account and that, in any pending proceeding before a court or 

regulatory body, such Persons are alleged by the Commission or any other 

29
 

APPENDICES 

31 
 

APPENDIX A 

FORMULAE FOR NET DILUTION DAMAGE 

These formulae derive an estimate of the net impact to accountholder value from each market 

timer share within a given VAF. 

Definitions: 

NDD = Estimate of Net Dilution Damage resulting from all Stale Price Arbitrage 

Damage or Benefit and Holding Period Return Damage or Benefit 

N = Net asset value 

t = Day of market timer purchase 

IS = Investment Schedule described as the number of days to fully invest cash from 

market timer inflow 

τ = Market timer holding period 

r = Portfolio underlying risky asset return 

c = Portfolio underlying cash return 

⎡ 1 ⎤

α i = min i ,1 , i = 1,...τ ⎢

⎣ IS ⎥⎦

Stale Price Arbitrage Damage or Benefit resulting from market timer purchase: 

N t+1 − Nt 

Holding Period Return Damage or Benefit: 

∑τ

N (1−α )(r − c ) t+i i t+i t+i i=1 

Stale Price Arbitrage Damage or Benefit resulting from market timer sale: 

ατ (Nt +τ − Nt +τ +1 ) 

Combined, the full equation estimates the Net Dilution Damage to a VAF and can be written: 

τ

NDD = Nt+1 − Nt +∑ Nt+i (1−α i )(rt+i − ct+i ) +ατ (Nt+τ − Nt+τ +1 ) i=1 

32 
APPENDIX B 

DEFINITIONS 

Account I: Escrow account created by JPMorgan Chase & Co. into which the disgorgement and 

penalty payments from Conseco Services and CES were paid on September 30, 2004, as set forth 

in Section 1.3.1. 

Account II: Escrow account created by JPMorgan Chase & Co. into which the disgorgement 

and penalty payments from CHIC were paid on September 20, 2004, as set forth in Section 1.3.1. 

Advantage Plus: Conseco Advantage Plus Fixed and Variable Annuity, as set forth in Section 

1.2.5. 

Allegedly Disqualified Investor: A Potentially Eligible Investor who is alleged by the 

Commission or any other party to have engaged in behavior affecting the VAFs during the 

Damage Period that would constitute unlawful behavior if such allegations were true and that, in 

the determination of the IDC, is likely to have caused dilution damage, as set forth in Section 

7.3.1. 

Appeal: The process through which a Person may challenge either the IDC’s decision to 

exclude the Person from the list of Eligible Investors or the IDC’s determination of the amount 

of the Distribution Payment to such Person, as set forth in Sections 7.1. 

BPD: The U.S. Treasury Bureau of Public Debt, as set forth in Section 1.3.2. 

CES: Conseco Equity Sales, Inc., as set forth in Section 1.2.2. 

CIHC: CIHC, Inc., as set forth in Section 1.2.2. 

Closing Round: The issuance of Residual Distributions to Eligible Investors with Net Dilution 

Damage less than the de minimis constraint, in descending order of Net Dilution Damage 

amounts, until the Fair Fund less the Reserve is exhausted, as set forth in Section 6.7.4. 

Commission: The Securities and Exchange Commission, as set forth in Section 1.2.1. 

Conseco: Collective reference to Conseco Inc., CIHC, Inc., Conseco Services, Inc. and Conseco 

Equity Sales, Inc., as set forth in Section 1.2.2. 

Conseco Fair Fund: The Fair Fund established pursuant to the Order and Section 308(a) of the 

Sarbanes-Oxley Act of 2002, as set forth in Section 1.2.9. 

Conseco Life: Conseco Life Insurance Company of Texas, as set forth in Section 1.2.4. 

Conseco Services: Conseco Services, Inc., as set forth in Section 1.2.2. 

33 
 

CVIC: Conseco Variable Insurance Company, as set forth in Section 1.2.3. 

Damage Period: The period from December 1, 1999 through October 22, 2002, as set forth in 

Section 4.1.2. 

Distribution Payment: A payment from the Conseco Fair Fund to harmed investors, as set forth 

in Section 2.3.1. 

Distribution List: The U.S. Postal Service mailing database, as set forth in Section 6.9.1.3. 

Disqualified Investor: Any Person on the list of Potentially Eligible Investors that has either (a) 

been found in a final and non-appealable order of a court or regulatory body to have engaged in 

unlawful behavior affecting the VAFs during the Period, (b) has entered into a settlement of any 

proceeding before a court or regulatory body in which such unlawful behavior has been alleged, 

unless the IDC determines that the settlement should not be deemed an admission of such 

unlawful behavior, or (c) admitted in writing to such behavior, as set forth in Section 7.2.1. 

Eligible Funds: The VAFs in which Total Net Dilution Damage was suffered, as set forth in 

Section 6.3.1.8. 

Eligible Investor: Each Potentially Eligible Investor other than Allegedly Disqualified Investors 

and Disqualified Investors, as set forth in Section 6.3.1.9. 

Eligible Investor Database: The database compiled by the IDC of name and address 

information for investors who will receive the Notice/check packet, as set forth in Section 

6.9.1.2. 

Group Account: Account containing aggregated balances of multiple individual investors that 

may exist at a UIC in the name of another financial services company, as set forth in Section 

3.2.3. 

Holding Period Return Benefit: The reduction in NAV depreciation in cases where non-cash 

return generating instruments in the VAF portfolio decrease in value and a portion of market 

timer investments in the VAF is held in cash instruments with positive or zero returns, as set 

forth in Sections 5.3.2. 

Holding Period Return Damage: The reduction in NAV appreciation in cases where non-cash 

return generating instruments in the VAF portfolio increase in value and a portion of market 

timer investments in the VAF is held in cash instruments with lower returns, as set forth in 

Section 5.3. 

IDC: The Independent Distribution Consultant, as set forth in Section 1.4.1. 

Identified Market Timers: Entities identified by the Commission or by Conseco as market 

timers, as set forth in Section 4.1.2. 

34 
Indirect Allegedly Disqualified Investor: Any Person that had an interest during the Damage 

Period in a Potentially Eligible Investor that is an Omnibus Account and that, in any pending 

proceeding before a court or regulatory body, is alleged by the Commission or any other party to 

have engaged in behavior affecting the VAFs during the Damage Period that would constitute 

unlawful behavior if such allegations were true and, in the determination of the IDC, is likely to 

have caused Dilution Damage if such allegations are true, as set forth in Section 7.4.3. 

Indirect Disqualified Investor: Any Person that had an interest during the Damage Period in a 

Potentially Eligible Investor that is an Omnibus Account and has either (a) been found in a final 

and non-appealable order of a court or regulatory body to have engaged in unlawful behavior 

affecting the VAFs during the Period, or (b) entered into a settlement of any proceeding before a 

court or regulatory body in which such unlawful behavior has been alleged, unless the IDC 

determines that the settlement should not be deemed an admission of such unlawful behavior, or 

(c) admitted in writing to such behavior, as set forth in Section 7.4.1. 

Initial Round: The initial issuance of Distribution Payments to Eligible Investors in the initial 

group of cooperating UICs and with calculated Distribution Payments in excess of fifty dollars, 

as set forth in Section 6.7.2. 

Investment Schedule: The rate over time at which cash newly supplied by market timers is 

typically invested in underlying fund assets by VAF portfolio managers, as set forth in Section 

5.1. 

Inviva: Inviva, Inc., as set forth in Section 1.2.11. 

Inviva Order: The Commission order that governs a separate settlement with Inviva based on 

dilution losses incurred after October 2002, as set forth in Section 1.2.11. 

KGP: Kormendi \ Gardner Partners, as set forth in Section 1.4.2. 

MAI: MidAmerica Institute for Public Policy Research, as set forth in Section 1.4.2. 

Market Timing: Either (a) frequent buying and selling of shares of the same mutual fund or (b) 

buying or selling mutual fund shares in order to exploit inefficiencies in mutual fund pricing, as 

set forth in Section 1.2.8. 

Monument: Conseco Monument Series Fixed and Variable Annuity, as set forth in Section 

1.2.5. 

NAV: The net asset value of a VAF, as set forth in Section 5.2.1. 

Negative Net Dilution Damage: The negative excess of (i) the sum of Stale Price Arbitrage 

Damage plus Holding Period Return Damage, less (ii) the sum of Stale Price Arbitrage Benefit 

plus Holding Period Return Benefit, as set forth in Section 5.5.3. 

35 
Net Dilution Damage: The positive or negative excess of (i) the sum of Stale Price Arbitrage 

Damage plus Holding Period Return Damage, less (ii) the sum of Stale Price Arbitrage Benefit 

plus Holding Period Return Benefit., as set forth in Section 5.5.2. 

Non-Market-Timing Investors: Those investors who were not found guilty of market timing 

and were invested in the affected VAFs from December 1, 1999 to October 22, 2002, as set forth 

in Section 4.3.1. 

Notice: The Notification of the Order that accompanies Distribution Payments, as set forth in 

Section 6.9.1.1. 

Offer: The Respondents’ Offer of Settlement dated July 27, 2004 submitted to the Securities 

and Exchange Commission, as set forth in Section 1.2.9. 

Omnibus Account: An account at a VAF in the name of a financial services firm and not in the 

names of such firm’s individual investors, as set forth in Section 3.1.2. 

Order: The Commission’s “Order Instituting Administrative And Cease-And-Desist 

Proceedings, Making Findings, and Imposing Remedial Sanctions and A Cease-And-Desist 

Order Pursuant to Section 8A of the Securities Act of 1933, Sections 15(b) and 21C of the 

Securities Exchange Act of 1934, and Sections 9(b) And 9(f) Of the Investment Company Act of 

1940,” dated August 9, 2004, as set forth in Section 1.2.1. 

Person: Either (i) an individual, or (ii) a business entity of any form of organization whatsoever. 

Fund Administrator: Rust Consulting, Inc., as set forth in Section 2.2.1. 

Positive Net Dilution Damage: The positive excess of (i) the sum of Stale Price Arbitrage 

Damage plus Holding Period Return Damage, less (ii) the sum of Stale Price Arbitrage Benefit 

plus Holding Period Return Benefit, as set forth in Section 5.5.3. 

Potentially Eligible Investors: Those investors identified by the IDC as having suffered Total 

Net Dilution Damage during the Damage Period, as set forth in Section 6.3.1.8. 

Publication Date: The date on which the IDC will publish the Published Plan Notice that is preapproved by the Commission, as set forth in Section 6.10.1.1. 

Published Plan Notice: The notice prepared and issued by the IDC and pre-approved by the 

Commission that informs the public of the Order, as discussed in Section 6.10.1.1. 

Primary Damaged VAFs: VAFs that suffered material amounts of Positive Net Dilution 

Damage for the Damage Period as a whole, as set forth in Section 5.7.3.1. 

QSF: Qualified Settlement Fund, as set forth in Section 2.1.1. 

36 
 

QSF Account: The account established by the Fund Administrator at U.S. Bank in the name of 

and bearing the Taxpayer Identification Number of the QSF, as set forth in Section 2.1.2. 

Reserve: The amount reserved such that the IDC is certain that all taxes and any amounts 

determined to be payable upon appeal will be paid before reconciling and closing the Conseco 

Fair Fund, as set forth in Section 6.8. 

Residual Distribution: A payment in the amount of fifty dollars to an Eligible Investor whose 

Distribution Payment in the Initial Round would have been below the fifty dollar de minimis 

constraint, as set forth in Section 6.7.4. 

Retirement Plan: An employee benefit plan, as such plans are defined in Section 3(3) of 

ERISA, 29 U.S.C. § 1002(3), which is not an Individual Retirement Account (IRA), whether or 

not the plan is subject to Title I of ERISA. 

Rules: The Commission’s Rules of Practice and Rules on Fair Fund Disgorgement Plans, as set 

forth in Section 1.2.1. 

Rust: Rust Consulting, Inc., as set forth in Section 2.2.1. 

Secondary Damaged VAFs: VAFs with at least one calendar month of material Positive Net 

Dilution Damage but with substantial Negative Net Dilution Damage for the Damage Period 

overall, as set forth in Section 5.7.3.2. 

Stale Price Arbitrage: Either (i) the purchase of VAF shares at a discounted NAV relative to 

the unrecognized “true” market NAV, or (ii) the sale of VAF shares at a premium to their 

unrecognized market NAV, as set forth in Section 5.2.1. 

Stale Price Arbitrage Benefit: The amount of the benefit gained by Non-Market-Timing 

Investors when a market timer is incorrect in forecasting the direction of the following day’s 

change in NAV, as set forth in Section 5.2.2. 

Stale Price Arbitrage Damage: The amount of the reduced NAV when the “true” value is 

recognized in the market by a delayed uptick in NAV on the day following a market timer 

inflow, as set forth in Section 5.2.1. 

Tax Administrator: Damasco & Associates, as set forth in Section 6.2.1. 

Total Net Dilution Damage: The sum of a particular Non-Market-Timing Investor’s Net 

Dilution Damage totaled across all VAFs, as set forth in Section 5.6.1. 

UIC: Unrelated Insurance Company; a firm other than Conseco offering variable annuity 

products, as set forth in Section 3.2.1. 

37 
Unrelated Insurance Company: A firm other than Conseco offering variable annuity products, 

as set forth in Section 3.2.1 

VAF: Variable annuity fund, as set forth in Section 1.1.1. 

38