The pension fund lawsuit against Conseco Inc. does not refer to asset-backed securities issued by Conseco Finance, as was expressed in last week's Wall Street Journal.

The article stated that "These notes were backed by the loans Conseco Finance made to consumers around the country. In a process known on Wall Street as securitization, Conseco would take the loans, bundle them together and sell them to investors as tradeable securities."

Aside from a $300 million trust originated preferred securities (TOPrS), the securities described in the lawsuit were actually general obligation notes issued by Conseco, and the alleged fraud took place because the registration statements of these securities cited Conseco's corresponding quarterly statements, in which the delinquency numbers were said to have been doctored.

The lead plaintiffs in the lawsuit are pension plan investors Anchorage Police & Fire Retirement System and the State of Louisiana Firefighters' Retirement System. Conseco downplayed the charges, comparing them to the class action suits that usually follow substantial drops in the market valuation of an investment, where investors feel they were wrongfully burned.

The lawsuit alleges that Conseco, in accounting for manufactured housing and home equity loan portfolios, changed defaulted loans to current loans, inflating the return (and excess spread) on the pools, thus painting a better revenue picture.

The suit named several ex-Conseco employees and a few current. Stephen Hilbert, co-founder of Conseco, and Rollin Dick, former chief financial officer were both named; the two, no longer with the company, were pushed out by Conseco's board in April 2000.

How the incident will impact Conseco's securitizations during the period in question, which was the first three quarters of 1999, remains to be seen.

Sources of ASR had differing opinions, based on a "whole lot of ifs."

"Unfortunately, until we get a better handle on what the real story is... I really don't want to make a comment about it at this point in time," said Pramila Gupta, a managing director at Moody's Investors Service.

If the alleged doctoring occurred at the 10-Q level, or any level above the documents that a transaction's trustee would monitor, there would not be much of an impact on the securitizations, one source predicted.

To prove that there is fraud in the loan reporting would be difficult, a mortgage analyst noted, because there is a fair amount of latitude with regard to what you can call a 30-day, 60-day, or 90-day delinquent loan. For example, "Sometimes you hear a company calling a borrower who has missed four months and then makes a payment current,'" the analyst said.

The point is that there are several ways to count deliquencies, which is an issue in and of itself. Further, if a new policy was put into effect at Conseco during that period of time, it will be hard to prove that there was fraud involved, the analyst added.

"On the other hand, if in fact they do prove that there was some sort of massive conspiracy or fraud to cook the books, with the numbers that go into the delinquency and loss accounts, and, if in fact those fraudulent numbers were being reported by the trustee for all these securitized deals, that's a problem," the analyst said.

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