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Conseco: The Buck Stops Where?


Finance: Executive Perks

Conseco: The Buck Stops Where?

As the company floundered, the ex-CEO got millions in loans

Call it chutzpah. For years, former Conseco Inc. CEO Stephen C. Hilbert, who was ousted on Apr. 28, never showed much restraint when it came to tapping Conseco for loans. On Apr. 6, as Conseco's stock was tanking, and earnings had to be restated, Hilbert saw fit to make himself a $23 million loan. While the loan was approved by the board, the circumstances under which Hilbert received the cash have raised eyebrows on Wall Street.

First, the timing couldn't be more suspect. Conseco and its stock were on a downward spiral. On Mar. 31, Conseco announced a $350 million aftertax charge. Further, its highly leveraged subprime lending unit, Green Tree Financial, would be put up for sale. Plus, Conseco's yearend filings, due out that day, would be delayed for another two weeks. The stock dropped 16%, to 11 7/16, on the news.NO SALE. But thanks to his timely loan, Hilbert avoided having to sell some of his Conseco shares to repay a margin loan on Conseco stock. Apparently, the Conseco board didn't want Hilbert selling during this tumultuous time due to "the potential concerns that could be created by" such a sale, according to the company's amended 10-K filing issued on May 1. The company did not respond to questions about the loan.

To make matters worse, details of the loan were not included in the original 10-K filed on Apr. 14. Hilbert has since repaid the loan out of his $72.5 million severance package, but that hasn't satisfied analysts. "I would argue this type of bridge loan to Hilbert, given at a subsidized rate, was a material item and should have been disclosed in its initial 10-K. That is exclusion of a material item and something the SEC will want to ask questions about," says Charles Peabody, an analyst with Mitchell Securities in New York.

When any CEO sells stock, it's a potential red flag to investors--doubly so if, like Hilbert, he had already borrowed $178 million under a company-guaranteed loan program to buy shares. "If he can't meet a $23 million margin call, how is he going to pay the $178 million he owes the bank?" asks one financial expert, who asked not to be named.

Conseco has consistently reassured investors that executives in its loan program have the ability to repay loans. But in the May 1 filing, the company casts doubt on whether Hilbert has the money available. The $23 million loan "was made because of the lack of opportunity for Mr. Hilbert to obtain alternate financing on an expedited basis," it says.

To analysts, that explanation raises more questions than it answers. "If he's so wealthy, why does the company need to make a loan to him to cover his margin loans? It's not like the stock dropped 90% in two weeks. He had three or six months notice on this stuff" as the stock continued to drop, says Alan Johnson, managing director of New York compensation consultancy Johnson Associates.

Luckily for Hilbert, he is not required to pay off his $178 million loan today. Conseco said that Hilbert will still be entitled to participate in the loan program and be able to borrow more to make interest payments as they fall due.

In total, more than 170 Conseco execs owe more than $500 million in loans made to buy Conseco stock (BW--Mar. 20). How much of that will ever be repaid is now very much an open question.By Debra Sparks in New YorkReturn to top

TABLE

How Hilbert Is $147 Million out of Pocket

-- Borrowed $178 million to buy Conseco stock

-- Borrowed $23 million to pay margin calls in April

-- Repaid the $23 million out of his severance package.

-- Still owes $178 million on stock, worth about $31 million

DATA: JOHNSON ASSOCIATESReturn to top


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