Conseco battles founder, seeks $218 million for stock loans

CARMEL, Ind. — As Stephen Hilbert's venture into the insurance business took off, the college dropout and former encyclopedia salesman amassed wealth's trappings: a Caribbean island estate, racehorses, art and antiques.

Five years ago, the company he founded, Conseco, began a descent into bankruptcy, a slide that forced Hilbert to resign. Now he could lose his riches in a fight that pits him against the company he led for nearly 20 years — Conseco is making a fresh start with a new board and ownership, and it's seeking $218 million that the company founder took out in loans and now refuses to repay.

Among the assets the former CEO could lose is a 25,000-square-foot, French-style mansion on a gated 36 acres of creekside fields and trees. He built the home a decade ago and lives there with his wife and two children.

'Far from a usual bankruptcy'

"It is unusual for this kind of dispute to arise following bankruptcy, but this is far from a usual bankruptcy, given the size and resources of Conseco and the depths to which it has fallen after its 'Wall Street darling' status in the 1990s," said Todd Saxton, an Indiana University business professor.

Hilbert is one of 11 Conseco officers and directors who in 1996 began taking out stock-purchase loans from banks through a type of program now barred under federal law. Company lawyers are trying to recover $676 million they say the former insiders collectively owe; Hilbert is the largest debtor.

Conseco guaranteed repayment of the loans. When the company's stock crashed, falling from $58 a share in 1998 to less than a nickel before it went into bankruptcy, Conseco was forced to cover the executives' losses.

David Erb, of Merrion Group, a New Jersey firm that invested in Conseco after Hilbert's April 2000 resignation, said Hilbert must repay the debt. "As far as I'm concerned, it's a contractual matter. He needs to live up to it," Erb said.

Hilbert did repay $7 million before the company's bankruptcy filing last December, but nothing since. The $218 million includes $155 million owed on the underlying loans, with the remainder representing interest.

Conseco, which emerged from Chapter 11 protection in September, holds the $19.4 million mortgage on Hilbert's mansion and has gone to court seeking foreclosure after talks to settle the debt failed.

Hilbert argues that changes in Conseco's management and ownership since his ouster triggered a "change of control" clause in his contract that let him off the hook.

Hilbert declined an interview, but in an October written statement distanced himself from executives in recent corporate scandals, including those at Enron, who dumped their stock as trouble emerged.

Although Hilbert bought much of his stock with borrowed money, he remained the company's largest shareholder even through tough times. "Such action supports my consistent position that I truly believed in Conseco, the company I founded and built — and still do," he said.

Stunning growth

Hilbert started Conseco in 1979 and built it by acquiring and streamlining struggling insurance firms. What began as a small Midwestern insurance company grew to 17,000 employees and investments in everything from a horse-racing track and casino to the General Motors Building in Manhattan.

Along the way, Hilbert became one of the nation's highest-paid CEOs, with $119 million in compensation in 1997 alone.

Today, Hilbert's success is obscured by a 1998 deal he hoped would transform Conseco into a financial-services supermarket to middle America. Instead, the $6 billion purchase of Green Tree Financial, which specialized in high-risk mobile-home loans, saddled Conseco with most of the debt that triggered its bankruptcy.

On the day the deal was announced, Hilbert remained confident even as Conseco shares dropped nearly 15 percent.

"As we all know, Wall Street sometimes takes a day or two to be totally enlightened," he told analysts then.

Now, Hilbert complains that he is under siege.

"For months, Conseco has employed a veritable army of private investigators harassing me, my wife, my children, my friends and even the youngsters that cut grass at my home," he said in a recent statement.

Opulent lifestyle

The litigation has focused new attention on the personal life of Hilbert, 57, and Tomisue, his sixth wife, a former topless dancer he married in 1994.

The couple share an interest in racehorses. Hilbert named his first thoroughbred purchase "Tomisue's Delight," and a horse that ran in the 1999 Kentucky Derby "Stephen Gets Even."

Hilbert is known for throwing lavish parties, including one in which he hired the music group Kool & the Gang to perform.

On Nov. 12, a judge denied Hilbert's motion to seal information Conseco introduced about his finances. The judge also denied a company request to freeze Hilbert's assets.

Reed Oslan, of Conseco's law firm, Kirkland & Ellis, accuses Hilbert of transferring more than $100 million in assets to his wife and family trusts to shield them from debt recovery, including thoroughbred race horses worth more than $12 million and a half-interest in the couple's estate on the Caribbean island of St. Martin. Hilbert has denied any improper transfers.

Hilbert's lawyers note that many of his millions have gone to philanthropy, including the Indianapolis Symphony Orchestra, which named its performance hall Hilbert Circle Theatre, and the city's zoo, where a garden conservatory bears Hilbert's name.

In his recent statement, Hilbert seemed eager to take on the company he founded, saying he had "bitten my tongue" in the face of recent negative publicity about him.

"I simply did not want to harm the company, and I did not want to interfere with its efforts to emerge from bankruptcy," he said. "Now, however, I look forward to proceeding to trial and exercising the opportunity to let the whole truth be known."