Transamerica Life Canada shuts down fund manipulation scheme

George Foegele, chairman, president and CEO of Toronto-based Transamerica, says a total of 56 employees were involved in the arbitrage-like scheme in the NN Information Technology Fund, in which policyholders lost an estimated $4 million to $6 million.

The remaining 36 employees were clerical people who “joined the bandwagon [but] who had no understanding of what they were doing,” says Foegele. They have all been asked to sign a code of conduct.

Foegele says the insurer will repay the money to policyholders and the problem has been fixed. Transamerica has also taken over management of the fund from ING Investment Management Inc.

The fund was launched in 1998 and then relaunched in November 1999 to make it RRSP eleigible. It was at about that time, says Foegele, that the problems began.

The technology fund invests in ING International Technology Fund, which is managed by ING in Luxembourg. The Luxembourg fund invests more than 80% of its holdings in New York-based Nasdaq.

Foegele says when the fund was set up in Canada, NN Information Technology Fund was priced based on the Luxembourg price. That meant that when the Luxembourg market closed for the day — and before North American markets opened — the value of the ING Information Technology Fund was already known. “So since most of the fund was in Nasdaq, you could basically predict tomorrow’s outcome on this [NN Information Technology] fund today,” he says.

An investment accountant at Transamerica discovered the irregularities when he noticed there were swings of as much as $8.5 million in and out of the $55-million fund. The insurance company was notified of the problem on about July 20, says Foegele, and the flaw in the pricing mechanism was fixed last Monday.

NN Life, which had been owned by ING, was taken over by Transamerica in April.

Foegele says all of Transamerica’s seg funds are valued at Canadian closing. Another ING-managed fund, NN International Brands Fund, is valued in a similar fashion to NN Information Technology. However, Foegele says the Brands Fund is a much less volatile fund and not as conducive to arbitrage as the technology fund.

Mark Daniels, president of the Canadian Life and Health Insurance Association, says this marks the first time he has ever heard of such a scheme being conducted in the insurance industry.

Foegele says the Office of the Superintendent of Financial Institutions and the Financial Services Commission of Ontario are aware of what has happened. He doubts if there are any regulatory penalties that will be forthcoming.

Deloitte & Touche has been hired to audit the extent of the losses. That exercise is expected to take three to four weeks.