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Two insurance companies will pay $20 million in a settlement that ends an investigation into charges that the companies allowed improper trading of annuities, law enforcement officials announced Monday.

Conseco Inc. and its successor in the variable annuities business, Inviva Inc., agreed to the settlement with New York Attorney General Eliot Spitzer and the Securities and Exchange Commission. Regulators accused the companies of allowing some favored investors to engage in rapid trading of mutual funds linked to variable annuity products, Spitzer said.

"It is one more example of the small investor being cheated so that the insiders get a special deal," Spitzer said Monday. "The scam in market timing throughout the mutual fund crisis has been that smaller investors are seeing their returns diluted so the big investors can walk away with the profits.'"

He said more than $2.6 billion has been returned in restitution through mutual fund settlements mostly to smaller investors seeking to grow their retirement funds.

The SEC called the settlement the first enforcement action charging insurance companies with securities fraud for allowing market time of mutual funds.

The insurance companies misled investors by claiming the annuities were "not designed for professional market timing organizations," according to the firms' prospectuses. But the companies marketed and sold the annuities to professional market timers anyway, according to the SEC.

"The variable annuity products at issue here became vehicles for market timing in mutual funds," said SEC enforcement Director Stephen Cutler. "The insurance company sponsors were well aware of this - indeed, they encouraged it, but left their retail investors and the mutual funds themselves in the dark."

Indiana-based Conseco was accused of allowing certain hedge fund managers to do rapid, short-term trading of its mutual fund sub-accounts from 2000 through April 2003. Inviva based in New York, which bought Conseco's variable annuities business in 2002, was accused of continuing the preferential treatment for a year.

Spitzer said the companies concealed the timing arrangements and activities from other investors.

Conseco doesn't admit or deny the allegations under the settlement and is "pleased to have resolved this legacy issue," said company spokesman Jim Rosensteele.

"Because Conseco had previously established a reserve for potential liabilities in this matter, the settlement is expected to have no impact on the earnings guidance Conseco provided in its second quarter 2004 earnings release last week," according to a prepared statement released by Rosensteele.

In January, Conseco, which had emerged from bankruptcy, disclosed in a government filing that the SEC and Spitzer are conducting annuities investigations that focus on so-called market timing.

Spitzer spokesmen have confirmed the office is investigating other sellers of variable annuities for possible trading abuses. Several other insurers also have disclosed receiving subpoenas last fall about annuities trading.

Under Monday's settlement, Conseco will pay $15 million in restitution and Inviva will pay $5 million. Inviva will also hire a monitor to make sure the firm is complying with reforms to prevent market timing of trades of variable annuities, which provide annuities payments, a death benefit and the option to invest in the stock market through separate mutual fund accounts.

An Inviva spokesman had no immediate comment.