Wednesday, December 02, 2009

Be Careful What You Ask For

Some Democrats were quick to criticize the office of Secretary of State Todd Rokita for failing to provide adequate regulatory oversight over businessman Tim Durham's activities in the wake of the federal government's claim that Durham's Fair Finance Company, an Ohio company, operated a classic Ponzi scheme. Durham has been a major benefactor of Republican candidates, making him an easy target for Democrats. Fair's activities were actually under the jurisdiction of Ohio state regulators, which reviewed and approved the finance company's security offerings in that state and which is run by a Democratic officeholder in that state. Rokita's office claimed in e-mail responses to whistleblower complaints concerning Durham's stock activities that it forwarded those complaints in the past to the SEC for further investigation.

The Democrats may now rue their calls for tougher securities regulation by Rokita. His office today announced a lawsuit it has filed in Marion Co. Superior Court accusing the Indiana State Teachers Association and its related financial companies of numerous Indiana securities law violations. The ISTA is one of the state's most powerful special interest groups and the largest benefactor of Indiana Democratic candidates. The lawsuit seeks to freeze certain assets of the ISTA, and its asking for the appointment of a receiver to help regulators sort through the union's financial morass.

In offering Indiana's school districts health insurance and long-term disability plans, the ISTA is accused of skirting Indiana's securities law. Specifically, the complaint alleges: the ISTA offered for sale securities to Indiana school districts in the form of commingled long-term disability and health arrangements with a promise of return on funds invested with the ISTA without registering those securities with Indiana's Securities Division; the ISTA acted as an investment advisor to school districts for compensation without being registered with the Securities Division to engage in such activities and managed others who were acting as investment advisors without authority; and the ISTA made fraudulent misrepresentations about its offerings and its financial condition in the course of selling them to school districts.

The complaint asserts that the ISTA is unable to account for as much as $23 million that was suppose to have accumulated for the benefit of the participating school districts. The National Education Association is also named as a defendant in the action because it assumed control of the ISTA in the wake of its recent financial meltdown. Rokita's office is asking the court to freeze all of the union's assets and appoint a receiver so that a complete accounting can be made to ascertain what happened to the lost assets. The case has been assigned to Judge S.K. Reid.

A crippled ISTA cannot be good news for Indiana Democrats. The Democratic Party has become very dependent on the union as a major source of campaign contributions. Will those contributions suffer as a result of the financial disaster and legal morass that has beset the union?


Doug said...

I think the question was more one of "where has he been?"

But, if ISTA has been playing fast and loose, let the chips fall where they may --- so long as Rokita is an equal opportunity enforcer; something about which I'm skeptical.

Cato said...

This is very thin.

I'm not sure Rokita's complaint passes the Howey test. The Complaint rests its entire subject-matter jurisdiction on this language: "sharing investment returns earned by the ISTA entities." The rest of the Complaint is logrolling and pro forma padding.

The "investment" is outlined in numbered paragraphs 14-17.

It's going to be difficult for Rokita to prove that a return of association funds to association members rises to the level of a security. Associations regularly invest funds, and nobody else is due these funds but the association and its members - where the funds here were returned.

Rokita seems to be going a long way to find a security. There is no allegation here that this plan was widely solicited to any and all comers, so this plan does not seem to be the sort of instrument that the Securities Act was created to prohibit.

Indeed, insurance policies are not purchased with the expectation of profit and are quite clearly not securities, absent an explicit effort to make the policy have a variable return of an investment character.

Rokita seems to be complaining that unspent insurance balances earned a return. What else are unneeded present funds supposed to do? Sit around dormant and become reduced through inflation?

I still wish I could participate in Rooney's Health Savings Accounts, but I haven't seen one of those, for a while.

Further, why is Rokita employing Frost Brown Todd when he has his own staff of securities attorneys? Was the representation competitively bid?

Still further, Rokita's attorneys are required to have the Attorney General plead their cases before the state courts. I'm not aware that the law was revised to allow a private firm to act in the stead of the A.G. and the Securities Division, simultaneously. This proceeding is truly unique.

More Durham, less this, Rokita.