David Karandos, a broker who advised the Indiana State Teachers Association Insurance Trust before it collapsed in 2009, is facing an administrative complaint from the Indiana Securities Division, which alleges 13 violations of the Indiana Securities Act for unethical, dishonest and deceptive practices.
The complaint comes nearly a year after Secretary of State Todd Rokita sued ISTA for securities fraud, saying the union could not account for $23 million invested by school corporations.
The complaint Rokita announced Wednesday alleges that Karandos advised the ISTA to invest its trust fund reserves in alternatives such as hedge funds and private equity funds – illiquid investment products that come with long-term obligations, but offered large up-front commissions for Karandos.
“This is money that was supposed to be kept safe to be used by the ISTA Insurance Trust in meeting its obligations to retired teachers and others with long-term care needs,” Rokita said in a prepared statement. “Now, because of these irresponsible and deceptive actions, along with other misdeeds and mishandlings, we’re forced to comb through a complex maze of ISTA funds in hopes of accounting for $23 million that ISTA admits is missing related to our federal litigation.”
If the allegations are proven by the Securities Division, Karandos could face a fine of up to $10,000 per violation, be ordered to pay restitution and could potentially be permanently barred from the securities industry in Indiana.
Karandos' Chicago-based attorney Steven Gomberg did not return a phone call from IBJ Wednesday afternoon. Karandos could not be reached at the number listed as his home in Indianapolis.
Indiana's 25-page securities complaint filed Tuesday paints a picture of Karandos leveraging his personal relationship with former ISTA Executive Director Warren Williams to ramp up the insurance trust's risky holdings. Karandos had been the investment adviser representative since 1991, but according to the complaint, he grew close to Williams, introducing him to his current wife and becoming his personal investment adviser.
When the CEO of the insurance trust left, Williams took over that role and became solely responsible for its investment decisions in 2003. The complaint alleges that from 2003 to 2007, the insurance trust's alternative holdings grew from 10 percent to 62 percent of its portfolio, or $20 million.
The ISTA Insurance Trust is one of the co-defendants in a federal securities fraud suit brought by the Indiana Securities Division against the ISTA. That suit alleges that ISTA unlawfully offered and sold investments in a health arrangement to dozens of Indiana school corporations, violating several provisions of the Indiana Securities Act.
This week the state amended that complaint to include the National Education Association as a co-defendant. The NEA took over ISTA's day-to-day operations in May 2009, and the lawsuit said as a result it had a responsibility to supervise its personnel.
According to the December complaint against ISTA, money paid into the ISTA-controlled trust that was intended to be used for health claims was co-mingled by ISTA with funds from other sources including long-term disability plan payments and invested by ISTA without the knowledge of the school corporations. The complaint alleges that ISTA now is unable to properly account for approximately $23 million intended for school districts.
The ISTA Insurance Trust was responsible for the issuance of medical and long-term disability plans endorsed and provided by ISTA. The medical plan offered a feature that allowed school corporations to set aside their excess balances in order to earn investment returns to be used to offset future costs. Karandos was responsible for advising the trust on how to invest and calculate a rate of return for these dollars.