Veteran Indianapolis stock-broker David Karandos appeared to be putting the ISTA Insurance Trust debacle behind him in February when he agreed to a $50,000 fine and a 75-day suspension from the securities industry.
But Karandos—who recommended investments that helped careen the trust into insolvency a few years ago—already has violated that agreement, leading the Indiana Securities Division of the Secretary of State’s Office to order him to appear at a hearing in May.
A Securities Division administrative filing says he failed to make the first payment—$1,000—that was due March 1. He also missed the $1,000 payment due April 1, and Securities Commissioner Chris Naylor has ordered him to appear before a hearing officer May 14 to make his case why “additional consequences” aren’t warranted.
That hearing should be interesting, given the flurry of questions now swirling around Karandos, 52, who until last month was a senior vice president and financial adviser at Morgan Stanley Smith Barney downtown.
Karandos’ official brokerage record lists March as the end of his employment but doesn’t say whether he resigned or was terminated. His attorneys did not return calls, and a Morgan Stanley Smith Barney spokeswoman declined to comment.
On his LinkedIn page, Karandos describes himself as an independent financial adviser at a firm that’s in the process of being formed. The page says it’s set to open May 15, right after his suspension is scheduled to end.
Naylor said Karandos’ employment status and ability to pay the fine will be among the topics discussed at the hearing. The four-page settlement had required Karandos to pay $1,000 a month for 10 months, then to pay $10,000 a year through 2016.
The Securities Division in 2010 filed an administrative complaint accusing Karandos of recommending an excessive concentration of high-risk alternative investments, such as hedge funds and private equity funds, and collecting “excessive and unreasonable” fees.
The complaint said Karandos had cultivated a personal relationship with Warren Williams, who served as CEO of the trust as well as executive director of the Indiana State Teachers Association and had sole authority on investment decisions. The two spent time together socially, and Karandos was Williams’ personal financial adviser and introduced him to his current wife, attorneys for the state say.
By 2007, the trust had become strained for cash, forcing it to sell more liquid investments to pay claims, according to court records. By the time insurance consultants poured through the trust’s records in the spring of 2009, 88 percent of its $19 million in assets were in alternative investments, many of them illiquid and difficult to value.
The Karandos settlement is just one of several deals struck by the Indiana Securities Division with parties accused of playing a role in the collapse of the ISTA Insurance Trust three years ago.
The value of the trust’s assets plunged 55 percent in 20 months, leaving it $57 million short of its liabilities, according to a 2009 Indiana Department of Insurance report. The trust, which launched in 1986, provided health insurance to about 7,000 school employees and family members around the state and long-term-disability coverage to nearly 30,000 others.
The ISTA reached a deal in 2009 to transfer the health insurance coverage to UnitedHealthcare. It has continued to make required disability payments, in part by charging more for union dues.
The financial picture today isn’t clear. The ISTA last year reached settlements with Morgan Stanley Smith Barney, Karandos’ employer from February 2009 until March 2012, and UBS Financial Services Inc., his employer from 2003 until February 2009. But the amounts the firms agreed to pay have not been made public.
David Orentlicher, an Indianapolis attorney who became one of the trustees of the insurance program after its collapse, wouldn’t quantify those settlements but said litigation and other efforts to bounce back from the trust’s collapse have gone well.
“It was a difficult situation, and I think it’s moving forward in a productive way,” he said.
The two Wall Street firms that employed Karandos have reached separate settlements with the Securities Division. UBS in May 2011 paid a $450,000 fine and $227,000 in investigative costs, and Morgan Stanley in January 2012 paid a $100,000 fine and $110,000 in investigative costs.
Still unresolved is the Securities Division’s 2-year-old fraud lawsuit against the ISTA and National Education Association, its parent organization.
The suit, which seeks more than $23 million, is scheduled for trial in October. It alleges the trust sold unregistered securities, comingled funds, failed to disclose its financial problems to school districts, and committed other violations of the Indiana Uniform Securities Act.•