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Investor reimbursement fund off to slow start

August 2, 2014

Four years after the General Assembly created the nation’s first-of-its kind securities restitution fund, the total payout to defrauded investors amounts to just a fraction of its $1.9 million balance.

The fund, administered by the Indiana Securities Division, since 2010 has paid out about $100,000, or about 5 percent of its balance.

The reason is that the fund’s enabling legislation, House Bill 1332, designated that payouts cover investors victimized starting on or after July 1, 2010.

“Since the crime had to happen after this date and, as you know, many of these cases take months to investigate and prosecute, our first payment wasn’t until August of 2012,” said Valerie Kroeger, spokeswoman for Secretary of State Connie Lawson.

The first recipient was Steve Brodie, who invested life savings of $400,000 with Fishers hedge fund manager Keenan Hauke. Brodie received $15,000, which is the maximum payout per investor.

Of the $100,000 paid out of the fund, $42,000 has gone to investors in Hauke’s former Samex Capital Partners, who lost more than $7 million.

Hauke invested millions of dollars in Michigan real estate that ended up virtually worthless. Rather than inform clients of the losses, he created false account statements.

An investigation by the Securities Division and the FBI ensued. In 2012, Hauke was sentenced to 10 years in federal prison. Because Hauke didn’t live a lavish lifestyle, a court-appointed receiver was able to recover more than $2 million.

The other big chunk of restitution fund balance went to five victims of financial advisor Thomas Redmond Jr., who defrauded mostly elderly victims out of $580,000.

Following an investigation by the Securities Division, Marion County Prosecutor Terry Curry brought a case against Redmond in court, which last year sentenced him to 15 years in state prison.

So far this year, the state’s investor restitution fund has paid out about $10,000. A payment to another investor is set for August.

The fund was seeded with $2 million the securities division collected in the form of fines assessed to companies and individuals that violated Indiana securities laws.

Even if a burned investor qualifies for a payout under the restitution fund, the maximum amount is modest: the lesser of $15,000 or 25 percent of unrecovered awards. So, for example, even someone who lost $500,000 would receive a maximum of $15,000.

There are caveats to qualifying for a distribution. Payment can only be made if a state or federal court or administrative agency has ordered that restitution be paid to that victim resulting from a securities violation.

Further, arbitration awards through the Financial Industry Regulatory Association, or FINRA, are not eligible.

Then again, even a relatively small distribution from Indiana’s fund could be helpful for those trying to rebuild their nest egg, Lawson noted when announcing the payout to Brodie.

Often, investors are left with pennies after getting burned during the collapse of a fraudulent investment firm. Indeed, proceeds from a receivership can sometimes amount to just 2 cents or 4 cents on the dollar, noted Mark Maddox, a former state securities commissioner and founder of Fishers-based law firm Maddox Hargett & Caruso.

An investor’s biggest return often comes when attorneys can identify assets—such as those of a regulated brokerage whose employee defrauds investors.

“My first job is to see if there is some big, deep pockets I can go to,” Maddox said.

Maddox noted that, for whatever reason, state restitution funds for investors are rare.

Indeed, only a handful of states besides Indiana have them. One, Montana, pays the lesser of $25,000 or 25 percent of funds owed investors.

Like Indiana’s fund, Montana does not use taxpayer funds to support the fund; rather, it uses court-ordered contributions from white-collar criminals.•

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