Van Dyke v. White, Docket No. 121452

Citation433 Ill.Dec. 153,131 N.E.3d 511,2019 IL 121452
Decision Date21 March 2019
Docket NumberDocket No. 121452
Parties Richard Lee VAN DYKE, Appellee, v. Jesse WHITE, Secretary of State, State of Illinois, Appellant.
CourtSupreme Court of Illinois

2019 IL 121452
131 N.E.3d 511
433 Ill.Dec.
153

Richard Lee VAN DYKE, Appellee,
v.
Jesse WHITE, Secretary of State, State of Illinois, Appellant.

Docket No. 121452

Supreme Court of Illinois.

Opinion filed March 21, 2019


131 N.E.3d 515

Lisa Madigan, Attorney General, of Springfield (David L. Franklin, Solicitor General, and Christopher M.R. Turner, Assistant Attorney General, of Chicago, of counsel), for appellant.

William P. Hardy and Michael D. Morehead, of Hinshaw & Culbertson LLP, of Springfield, for appellee.

Kirk W. Dillard, Julie L. Young, and Hugh S. Balsam, of Locke Lord LLP, of Chicago, for amicus curiae Fidelity & Guaranty Life Insurance Company.

E. King Poor, Gary R. Clark, and Charles E. Harper, of Quarles & Brady LLP, of Chicago, for amicus curiae National Association for Fixed Annuities.

Roland C. Goss and Jason R. Brost, of Carlton Fields Jorden Burt, P.A., of Washington, D.C., for amicus curiae American Council of Life Insurers.

Deanna Besbekos-LaPage, of Stoltmann Law Offices, of Barrington, Royal B. Lea III, of Bingham & Lea, P.C., of San Antonio, Texas, Braden W. Sparks, of Braden W. Sparks, P.C., of Dallas, Texas, and Melinda J. Steuer, of Sacramento, California, for amicus curiae Public Investors Arbitration Bar Association.

Christopher D. Galanos, of Quinn, Johnston, Henderson, Pretorius & Cerulo, of Springfield, and Mark Jonathan Stewart, of Washington, D.C., for amicus curiae North American Securities Administrators Association, Inc.

JUSTICE NEVILLE delivered the judgment of the court, with opinion.

433 Ill.Dec. 157

¶ 1 The Illinois Secretary of State Securities Department (Department) initiated administrative proceedings against Richard Lee Van Dyke based on charges that he had engaged in fraudulent and misleading conduct in violation of the Illinois Securities Law of 1953 (Act) ( 815 ILCS 5/1 et seq. (West 2012) ). Following a hearing, Secretary of State Jesse White (Secretary) issued a final administrative decision finding that Van Dyke had violated several sections of the Act. Based on that decision, the Secretary revoked Van Dyke's registration as an investment adviser, prohibited him from selling securities in Illinois, and ordered him to pay certain fines and costs. The circuit court of Sangamon County affirmed that decision, and Van Dyke appealed. The appellate court reversed, holding that the Department had failed to prove that Van Dyke violated the Act. 2016 IL App (4th) 141109, 406 Ill.Dec. 458, 60 N.E.3d 1009. This court allowed the petition for leave to appeal filed by the Secretary, the Department, and its director, Tanya Solov. Ill. S. Ct. R. 315 (eff. Mar. 15, 2016). For the following reasons, we affirm the judgment of the appellate court.

¶ 2 I. BACKGROUND

¶ 3 At all relevant times, Van Dyke was licensed by the Department of Insurance as an insurance producer. Insurance producers are licensed and regulated by the Department of Insurance under the Illinois Insurance Code ( 215 ILCS 5/1 et seq. (West 2012) ). Van Dyke was also registered with the Illinois Secretary of State Securities Department as an investment

131 N.E.3d 516
433 Ill.Dec. 158

adviser. Investment advisers are regulated by the Department under the Act ( 815 ILCS 5/1 et seq. (West 2012) ).

¶ 4 In August 2011, two Department auditors, Herb Clausen and Ray DeWitt, appeared at Van Dyke's place of business to conduct an investment adviser audit. The auditors received instructions from the Department's senior enforcement attorney, David Finnigan, to conduct the audit after the agency received a complaint from the adult children of one of Van Dyke's deceased clients. The auditors first reviewed Van Dyke's investment adviser files and found nothing wrong. They then reviewed Van Dyke's insurance files.

¶ 5 In March 2013, the Department filed a notice of hearing to determine whether Van Dyke's registration as an investment adviser should be retroactively revoked or suspended and whether he should be prohibited from offering or selling securities in the state of Illinois. As grounds for the proposed action, the Department alleged that Van Dyke had "defrauded over 21 clients, all of whom are senior citizens, of $ 263,822.13."

¶ 6 The Department charged that Van Dyke obtained investment clients through seminars, his website, and advertisements and that he later provided investment advice, financial planning, and recommendations to purchase financial products, including indexed annuities.

¶ 7 In particular, the Department alleged that, from February 2009 through October 2010, Van Dyke effectuated 31 purchase transactions involving the liquidation of the clients' previously owned indexed annuities to purchase one or more new indexed annuities. The Department further alleged that, as a result of these transactions, Van Dyke received $ 160,937.05 in commissions.1 In all but one transaction, the original indexed annuity had been sold to the clients by Van Dyke, and he earned $ 155,341.51 in commissions.2 In total, Van Dyke earned $ 316,278.56 in commissions from the sale of these indexed annuities while his clients lost $ 263,822.13 in surrender charges, penalties, and other fees. The Department charged that all of the purchase transactions reviewed "involved persons age 58 or older at the time of the transactions, with the oldest person being 82."

¶ 8 The Department also alleged that Van Dyke violated section 130.853 of the Department's administrative regulations under the Act, which prohibits an investment adviser from effectuating any transactions of purchase or sale that are excessive in size or frequency or unsuitable and constitute a fraudulent, deceptive, or manipulative act. 14 Ill. Adm. Code 130.853 (1997).

¶ 9 Finally, the Department alleged that the indexed annuities are securities and that Van Dyke violated the Act by acting as an investment adviser and engaging in transactions, a practice, or a course of business that tended to work a fraud or deceit upon his clients. The Department charged that Van Dyke violated sections 12(A), (F), (G), (I), and (J) of the Act ( 815 ILCS 5/12(A), (F), (G), (I), (J) (West 2012) ).

¶ 10 Van Dyke moved to dismiss the charges against him, arguing that the Department had no jurisdiction because section 2.14 of the Act (id. § 2.14) excluded

131 N.E.3d 517
433 Ill.Dec. 159

indexed annuities from the Act's definition of "security" and because he did not act as an investment adviser in the alleged transactions. The hearing officer denied Van Dyke's motion, finding the indexed annuities were subject to the Act's provisions and that the notice of hearing alleged sufficient facts to impose sanctions against Van Dyke as an investment adviser.

¶ 11 Also in March 2013, the Department of Insurance filed a separate administrative action seeking to discipline Van Dyke based on the same annuity transactions. Following investigation and amended charges by the Department of Insurance, Van Dyke settled the insurance action, with no admission of guilt, for $ 6000 to resolve allegations he failed to complete 4 annuity replacement forms and answered questions incorrectly on 22 suitability forms submitted to an insurance company.

¶ 12 Beginning in April 2013 and continuing through August 2013, a six-day administrative hearing ensued. Evidence presented at the hearing indicated that Van Dyke prepared financial plans for certain clients, in which he provided investment advice and recommendations for the purchase and sale of financial products including the original indexed annuity contracts (original contracts) and the replacement indexed annuity contracts (replacement contracts).

¶ 13 The Department's witnesses included DeWitt, the Department's auditor; Edward O'Neal, Ph.D., who was admitted as an expert in financial analysis; Department of Insurance actuary Susan Lamb; and four of Van Dyke's clients. The Department also presented 172 exhibits, including financial planning documents, duplicates of three different types of original contracts and a duplicate of a replacement contract, and documents used in the applications and surrenders of the contracts.

¶ 14 DeWitt, who has an associate's degree in accounting, testified that he prepared several spreadsheets to compare the aggregate dollar amounts of the original contracts to the replacement contracts. One of the spreadsheets, identified as exhibit 145, included columns comparing (1) the surrendered original contract totals plus their market value adjustments (MVAs) to the replacement contracts with bonuses, which calculated a total loss of $ 99,480.95 for all 21 clients and (2) the surrendered original contract totals plus MVAs to the replacement contracts without bonuses, which calculated a total loss of $ 297,457.06 for all 21 clients. In explaining exhibit 145, DeWitt testified that he was told by Finnigan to distinguish between the values of the replacement contracts with bonuses and without bonuses. DeWitt also testified that "the Department doesn't recognize a bonus as a reason for switching an annuity."

¶ 15 DeWitt...

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