Van Dyke v. White

• Decision Date: 07 September 2016
• Docket Number: No. 4–14–1109.,4–14–1109.
• Citation: 60 N.E.3d 1009,406 Ill.Dec. 458
• Parties: Richard Lee VAN DYKE, d/b/a Dick Van Dyke Registered Investment Advisor, Plaintiff–Appellant, v. Jesse WHITE, in his Official Capacity as Illinois Secretary of State; the Illinois Department of Securities; and Tanya Solov, in her Official Capacity as the Director of the Illinois Department of Securities, Defendants–Appellees.
• Court: United States Appellate Court of Illinois

60 N.E.3d 1009

406 Ill.Dec. 458

Richard Lee VAN DYKE, d/b/a Dick Van Dyke Registered Investment Advisor, Plaintiff–Appellant,

v.Jesse WHITE, in his Official Capacity as Illinois Secretary of State; the Illinois Department of Securities; and Tanya Solov, in her Official Capacity as the Director of the Illinois Department of Securities, Defendants–Appellees.

No. 4–14–1109.

Appellate Court of Illinois, Fourth District.

Sept. 7, 2016.

William P. Hardy (argued), of Hinshaw & Culbertson LLP, of Springfield, for appellant.

Lisa Madigan, Attorney General, of Chicago (Carolyn E. Shapiro, Solicitor General, and Christopher M.R. Turner (argued), Assistant Attorney General, of counsel), for appellees.

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

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

Christopher D. Galanos, of Quinn, Johnston, Henderson, Pretorius & Cerulo, of Springfield, amicus curiae.

Anne–Valerie Mirko, of North American Securities Administration Association, Inc., of Washington, D.C., amicus curiae.

OPINION

Justice TURNER delivered the judgment of the court, with opinion.

¶ 1 In March 2013, the Illinois Department of Securities (Department), under Illinois Secretary of State Jesse White (Secretary), filed a notice of hearing alleging plaintiff, Richard Lee Van Dyke, d/b/a Dick Van Dyke Registered Investment Advisor, defrauded clients by recommending the sale of indexed annuities in violation of Illinois law. In April 2014, the Secretary found Van Dyke committed fraud, revoked his investment-adviser registration, and imposed a fine and other costs. Thereafter, Van Dyke filed a complaint for administrative review. In December 2014, the circuit court affirmed the final administrative order.

¶ 2 On appeal, Van Dyke argues (1) the Department had no jurisdiction over the marketing and sale of indexed annuities by insurance producers; (2) the Department failed to prove fraud and acted arbitrarily; and (3) the fines and penalties imposed were arbitrary, excessive, contrary to the evidence, and inconsistent with fines imposed in other cases. We reverse the circuit court's decision and the Secretary's final order.

¶ 3 I. BACKGROUND

¶ 4 At the relevant times in this case, Van Dyke was registered with the Department as an investment adviser. Investment advisers are regulated by the Department under the Illinois Securities Law of 1953 (Act) (815 ILCS 5/1 to 19 (West 2012)). Van Dyke was also licensed by the Illinois 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)).

¶ 5 In March 2013, the Secretary 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 Secretary alleged Van Dyke “defrauded over 21 clients, all of whom are senior citizens, of $263,822.13.” The Secretary also alleged as follows:

“Dick Van Dyke recommended and sold 31 transactions that resulted in the early surrender of Indexed Annuities in order to purchase new Indexed Annuities. For these transactions Dick Van Dyke received $160,937.05 in commissions but his clients lost $263,822.13 in surrender charges, penalties and other fees. In addition, Dick Van Dyke, in all but one transaction, had sold the surrendered Indexed Annuity and had received $155,341.51 in commissions from the transactions.”

The Secretary stated all of the purchase transactions reviewed by the Department involved persons age 58 or older at the time of the transactions, with the oldest person being 82. The Secretary alleged 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)).

¶ 6 Van Dyke filed a motion to dismiss, arguing the Department had no jurisdiction because section 2.14 of the Act (815 ILCS 5/2.14 (West 2012) ) excluded indexed annuities from the Act's definition of “security” and because he did not act as an investment adviser. The hearing officer denied Van Dyke's motion, finding the indexed annuities were subject to the Act's provisions and the notice alleged sufficient facts to impose sanctions against Van Dyke as an investment adviser.

¶ 7 Evidence presented at the administrative hearing indicated Van Dyke prepared financial plans for clients, in which he provided investment advice and recommendations for the sale and purchase of financial products, including indexed annuities. For example, Van Dyke provided a financial plan to a client, in which he identified himself as a registered investment adviser, recommended the sale and purchase of various investments (including indexed annuities), and represented the summary was based on his professional opinion as a registered investment adviser.

¶ 8 The relevant financial contracts at issue here are equity-indexed annuities. In contrast to traditional fixed annuities, indexed annuities offer, in addition to a minimum annual return, a potential return on the account value that is tied through a formula to the performance of one or a combination of selected stock market indexes, such as the S & P (Standard & Poor's) 500 stock index, NASDAQ (National Association of Securities Dealers Automated Quotations)–100 index, or FTSE (Financial Times Stock Exchange) 100 index.

¶ 9 In March 2014, the hearing officer filed his report and recommendation. Therein, he found the documents disclosed that from February 2009 through October 2010, Van Dyke effected 33 indexed annuity purchase transactions involving the liquidation of 30 previously owned indexed annuity contracts by 21 of his clients, resulting in surrendered annuity contract commissions of $183,161.58, and $177,417.42 in new annuity contract commissions. The officer also found as follows:

“Twenty-nine of the 30 previously-owned Indexed Annuity contracts had been recommended for purchase by [Van Dyke.] Five of 29 of the surrendered annuity contracts had eight years remaining until they could be surrendered without penalty, 20 contracts had seven years remaining until they could be surrendered without penalty. Surrender penalty charges ranged from $2,078.39 to $21,291.66. Six surrendered contracts had bonus recapture fees that ranged from $2,232.01 to $8,940.48. Twenty- nine of the surrendered annuity contracts had positive market value adjustments. The contract value for the 30 surrendered Indexed Annuities totaled $2,327,904.95. However, the final amount credited to the 21 clients only totaled $2,246,897.59. Eleven of the 30 surrendered annuities resulted in eight clients having taxable income reported.”

¶ 10 The hearing officer also found all but one of the 33 new indexed annuities featured higher fees and the start of new surrender penalty periods. Eight of the new contracts had 12–year surrender penalty periods, 21 had 10–year surrender penalty periods, and 4 had 6–year surrender penalty periods.

“Twenty-four of the new Indexed Annuities had 10% bonuses, eight had 5% bonuses, and one had an 8% bonus. However, four of the new Indexed Annuity contracts required the owners to wait 15 years before having access to the full bonus value upon surrender, seven had to wait 12 years, 14 had to wait for 10 years, and four had to wait for six years. The four Indexed Annuity contracts that did not have bonus recapture periods provided that the owner may receive less than the premiums paid if the annuity contracts were surrendered within the surrender penalty periods.”

The hearing officer found all 33 transactions were solicited and made at Van Dyke's recommendation.

¶ 11 In his conclusions of law, the hearing officer found Van Dyke had violated section 12 of the Act, concluding Van Dyke's actions, statements, representations, and/or omissions tended to work a fraud or deceit on Illinois purchasers; were untrue or misleading; and were fraudulent, deceptive, or manipulative.

¶ 12 In April 2014, the Secretary issued a final order adopting, in relevant part, the hearing officer's recommended findings of fact and conclusions of law. Therein, the Secretary found Van Dyke was a registered investment adviser under the Act at all relevant times and “provided investment advice, financial planning and recommendations to purchase financial products including Indexed Annuities.” As a registered investment adviser, Van Dyke was under a fiduciary duty to act in the best interests of his clients. The Secretary found the indexed annuities are securities under the Act that, although exempt from registration with the Department, are subject to other provisions of the Act.

¶ 13 The Secretary found the indexed annuity transactions “were both unsuitable and not in the best interests of the clients due to the age of the clients, the surrender penalties incurred due to the early liquidation of the existing Indexed Annuity contracts, the frequency of the commissions paid and no derivation of additional tax benefits.” The Secretary found Van Dyke offered and sold at least 33 indexed annuities in violation of the Act and those transactions

“worked or tended to work a fraud or deceit upon the purchasers thereof by representing to and misleading [his] clients who liquidated an existing annuity contract to purchase a new annuity contract that the surrender penalty charges to be incurred would be recovered by a positive market value adjustment, that the new annuity contract provided favorable bonuses and interest thereon, and that the new annuity was a better investment over their current annuity and in the client's best interests.”

Further, the Secretary found Van Dyke employed...