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Van Dyke v. White

Court of Appeals of Illinois, Fourth District

September 7, 2016

RICHARD LEE VAN DYKE, d/b/a Dick Van Dyke Registered Investment Advisor, Plaintiff-Appellant,
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.

          Rule 23 order filed July 29, 2016

          Rule 23 order withdrawn September 7, 2016

         Appeal from the Circuit Court of Sangamon County, No. 14-MR-305; the Hon. John W. Belz, Judge, presiding.

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

          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.

          Panel JUSTICE TURNER delivered the judgment of the court, with opinion. Justices Harris and Holder White concurred in the judgment and 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 ...

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