Indiana Secretary of State Connie Lawson says the Indiana State Teachers Association and National Education Association have agreed to a $14 million settlement over fraud allegations. Lawson's office says the organizations sold health plans to 27 school corporations and misrepresented how the funds were being used.

August 13, 2013

News Release

Indianapolis, Ind. — Secretary of State Connie Lawson announced today that her office has reached an agreement in principle regarding terms of a settlement for $14 million with the Indiana State Teachers Association (ISTA) and the National Education Association (NEA) for allegedly defrauding Hoosier teachers out of over $27 million. The Secretary of State’s office alleged that ISTA and the NEA sold health plans, which were unregistered securities, to 27 school corporations. ISTA and the NEA then made misrepresentations regarding these securities and improperly commingled funds. The tentative $14 million settlement will go to the school corporations to compensate for their lost investments.

“This is the right result for teachers and schools,” said Secretary Lawson. “The tentative amount puts roughly 50 cents for every dollar lost from this mismanagement back to the school corporations. While $14 million is a significant amount, it does not cover ISTA’s nor the NEA’s full financial obligation to the school corporations. We remain confident in our case, but took the leadership step to get this money in hand for schools as soon as possible.”

ISTA offered teachers and other school employees a medical plan that allowed school corporations to invest their excess balances to offset future health care costs. In the Secretary of State’s complaint, the office alleges that ISTA didn’t invest the money, but instead used the money to cover significant shortfalls in their long-term disability plan. ISTA continuously issued quarterly and annual statements to schools misrepresenting fund balances.

ISTA and the NEA have made several attempts to have the case dismissed and skirt their financial responsibilities to the schools. ISTA has tried to portray themselves as the victim and tried to push all of the blame on David Karandos and state-level ISTA employees who managed ISTA’s investments. ISTA was a victim in the David Karandos case, but this case against ISTA and the NEA is distinct. In this case, the Secretary of State’s office believes ISTA used the money it took from school health plans to cover shortfalls in its long-term disability plan and to invest in risky securities with David Karandos for its own benefit, instead of investing on behalf of the schools as promised.

“ISTA was blatantly covering up their Ponzi-like scheme through falsified account statements,” said Secretary Lawson. “Repeatedly doctoring account statements to create the illusion that investment funds exist after they've been misappropriated is shameful. I hope this case will serve as a warning to others who think they can take advantage of their investors and as a reminder to investors to keep a vigilant eye on their investments. I further believe that ISTA and the NEA have the moral obligation to repay the full amount of losses suffered by these schools.”

ISTA and the NEA have agreed to settlement terms that would return $14 million to the 27 school corporations. The settlement must be agreed upon by each school corporation to avoid sending the case to trial. An October trial date is still on the docket of U.S. District Court Judge Sarah Evans Barker.

This litigation was not fought at the taxpayers' expense. All legal fees were paid from fines collected from violators of Indiana’s securities laws. Secretary Lawson waived the right to levy fines against ISTA and the NEA and to seek repayment of attorney fees so as not to diminish the total amount the school corporations will receive if the settlement is finalized.

“I want to thank my team, Securities Commissioner Chris Naylor and Associate General Counsel Carol Mihalik, for their diligent work over the last four years,” said Secretary Lawson. “It has been a long road, but I believe this agreement, while tentative, is a victory for cash-strapped school corporations and a moment of closure for teachers whose healthcare premiums were misused.”

Source: Office of Indiana Secretary of State Connie Lawson

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