Bad, Bad Week in Indiana Courts for NEA, ISTA

You would think losing a voucher challenge would be enough of a blow for NEA and the Indiana State Teachers Association, but they got some more bad news when U.S. District Court Judge Sarah Evans Barker refused to grant them summary judgment to dismiss the state securities commissioner’s $24 million lawsuit against them. The state accuses ISTA of unlawful sale of securities and fraudulent misrepresentation in connection with the collapse of its insurance trust. The state alleges NEA is also liable because of its oversight of the UniServ program. The case is scheduled to go to trial October 28.

In her 31-page ruling, Judge Barker chides the unions for their characterization of some of the evidence:

Ultimately, the most troubling aspect of the ISTA’s chief argument (to wit, that the  Trust arrangement was in no way an “investment”) is the incorrect characterization of the facts upon which it relies. Our review of the record indicates that a number of facts—many of them material—cannot properly be considered “undisputed.” The fact that this case involves group health plans for a number of school districts hinders our ability to reach broad conclusions as to expectations of profit or benefit. Several evidentiary items actually sharply undercut the ISTA’s argument that the school districts did not anticipate some sort of economic benefit to result from their participation in the Trust.

“Today is a major step forward in our efforts to reclaim teachers’ hard earned money,” said Indiana Secretary of State Connie Lawson. “We look forward to the opportunity to present the evidence supporting the allegations of wrongdoing by ISTA and the NEA in our pursuit of full recovery of the losses suffered by the victims.”

I don’t know much about insurance and securities law, but it appears to me that ISTA is exposed, mostly because it used expected returns on investment as a selling point during collective bargaining negotiations to persuade school districts to use the insurance trust. Knowing what I know about how the UniServ program operates, NEA is probably safe. NEA helps pay for UniServ directors, and has the ability to utilize them for its own purposes, but it doesn’t exercise day-to-day control over them. The ISTA leadership, which does exercise that control, claims it didn’t know its own executive director had committed alleged acts of malfeasance. It would be difficult to put Dennis Van Roekel on the hook for that.

Unfortunately for NEA, it’s not that simple. Even if the national organization is exonerated, most of any penalties assessed against ISTA ultimately would have to be paid by NEA. The Indiana union is already in hock up to its eyeballs and under NEA trusteeship. NEA is also in the awkward position of claiming that once it sends about $1.2 million in UniServ grants annually to ISTA, it has no control whatsoever over what UniServ directors do. Judge Barker said the trial will decide that:

None of these privileges, of course, can definitively establish that the NEA retained full control over the UniServ Directors. Nevertheless, the 2008 UniServ Agreement considerably weakens the ISTA’s position that the NEA exercised no operative control of these individuals. The following aspects of the UniServ arrangement lead us to conclude that genuine disputed issues of material fact remain: the UniServ Directors’ reliance on NEA for a significant portion of their salary; the fact that the NEA could “use each UniServ [Director] for up to 10 working days each year;” the NEA’s demonstrated commitment to supervising the UniServ Directors’ career development activities; and the NEA’s intermittent “review of the total statewide UniServ Program.” 2008 UniServ Agrmt. at 4-5. Likewise, the NEA’s reservation of the right to “make the final decision” regarding activities it funded belies its insistence that it did not supervise the UniServ Directors. These aggregated facts, as well as the ISTA’s proffered testimony regarding who the UniServ Directors regarded as their “supervisor,” preclude us at this time from granting judgment as a matter of law in favor of the NEA. Whether the NEA “fell asleep at the wheel” (or, of course, whether the NEA was duty-bound to “steer” at all), so to speak, in its relationship with the UniServ Directors is a determination that must be reserved for trial.

There often has been some tension between NEA’s depiction of itself as one united organization while simultaneously insisting affiliates are entirely independent. That’s hardly unique to the teachers’ unions, but in this case NEA may be forced to accept the damages caused by that relationship, rather than just reap the benefits.