State Alleges Giant Scam in Prepaid Funerals
LOS ANGELES (CN) - California claims one of the nation's largest funeral trusts illegally diverted millions of dollars for prepaid funerals, paid unauthorized fees to for-profit management companies, paid illegal kickbacks to funeral homes and spent customers' money inappropriately.
The California Attorney General filed the lawsuit on behalf of the state's Cemetery and Funeral Bureau, which regulates the state's funeral industry.
Defendants in Superior Court include the California Master Trust and its administrators, the Funeral Directors Service Corporation (FDSC), the California Funeral Directors Association (CFDA), and other California corporations and officers of FDSC.
California claims that "in or about 1985, defendant CFDA and its board members concocted a plan to pool the preneed funeral arrangement trust funds of tens of thousands of California consumers into one master trust," and have CFDA manage the funds.
"To avoid tax problems, in or about 1985 CFDA incorporated defendant FDSC, a for-profit corporation, to manage the trust and to funnel funds from the trust to support CFDA's activities and agenda," the complaint states.
The state says the trust controls more than $63 million taken from more than 27,000 California consumers who paid in advance for funeral services for themselves or loved ones.
"The majority of preneed funeral purchasers are among California's most vulnerable and trusting consumers," most of whom are over 65, according to the 60-page complaint.
California says FDSC and CFDA unlawfully retained control over the trust by hiring banks to act as trustees. "In practice, these banks delegated actual control of the trust and decision-making power over the trust to FDSC and its parent company, CFDA," although neither could legally manage a funeral trust, the state says.
It claims the defendants illegally withdrew money from the trust and paid themselves excessive administrative fees, even when the trust suffered losses from risky investments.
California says the defendants "conspired to create, adopt, and/or implement a fraudulent scheme to conceal the $9.8 million loss. The purpose of this scheme was to justify the continued withdrawal of administrative fees to pay themselves and others and to avoid disclosure of and potential liability for the loss."
The state says the defendants devised a "disparity resolution plan" whereby "FDSC would 'purchase' the loss by executing a non-interest bearing promissory note in favor of the trust," which would offset the loss on annual financial statements.
"In furtherance of said defendants' scheme to defraud, FDSC and [defendant trustee] Comerica Bank chose not to provide a copy of the Disparity Resolution Plan to the trustor-beneficiaries, the enrolled funeral establishments, or the Bureau," the complaint states.
The state says, "the trust's 2001 audit report that was submitted to the Bureau was false and misleading, had material omissions, and was incomplete. To offset $9.8 million loss in the trust's 2001 audit, which was at $9.5 million as of December 31, 2001, said defendants represented that the trust earned approximately $9.4 million of income, called 'disparity resolution income.' This representation was false. The Trust had not earned any such income in 2001."
The state says the defendants also misrepresented the trust's 2002 audit report. By not reporting a loss for the 2 years, the defendants were able to pay themselves and their associates at least $4.8 million in administrative fees, according to the complaint.
The defendants paid more than $4.6 million in illegal kickbacks to funeral homes from clients' trust funds and used prepaid funeral money to pay for non-trust related expenses, which were misrepresented as administrative trust expenses, according to the complaint.
The state says that the defendants kept "funds owed trustors after a funeral establishment became unable to perform contracted funeral services" and failed to promptly refund customers' money in case of contract revocation.
"On or about November 9, 2007, the Bureau requested records from defendants FDSC and Comerica Bank to perform an audit of the preneed funeral trust funds held in the trust. Despite this request and several subsequent requests, said defendants refused or failed to provide sufficient records for the Bureau to perform its audit," the state says.
In response to a 2010 subpoena from state regulators, "FDSC finally produced approximately 61 boxes of trust documents that it had been storing in Oregon," but did not produce all of the requested documents, the state says.
The Cemetery and Funeral Bureau, a branch of the California Department of Consumer Affairs, seeks restitution and an injunction, and it wants the FDSC removed as the fund administrator.