CHICAGO (CN) – In a “horrific scheme” to earn “tens of millions of dollars in commissions,” Merrill Lynch financial advisors took money set aside for funerals and invested it in life insurance policies that led to a $100 million deficit, the Illinois Funeral Directors Association claims in a class action in Cook County Court.
The association offers “pre-need contracts,” which allow people to arrange and pay for their own funeral services, through the IFDA Preneed Trust Tax-Exempt Funds. These funds were “to be invested in a manner providing optimum growth plus safety of principal … on a tax-free basis,” the lawsuit states.
Funeral directors say pre-need contracts give customers peace of mind, and spare survivors “the emotional and financial obligations associated with a funeral.”
IFDA members claim Merrill Lynch told them that the funds had been invested in “safe and tax-exempt investment vehicles such as AAA municipal bonds.”
However, Merrill Lynch advisors placed the trust funds in life insurance policies that did not meet pre-need regulations, because they are “not easily convertible to cash and do not confer a fixed death benefit, but rather offer a payout depending upon the performance of the life insurance policies’ subaccounts,” the complaint states. “What’s more, many of the life insurance policies are subject to a 10 percent excise tax if the policies are terminated or if funds are borrowed or withdrawn before the insured reaches 59 ½ years old.”
IFDA members say they suffered “great financial losses and grievous damages to their goodwill and profession,” while Merrill Lynch reaped huge rewards, including tens of millions of dollars in commissions, administrative fees and mortality charges.
Merrill Lynch advisors and insurance providers also failed to properly analyze if the life insurance contracts were in the best interest of the IFDA and its members, and they tried to continue the “charade” even after it blew up, the plaintiffs claim.
They say Merrill Lynch advisors solicited “unsuspecting funeral directors” in Illinois, “luring them with the promise that permitting themselves to be insureds would endow IFDA.”
Because of these poor investments, IFDA members have allegedly been forced to honor the guarantees of the pre-need contracts, though they no longer have enough money in the pre-need trust.
They allege consumer fraud, civil conspiracy, unjust enrichment and conversion. Defendants include Merrill Lynch; Pierce, Fenner & Smith; Merrill Lynch Life Agency; Merrill Lynch Life Insurance; and Merrill Lynch employees Edward Schainker, Paul Felsch and Mark Summer.
Class members are represented by Kenneth Wexler of Wexler Wallace, and Barry Montgomery of Williams Montgomery.