Cemetery operator 'misused' millions
By Jim Dooley
Advertiser Staff Writer
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Between $20 million and $30 million owed to as many as 50,000 purchasers of "pre-need" funeral plans and cemetery plots in Hawai'i is missing from trust accounts, according to a court-appointed official examining the books of the RightStar group of companies.
A preliminary review of RightStar's finances "has revealed that the Pre-Need Trusts have been routinely misused, mismanaged and looted by those who operated the RightStar companies," said John Candon, selected in May 2005 by state Circuit Judge Sabrina McKenna to oversee a financial accounting of the trusts.
In court papers filed March 2, Candon said there is a "shortfall" of $20 million to $30 million in RightStar pre-need trust accounts held for the benefit of 40,000 to 50,000 customers. Candon said more precise numbers can't be determined until a contract-by-contract examination of the accounts is conducted.
RightStar owns and operates Valley of the Temples on O'ahu, Maui Memorial Park on the Valley Isle, and Homelani and Kona Memorial Parks on the Big Island. RightStar also owns several companies here that sell and administer "pre-need" funeral plans, including 50th State Funeral Plan.
The company purchased the cemeteries and related mortuary and funeral plan trust assets in 2001, and the state licensed RightStar to operate them in November 2001.
ONGOING CIVIL LAWSUITS
RightStar's financial problems surfaced in 2004, prompting lawsuits and a state criminal investigation and leaving many consumers in limbo about their funeral plans and plot purchases.
State officials and a lawyer for a firm trying to take control of the RightStar companies through a foreclosure action said in court yesterday that all consumer contracts for pre-need, funeral and perpetual care contracts will be honored while terms and conditions of a sale to a new owner and operator are negotiated.
The RightStar companies and their former operators and trustees, including former Hawai'i Gov. John Waihee, are the subjects of ongoing civil lawsuits and a criminal investigation conducted by the state attorney general. They have denied any wrongdoing.
William McCorriston, attorney for Waihee and other trustees, couldn't be reached for comment yesterday. He said last year it was his clients who "informed the attorney general of irregularities and delinquencies" and that information "was the genesis of their investigation."
'NATIONAL SCANDAL'
Attorney General Mark Bennett has been involved in trying to negotiate a settlement of the foreclosure action, which would clear the way for a sale of the financially troubled companies to a new owner and operator, Deputy Attorney General James Paige said.
Candon reported that Hal Martin, head of American Funeral and Cemetery Trust Services, a Portland, Ore.-based firm now involved in management of the trust funds, said last month that financial failure of the RightStar accounts would create "an awful national scandal." If the trusts are not transferred to a successful cemetery operator, Martin said, "it would be the biggest scandal ever to hit the (funeral) industry."
Candon described several different ways in which he said money was "improperly withdrawn" from the trust funds:
Valley of the Temples customer John Quirones, who owns burial plots at the facility and makes monthly payments on several "pre-need" plans, said yesterday he hopes his contracts are still valid.
"They sent me a payment booklet and I pay every month," Quirones said.
Guido Giacometti, another court-appointed official who is in charge of the day-to-day operation of the RightStar assets, said: "We are honoring the contracts and will continue to do so."
In his court filing, Candon alleged that the former RightStar operators improperly withdrew $7 million from the pre-need trusts by changing the formula for depositing customers' installment payments into the funds.
Before RightStar, Candon said, up to 30 percent of each monthly payment was retained by the company and 70 percent was deposited into the trust accounts. The new owners changed the procedure, retaining all customer payments until its 30 percent portion of the contract value was recovered, and then depositing subsequent payments into the trust accounts.
And that wasn't just for new contracts sold by RightStar, Candon said. The new owner applied the formula to all accounts, taking "an estimated $5.7 million from the pre-need trusts on the basis of this accounting change," Candon said.
In what Candon called "the bundled contracts dodge," the former owners combined pre-need funeral services plans with cemetery plot purchases and said the services would be provided free of charge. That meant that no portion of a customer's pre-need payments had to be put in trust because it was all earmarked as payment for a burial plot, Candon said.
Candon said the estimated $7 million loss from the bundled contracts alone "could be much higher and will not be known with certainty until a 'contract-by-contract' analysis is completed."
Candon also questioned the propriety of a decision by RightStar to place $22 million of trust fund assets in an investment vehicle called Vestin Fund II, which is affiliated with Vestin Mortgage Inc., the Las Vegas-based lender that financed RightStar's purchase of cemeteries and funeral businesses in 2001.
CASHING OUT
The state has attempted to recover that money but the fund operators have said terms of the investment only allow recovery of 10 percent per year, meaning full recovery of the money couldn't be completed until the year 2015.
Vestin spokesman Steve Stern said yesterday from Las Vegas that Vestin Fund II has outperformed all other trust fund investments made by RightStar. The fund is being converted soon to a more liquid form that will be publicly traded and will allow investors to cash out if they so choose, Stern said.
Attorney Grant Kidani, representing Alternative Debt Portfolios, a company that bought some of RightStar's outstanding burial plot and funeral service contracts, said in court yesterday that RightStar and Vestin were in a "collusive" relationship, a charge hotly denied by Vestin lawyer Paul Alston.
"We want to get to the bottom of this because we are one of the primary victims," Alston said.
He said the financial problems were the result of "dishonesty and deceitful practices by the debtors (RightStar), the managers and others." State personnel, who license and regulate cemeteries and funeral businesses, "failed to oversee the operations of RightStar," Alston added.
HEARING TOMORROW
Vestin has also objected to Candon's activities, saying they are an unnecessary and expensive duplication of work already performed by others.
Those objections and a discussion of Candon's report will be taken up in another hearing scheduled for tomorrow morning before Judge McKenna.
Yesterday's court hearing involved an attempt by the state to amend the terms of a foreclosure sale of RightStar's assets, making any new purchaser liable for repayment of customers' funds removed from the trust accounts because of improperly cancelled contracts.
McKenna asked attorneys in the case to submit additional arguments on that point.
Reach Jim Dooley at jdooley@honoluluadvertiser.com.
