Public Safety | Daily Report

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Executives at a California funeral trust accused of financial malfeasance argue that state auditors are mischaracterizing common practices as nefarious and basing allegations on inaccurate numbers.

Last week, state Attorney General Kamala Harris filed a lawsuit [PDF] against the California Master Trust, its trustees and a number of mortuary owners. The civil action is based on an audit by the California Department of Consumer Affairs, which accuses the defendants of a host of improprieties, including paying illegal kickbacks and fees.

The trust, valued at roughly $63 million, manages “preneed” funeral accounts into which consumers pay their funeral expenses months or years before death.

In November, the trust and its primary operator, the Funeral Directors Service Corporation, filed their own lawsuit against the state seeking to force auditors to revise their conclusions.

At stake is $14 million that the state’s lawyers now say the California Master Trust must pay to its customers.

Among other defenses, trust executives point out that the state’s Cemetery and Funeral Bureau did nothing to block their actions when they were taking place. In its lawsuit, the funeral directors corporation writes that it “has relied on the Bureau’s inaction in response to the annual reports filed by the (California Master Trust) as an implicit approval of the practices and procedures implemented by the (trust).”

The back-and-forth further muddles an already complex dispute.

Here is California Watch’s breakdown of the key allegations, the funeral director’s rebuttals, and further clarification where possible:

Allegation: The trust’s executives used an accounting trick to paper over more than $15 million in investment losses during 2001 and 2002. The funeral directors corporation issued a promissory note to assume ownership and responsibility for the decline, taking it off of the trust’s books.

Those operating the trust (Comerica bank and the funeral corporation) only receive administrative fees when the accounts generate net income; the maneuver allowed the trust to pay $4.8 million in those years.

Rebuttal: The promissory note was a smart fix to a challenging quandary, according to Grace Bergen, a Sacramento attorney representing the California Master Trust. People don’t work free and if the trust was unable to pay fees, no one would have administered the accounts.

“It was a real problem and would have been the end of the trust,” Bergen said. “And all the consumers would have suffered who had wanted to have these plans in place for their death.”

Further, the promissory note was only for $9.7 million in 2001, not the more than $15 million auditors claim, she said. The funeral directors have repaid all but $1.3 million of that debt.

Additional information: In question is $6 million that the trust reported as an investment loss in 2002. State auditors count this as being on top of the $9.7 million lost the year before, brining total losses to more than $15 million.

Bergen disputes that as a mischaracterization, or auditor’s “magic math.” The $6 million in 2002 reported losses are not additional investment declines, but the amount the funeral directors corporation owed on the promissory note at that point.

This version suggests that the corporation in one year managed to pay off about $3 million in debt. However, the funeral directors’ audit responses [PDF] state they had only $1.5 million in “liquid reserves.” It is unclear how the corporation made such a large payment on the note and covered the rest of its bills.

Allegation: Hundreds of funeral homes that invest their preneed funeral dollars with the trust have received kickbacks, totaling $4.6 million since 2000.

Rebuttal: The payments aren’t kickbacks, Bergen said. Selling and managing preneed accounts come with costs for mortuaries. The above-mentioned disbursements help cover those expenses and encourage the businesses to sell more preneed services, growing the trust.

Any payments are deducted from what funeral homes receive from the accounts when providing services after the customer dies.

Additional information: The state consumer affairs department argues the rebuttal is irrelevant. “No money is allowed to be paid in advance of service,” said Kim Brown, a spokeswoman for the state consumer affiars department.

Allegation: The trust failed to reimburse more than 600 customers when the mortuaries that sold them “preneed” accounts went out of business or lost their state licenses.

Rebuttal: Trust executive do their best to keep tabs on the more than 300 mortuaries they work with, Bergen said. Customers can shift their accounts from the closed funeral homes to another.