Quinn for Illinois

QUINN CAMPAIGN DEMANDS ANSWERS FROM DAN HYNES

ON EIGHT-YEAR COVER-UP OF $100 MILLION FUNERAL FUND SCANDAL

Says Failure To End 8-Year Fraud Undermines Claim

Of Effective Fiscal Management

CHICAGO --- The Quinn for Illinois campaign is calling on Comptroller Dan Hynes to give honest answers to consumers about the Illinois Funeral Directors Association Pre-Need Trust Fund – a Madoff-style Ponzi scheme that flourished for almost a decade under the Comptroller’s direct supervision.

 “When Dan Hynes claims in his TV ads to be a good fiscal manager, Illinois voters need to take it with a $100 million grain of salt,” said Quinn campaign spokeswoman Elizabeth Austin.

The basic issue is simple: In 2001, Dan Hynes learned that the IFDA’s pre-need trust fund was losing money. In just one year, the fund balance had dropped from an $18 million surplus to a troubling deficit.

 Yet, according to legal filings and newspaper accounts, Comptroller Hynes waited eight long years before taking action to protect consumers. As a result, an estimated $100 million in consumer dollars vanished from the fund, and hundreds of family-owned funeral homes throughout Illinois are facing serious financial losses – even bankruptcy.

 “We all know that Dan Hynes waited far too long to act on disturbing reports about conditions at the Burr Oak Cemetery,” Austin said.  “The IFDA scandal shows that Comptroller Hynes has a decade-long history of ignoring serious problems – with disastrous consequences for 50,000 Illinois consumers.”

Austin noted that Hynes has refused to provide documents requested by Bruce Rushton, a reporter for the Springfield State Journal-Register, that might shed light on the Comptroller’s delay in acting to end the fraud and protect consumers.

“When well-respected journalists file legitimate requests for information from his own office, Comptroller Hynes loses his enthusiasm for transparency, accountability, and the public’s right to know,” Austin said.

Here’s what we know so far about the scheme, and about Comptroller Hynes’ failure to stand up for Illinois consumers:

BIRTH OF A PONZI SCHEME 

In 1980, the Comptroller’s office licensed Illinois Funeral Directors Association Services to administer a “pre-need” funeral trust fund. Using these funds, consumers can plan and pay for funerals in advance. In this case, the funeral costs were paid to local funeral directors, who then invested the consumers’ deposits in the IFDA trust fund. Over time, about 50,000 consumers paid $300 million into the fund.

Normally, these pre-need funeral trust funds – which by law are supervised by the Comptroller’s office – are conservatively invested. That way, the funds generate a modest but reliable profit, so funeral home directors do not lose money when they provide a funeral in 2010 that was bought at 1995 prices.

However, in the mid-1980s, IFDA Services embarked on a risky investment scheme, using the bulk of consumers’ money to buy expensive “variable universal life” (VUL) insurance policies on funeral home directors.

VUL policies do not provide a specified death benefit; instead, the actual payout depends on the ups and downs of the stock market. They carry hefty management fees, and they can trigger huge tax penalties on payout. These policies also have low cash values, so fund managers can’t readily bail out and find better investments if the stock market tanks.

The entire scheme depended on receiving frequent cash injections from these insurance policies. That meant the insured funeral home directors had to die on schedule – which, not surprisingly, they failed to do.

These VUL insurance policies do have one huge advantage – for the agents who sell them. The premiums on these policies are very high. A lawsuit against the IFDA states that the fund paid $90 million in premiums on insurance policies with total death benefits estimated at $357 million. Since the scheme’s final collapse in 2009, the majority of those policies are being cashed in – for about $100 million.

Clearly, the VUL insurance strategy was doomed from the start. So to keep investors from suspecting chicanery – and to keep on snaring new, unwary consumers – the IFDA trust fund apparently used money from new investors to pay a modest but steady stream of “profits” to previous investors. That is exactly the “Ponzi scheme” system made infamous, most recently, by Bernard Madoff.

FIRST SIGNS OF TROUBLE

In 2001, a routine audit by the Comptroller’s office found that the balance of the IFDA trust fund had started to shrink – going from an $18 million surplus to a deficit that Comptroller Hynes’ office brushed off as “pennies on the dollar.”

But instead of taking action to protect consumers, the Comptroller’s office inexplicably stopped requiring regular audits of the IFDA trust fund. As a result of Comptroller Hynes’ failure to provide oversight, as required by law, the trickle of losses silently became a stream.

While Comptroller Hynes looked the other way, the IFDA fund continued to take in more and more pre-need deposits, and the fund’s trustees continued to pay hefty management fees while taking in more and more unwary new investors to keep the scheme afloat. At one point, the fund’s losses mounted to $25,000 a day.

Meanwhile, the IFDA’s leadership rewarded themselves with hefty six-figure salaries, perks, and fringe benefits and the Fund’s investment adviser, the architect of the scheme, was reaping massive commissions.

Only in 2005 did Comptroller Hynes finally get around to ordering an audit of the IFDA trust fund’s books. By that time, the deficit in the fund had grown to nearly $39 million. IFDA Services, unsatisfied by the law’s limits on management fees, had awarded itself excess fees of $8.6 million – over and above the 25% management fees allowed by statute.

Faced with these mounting losses that had occurred on his watch, Comptroller Hynes took action: He sent IFDA a letter ­– by certified mail.

In the letter, dated June 21, 2006, the Comptroller’s office reprimanded IFDA Services for paying itself handsomely while the trust fund hemorrhaged cash, and told the fund’s administrators that they should repay the excess fees. The letter also called the $39 million deficit in the trust fund “an intolerable situation,” and threatened “appropriate” action.

WHAT COMPTROLLER HYNES COULD HAVE DONE TO PROTECT CONSUMERS

Under the Illinois Funeral or Burial Fund Act, all sellers of pre-need funeral contracts must submit annual reports to the Comptroller’s office detailing the health of their funds. So Comptroller Hynes should have known that the IFDA fund was in trouble long before 2006.

The Comptroller also has the legal power and responsibility to audit any of these funds – especially if they start to show losses. As noted in the statute, “The Comptroller may order additional audits or examinations as he or she may deem necessary or advisable to ensure the safety and stability of the trust funds and to ensure compliance with this Act.”

Additionally, the Comptroller has the power to suspend or revoke a license to sell pre-need contracts if the licensee has made false statements or concealed important facts about the trust – as clearly had happened with the IFDA fund. The Comptroller also has the power to yank a license if the fund is insolvent, if the licensee refuses to open its books to state auditors, or if the licensee commits fraud.

Finally, the Comptroller has the statutory power to ask the courts for an injunction to prevent a trust from bilking consumers or engaging in risky, imprudent investment practices.

But even though Comptroller Hynes knew the fund was in trouble as early as 2001, he did not take action, despite his many legal powers and his responsibility to protect Illinois consumers.

WHAT COMPTROLLER HYNES DID INSTEAD

Instead, Comptroller Hynes and his staff held several meetings with the IFDA’s leaders during the summer of 2006. (To excuse his slowness to act, the Comptroller’s staff later explained that the Fund’s Ponzi scheme of ill-advised insurance purchases and fraudulent payments required “sophisticated analysis.”)

Meetings with the IFDA continued until September 2007 – more than a year after the Comptroller’s threatening letter – when Comptroller Hynes finally revoked IFDA Services’ license and told the IFDA that it had just one year to find a trustee to take over the Fund.

By early summer 2008, Comptroller Hynes had identified a new trustee, which finally took over the Fund in November of that year. By that point, the Fund already had written off $59 million of losses – dollars that consumers had deposited with the Fund in good faith.

Despite the heavy losses, funeral home directors were required to keep on providing the services their pre-need customers had purchased – even though the pre-need fund now provided only a fraction of reimbursement for their actual costs. As a result, many funeral home directors were forced to pay for funerals out of their own pockets, and some report losses reaching six figures. Some smaller family-owned funeral homes are even facing bankruptcy because of the scheme’s collapse.

Yet from 2006 to 2008, when a flurry of lawsuits were filed over the IFDA losses, Comptroller Hynes did nothing to protect funeral homes and their customers from continuing to invest more of their money into this fraudulent Ponzi scheme.

In a July 2009 interview with the State Journal-Register – whose reporter, Bruce Rushton, first brought the IFDA scheme to light – Comptroller Hynes claimed he kept quiet about the Fund’s problems because he did not want to frighten consumers, who would have withdrawn their deposits.

Comptroller Hynes also admitted to the State Journal-Register that he didn’t want to make headlines.

Instead, Comptroller Hynes allowed IFDA Services to keep its license – and keep on marketing the scheme -- while thousands of Illinois consumers continued to deposit millions of dollars in the fraudulent and now-failing Fund.

As Rushton noted: “The longer the situation festered, the steeper the losses became.” At last count, the Fund’s losses were estimated at $100 million.

HYNES: `I THINK WE DID OUR JOB’

A November 17, 2008 letter to funeral home directors said Comptroller Hynes had maintained three major goals throughout its multi-year investigation of the IFDA Fund:

·      “First, to protect thousands of Illinois consumers who have purchased pre-need goods and services;

·      Second, to ease, to the extent possible, potential losses to our licensees; and

·      Third, to prevent the potential collapse of your industry.”

When asked by the State Journal-Register why he stood by for so long and allowed so many Illinois consumers to invest so many millions of dollars in a fund that was clearly collapsing under the weight of fraud and misrepresentation, Comptroller Hynes said: “I think we did our job.”

It is true that, in May 2009, after the State Journal-Register broke the story in a long, detailed series by Rushton and his colleagues, Comptroller Hynes issued an ultimatum to IFDA Services: Repay $10 million in excess fees, or face court action – in May 2010.

In other words, Comptroller Hynes was threatening to take legal action against the scheme’s administrators almost a full decade after his office first noticed the IFDA Pre-Need Trust Fund’s losses. And only after the Fund’s failure began to make headlines statewide did Comptroller Hynes say that he might consider seeking criminal prosecution of the perpetrators of this $100 million fraud. (These types of violations are Class 4 felonies under state law.)

HOW SECRETARY OF STATE WHITE SET AN EXAMPLE FOR HYNES

By contrast, Illinois Secretary of State Jesse White took immediate action once his office became aware of the IFDA Pre-Need Fund’s disastrous financial condition.

The State Journal-Register’s first story on the IFDA Services fund ran on Jan. 31, 2009. Twenty-four days later, the Secretary of State suspended the license of the investment adviser and salesman who sold hundreds of the VUL policies to IFDA Services. The suspension prohibited the adviser from selling securities or offering investment advice.

The director of the securities department in the Secretary of State’s office told the State Journal-Register that her office moved to suspend the adviser’s license as quickly as possible. “At the first inkling that there is a problem, we want to say, `Stop doing your business,” she said.

HYNES: IT’S NOT MY FAULT

In describing his action – or lack of it – to the State Journal-Register’s editorial board, Comptroller Hynes said there was plenty of blame to spread around, to everyone but him.

Comptroller Hynes blamed the IFDA and the financial adviser who created the scheme for continuing to bilk investors while the Comptroller’s Office wasn’t paying attention.

Comptroller Hynes blamed funeral home directors who were victims of the fraud, who are “sophisticated business owners, supposedly,” and should have known that they were being given phony information about the trust and its investments.

Comptroller Hynes blamed the General Assembly for gaps in the law regulating the cemetery and funeral industries. He also blamed the General Assembly for giving his office responsibility for regulating the funeral and cemetery industries.

THE PEOPLE OF ILLINOIS WANT ANSWERS

The State Journal-Register, less inclined to absolve Comptroller Hynes of all responsibility for a $100 million scheme that unfolded under his watch and exploded despite his knowledge, wants more information about what Comptroller Hynes knew about the fund, and when he knew it 

To find out, Ruston has filed formal requests for copies of all audits or financial reviews of the IFDA trust fund, from Jan. 1, 1999, to the present day, as well as copies of all status reports on the fund filed by the IFDA from Oct. 12, 2006 to the present day.

Comptroller Hynes has refused to make this information public, claiming his office does not perform audits – even though the June 21, 2006 letter to the IFDA refers to an attached audit of the Fund.

In a response to Comptroller Hynes’ refusal to release the information, Rushton wrote:

“It appears to me that your office prefers secrecy over disclosure and accountability. And that is not a good thing.

“As you are aware, nearly 50,000 Illinoisans have money in this fund…. Your office is tasked with regulating the funeral industry, and your office holds records that, I am quite certain, consumers and funeral home directors who stand to lose millions of dollars would be very interested in seeing. It is, after all, their money.”

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