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Case in money-shedding funeral fund closes with lost principal recovered

Case in money-shedding funeral fund closes with lost principal recovered

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Forest Hill Cemetery tombstones

Forest Hill Cemetery in Madison

The death benefits promised by an overly optimistic and now defunct trust fund will live on for its remaining 7,859 investors until they need a funeral.

The court-appointed receiver for the money-shedding Wisconsin Funeral Trust recovered nearly $12 million in settlements, though the fund remains $13.5 million short of its full obligations — making good on prepaid funerals arranged through the Wisconsin Funeral Directors Association — according to the case-closing report filed in Dane County court this week.

Receiver John Wirth spent 32 months recovering money for the fund, now known as the WFT Liquidating Trust.

The trust, started in 1999, collected more than $54 million from investors but by 2012 was worth $48 million and, based on its guaranteed return, owed investors $70.7 million.

At the end of March, even after paying out $12.9 million for burials since the receivership began, the trust’s assets stood at $45.7 million. What was once a total “deficiency” of at least $21 million stands at $13.5 million, according to the report.

Wirth took over the trust after state finance and insurance regulators in summer 2012 revealed the fund had been shedding money for several years.

Additionally, highly speculative investments had been made with the money from the 10,828 investors.

Wirth’s final report does not identify any insurmountable problems and notes that the receivership ensured “that every consumer-depositer receives the full benefit of his or her burial contract.”

To do that, the receivership sold an insurance company, fired the association’s executive director and negotiated financial settlements with 10 “prospective or actual” defendants for $10.9 million cash and $850,000 in future services.

“We actually recovered more than the principal that was lost,” Wirth said.

By the time the books are closed, the trust will be paying up to 65 cents on the dollar of the funeral costs for the customers. Funeral home owners picked up the rest.

Wirth said 2,969 customers died and received the promised benefits and services due them in the interim.

The receivership reported litigation costs of $1.3 million, or 11 percent of the recovered amount. Total receivership costs will be about $1.6 million, including $50,000 paid for public relations.

The source of most of the $11.75 million in settlements remains secret. Only one settlement is identified, a $650,000 payment from the funeral directors association’s insurance company.

An additional $1.82 million was returned to the trust when Wirth sold the trust-owned Requia Life Insurance Co., a money-slurping and “improper” investment created for the trust.

It was during a routine audit of Requia in 2011 that the Office of the Commissioner of Insurance first noticed peculiarities in the setup between the trust and the company.

The strategy for getting settlements, according to Wirth and the report, included preparing and circulating a confidential draft 108-page complaint to “prospective defendants.”

Wirth said keeping the identities secret of the companies or individuals making settlements was also key.

“We would not have been as successful if we didn’t include those (secrecy) agreements with each of the people we settled with,” he said.

At least one of those confidential settlements, however, can be traced to the investment advice provided by brothers Patrick and Michael Hull, while working for Morgan Stanley Smith Barney.

According to Security and Exchange Commission broker records, the brothers were targeted in a complaint filed in September 2012, alleging the company recommended prohibited securities “governing investments for pre-need funeral trusts.”

The complaint alleged damages of $24 million and was settled in November 2013 for $2.4 million — a sum that matches the receivership’s settlement receipts for November and December 2013.

The SEC record notes the $2.4 million was not paid by the individuals.

The Hulls, who told the State Journal in 2013 that their advice was made “in strict accordance with the fund’s objectives,” remain registered as brokers with the state Department of Financial Institutions.

Neither DFI nor the SEC on Friday would confirm or deny an ongoing investigation of the Hulls, whose advice received blistering criticism from state auditors, especially in light of the way the trust was marketed as safe to funeral customers.

Wirth said that in some cases with the trust, “people that gave advice were protected by time limitations.

“Most importantly, we were able to stabilize the trust, reach an agreement with all of the funeral directors in the state for the consumers to get what they bargained for and maximize the recovery,” said Wirth.

The trust is not taking new deposits, and a team has been set up to administer its investments and payouts.

About $1.5 million is expected to be paid to funeral homes as retroactive reimbursement for funerals already conducted, Wirth said.

Wirth praised the Wisconsin Funeral Directors Association, with which the receiver had “plenty of arguments and fights,” for “steadfastly seeing this through and seeing this fixed.”

The organization did not create any group-wide financing mechanism to replace the trust, said executive director Adam Raschka. Individual funeral homes continue to offer insurance products and local bank trusts, he said.


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