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The Honolulu Advertiser
Posted on: Saturday, April 22, 2006

Lender accuses state of extortion

By Jim Dooley
Advertiser Staff Writer

A Las Vegas lender accused the state of extortion, malfeasance and negligence yesterday in the latest round of legal skirmishing over who is responsible for serious financial problems at Hawai'i's largest group of cemeteries and "pre-need" funeral trusts.

The accusations were made in a Circuit Court lawsuit filed by Vestin Mortgage against the state and in a separate motion filed by Vestin in a suit that it first brought here in 2004. In that case, the Nevada-based company is seeking to foreclose on a $34 million loan it made in 2003 to finance the purchase of four Hawai'i cemeteries and related funeral services plans.

The state said that the new Vestin lawsuit has "no merit" and that the state will be filing legal action of its own Monday. The state will say that "Vestin was responsible for inducing the improper diversion of more than $20 million" in funeral plan trust funds owed to Hawai'i customers, said Mark Recktenwald, director of the state Department of Commerce and Consumer Affairs.

State officials have sought to reassure 40,000 to 50,000 customers that their funeral contracts would be honored despite the shortfall in the trust accounts.

Vestin's $34 million mortgage loan went to a company called RightStar Management Co. and a group of related firms that purchased several large Hawai'i cemeteries in 2002. The purchase included Valley of the Temples on O'ahu, Homelani Memorial Park and Kona Memorial Park on the Big Island and Maui Memorial Park. RightStar also bought several large pre-need funeral services companies, among them 50th State Funeral Plan.

State Attorney General Mark Bennett sued the RightStar companies in 2004, contending that the company and four former trustees, including former Hawai'i Gov. John Waihee, improperly removed about $20 million in trust fund assets in 2002, transferring the money to RightStar's operational accounts.

The state said the transfers should only have been made after a full accounting of the cemeteries' and trust funds' finances was completed and filed with the state.

Bennett's office is also conducting a criminal investigation of the RightStar companies and their handling of corporate funds. All the defendants in Bennett's suit, including former company officials and the former trustees, have denied any civil or criminal wrongdoing.

In the legal papers filed yesterday, Vestin said the state rejected the company's offer to settle the foreclosure case by reducing the outstanding loan from $34 million to $25 million and making numerous other financial concessions that it wasn't legally obligated to offer.

Vestin chief executive Michael Shustek was in Honolulu yesterday, answering questions related to the RightStar loan in a sworn deposition attended by lawyers in the growing litigation. But Vestin spokesman Steven Stern said Shustek had no public comment.

In court papers, Vestin said that a buyer, identified as Spectrum Family Services (Hawai'i) Inc., is waiting to purchase the RightStar companies but cannot do so because the state won't agree to Vestin's settlement offer. "The state's agenda is to force Vestin to pay the shortfall in the trusts that resulted from the state's own negligence and/or malfeasance in failing to perform its statutory duty to prevent the looting of these trusts," the company charged.

State official Recktenwald said in a written statement: "We have tried for months to reach a resolution with Vestin that would ensure that the interests of consumers are protected. Just yesterday, Vestin backtracked on the terms of a settlement offer that they had made days earlier."

State officials say all customer contracts with the RightStar cemeteries and funeral services plans will be honored and that the public's funds are not at risk.

Since the Vestin foreclosure suit was filed in 2004, Guido Giacometti a court-appointed receiver has been operating the companies and filing regular progress reports with Circuit Judge Sabrina McKenna. Another court-appointed official, John Candon, has been analyzing the financial records of RightStar and its related companies.

Candon reported in March that between $20 million and $30 million held for as many as 50,000 purchasers of RightStar "pre-need" funeral plans and cemetery plots was missing from trust accounts. He said trust accounts "have been routinely misused, mismanaged and looted by those who operated the RightStar companies."

Reach Jim Dooley at jdooley@honoluluadvertiser.com.