The troubles at RightStar, Hawai'i's biggest cemetery and funeral needs company with nearly 50,000 clients statewide, illustrate the need for strong government oversight of funeral companies.

State Attorney General Mark Bennett has alleged in court papers that between $20 million and $30 million belonging to RightStar customers was fraudulently removed from RightStar trust accounts after the companies were purchased out of bankruptcy court in 2001.

RightStar owns and operates Valley of the Temples and Diamond Head Mortuary on O'ahu, Maui Memorial Park, and Homelani and Kona Memorial Parks on the Big Island. RightStar also owns several companies that sell and administer "pre-need" funeral plans, including 50th State Funeral Plan.

A court-appointed official has been running the RightStar companies since late 2004, and state officials say all customer contracts have been honored and will continue to be honored.

Former officers of RightStar and other defendants in Bennett's suits have denied wrongdoing.

Earlier this month, Bennett announced a public auction of RightStar assets — including the various cemeteries and companies — for at least $25 million. Of that total, $9 million must be deposited in the RightStar trust funds, and the $16 million balance will go to RightStar's principal creditor, Vestin Mortgage Inc. of Las Vegas, Bennett's office said. Vestin is owed nearly $50 million by RightStar.

The story of RightStar begins in mid-2000, when the company was formed in Las Vegas by a Texas married couple, John Dooley and Katheryn Hoover, and Californian Richard Bricka. They set out to buy the Hawai'i assets of Loewen Group International, a bankrupt Canadian company that owned funeral and cemetery operations here.

The RightStar owners claimed to have "discovered a 'secret': the trusts were overfunded by some $30 million," a National Association of Securities Dealers hearings panel wrote in 2004. "RightStar believed that once it concluded the acquisition, the trust could provide the surplus trust funds to RightStar, which could then use those funds to pay for the acquisition."

Thus, RightStar planned to acquire the assets at, effectively, no out-of-pocket cost, the NASD reported.

In search of financing, Dooley came into contact with securities dealer Lance C. Newby, then working in the Hawai'i office of Raymond James Financial Services Inc., Dooley said in an interview.

The plan was that Raymond James would loan RightStar $30 million to purchase the Hawai'i businesses, according to the NASD and the state. Once the sale closed, Raymond James would be repaid with "$30 million of trust assets that would be characterized as 'surplus trust money,' " the state said.

But Newby's superiors at Raymond James refused to approve the plan, the NASD reported.

Nonetheless, Newby then issued a $30 million Raymond James loan commitment letter to RightStar without the knowledge of his bosses, NASD said.

When Raymond James officials later learned of the letter, they disavowed it and Newby was "permitted to resign" from the company, NASD said.

After leaving Raymond James, Newby assisted RightStar in securing the purchase financing from Vestin.

Once in control, RightStar owners improperly removed tens of millions of dollars from the trust funds using several different strategies, Bennett's office said.

Bennett's office has blamed the four-member board of trustees appointed by RightStar for inadequate oversight of the trust fund withdrawals.

According to the NASD findings, each of the RightStar trustees received $200,000 "as an 'inception fee,' plus $5,000 to $10,000 per month thereafter."

William McCorriston, attorney for the trustees, said his clients first alerted the state to problems at RightStar and have cooperated fully. "We believe our information was the genesis of their investigation," McCorriston said.

Dooley, Hoover, Bricka, Newby and the trustees — with former Gov. John Waihee among them — all deny wrongdoing.

The former RightStar principals say they fully informed state regulators of their activities and claim that the financial records they inherited from the bankrupt Loewen Group were in disarray.

Dooley called the state's version of events, laid out in court papers, "very simplistic."

"When the truth comes out, it's going to be a totally different picture" from the one painted by the state, Dooley said.

Newby was banned for life from the securities industry in 2004 by the National Association of Securities Dealers for his role in the RightStar financing.

Newby recently filed personal bankruptcy papers in Florida, listing $23.8 million in liabilities, with the largest a $22 million debt claimed by the state of Hawai'i in connection with his RightStar activities. Newby has denied owing that money.

Newby now lives in Costa Rica, according to court papers.

An individual identifying himself as Newby said in e-mails sent from Costa Rica that he filed the bankruptcy "because I did not want to put up with the stress of the (financial) situation."

"I know I did nothing wrong," he said.

Reach Jim Dooley at jdooley@honoluluadvertiser.com.