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The Honolulu Advertiser
Posted on: Tuesday, February 16, 2010

Audit: RightStar short $22.6M

By Jim Dooley
Advertiser Staff Writer

Hawaii news photo - The Honolulu Advertiser

Former Gov. John Waihee

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Hawaii news photo - The Honolulu Advertiser

Attorney General Mark Bennett

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Five years after accusing former Gov. John Waihee and others of illegally diverting tens of millions of dollars from funeral home trust accounts, the state attorney general is poised to try to collect the money.

"They want scapegoats and a former governor is a good target," said David Minkin, one of the lawyers representing Waihee and three other former trustees of the RightStar group of funeral homes and cemeteries here.

RightStar is a major player in the local "death care" industry, operating cemeteries and "pre-need" funeral plans on three islands, including Valley of the Temples on O'ahu, Homelani Memorial Park and Kona Memorial on the Big Island, and Maui Memorial Park on the Valley Isle. Among the businesses in the RightStar group of companies are 50th State Funeral Plan and the Center for Pre-Arranged Funeral Planning.

RightStar defaulted on more than $34 million in loans in 2004 and has been under state court supervision since then, while the attorney general's office investigated the causes of the collapse and accountants pored over RightStar financial records.

The audit of RightStar's books has now been filed in Circuit Court. It says that trust funds maintained for the benefit of some 50,000 customers are $22,621,567 below legal requirements.

The auditors said, however, that many of RightStar's records have been lost or destroyed and that the audit findings are "approximate figures."

Minkin and his law partner, William McCorriston, said the audit is deeply flawed but added that they believe state Attorney General Mark Bennett will use it to pursue Waihee and other former RightStar trustees and officials for recovery of the missing trust funds.

Bennett, a former law partner of McCorriston and Minkin, said his office and the new owner of RightStar have reached an agreement to proceed with "litigation against third parties and former trustees."

Paul Alston, lawyer for Vestin Group Inc., the new owner, said Vestin and Bennett's office "have agreed to collaborate on prosecution of (financial) claims against the former trustees and others."

A Mainland law firm is being hired to head the effort, along with a local firm, Ning, Lilly and Jones, Alston said.

Former state Attorney General Michael Lilly, a partner in that firm, said talks on the collection effort are continuing.

"Nothing's been signed," Lilly said this week.

"I think it will happen, but we don't have an agreement yet," he said.

McCorriston said any collection efforts against his clients "have no merit and will be vigorously defended."

The trust deficiency amounts in the final audit are "mere guesses" and "have no apparent basis in fact," McCorriston and Minkin said in court papers that urged Circuit Judge Sabrina McKenna not to accept the report.

Acceptance could "judicially establish these unsupported figures as trust deficit amounts for which recovery may be sought against former trustees," the McCorriston firm argued.

But former Circuit Judge Marie Milks, who was appointed by McKenna to operate the RightStar family of companies for the court, argued for adoption of the audit.

"RightStar's financial records were left in a mess by the actions of the former trustees," Milks said in court papers.

McKenna granted a motion to approve the audits.

Vestin attorney Alston said in a court filing that RightStar's financial problems were caused by bad economic conditions and the fact that "more than $20 million was looted from the pre-need trusts."

Vestin, a Las Vegas-based "hard money" lender that pools investments for high-interest loans usually secured by real estate, filed a 2004 foreclosure lawsuit against RightStar after the company defaulted on its 2001 loans.

RightStar has been operated under state court supervision since then. A December 2008 auction of RightStar failed after no qualified bidders offered to buy the business for the minimum asking price of $25 million.

In another auction held two months ago, Vestin took ownership of the companies with a $19 million bid that involved no exchange of cash.

Vestin was the sole bidder, although three companies had expressed interest in buying RightStar.

RightStar was incorporated in Nevada in mid-2000 by a married couple from Texas, John Dooley and Katheryn Hoover, and Californian Richard Bricka.

The RightStar founders believed there was huge surplus of money in trust funds held by Loewen Group, a bankrupt Canadian company that owned funeral homes, cemeteries and mortuaries here. The RightStar plan was to use the "surplus" trust money to pay back loans borrowed to buy the Loewen assets, according to court records.

RightStar turned to Vestin after unsuccessfully trying to borrow money from other lenders.

The state has alleged that RightStar illegally removed some $20 million to $30 million from trust accounts and that another $20 million was improperly invested in a Vestin Nevada real estate venture called Vestin Fund II.

The trust fund transfers were approved by a four-member group of trustees Waihee, Stephen E. Harris, M. Tyler Pottenger and Reed B. Rohrer appointed to oversee use of the trust money.

According to court records, each of the RightStar trustees was paid a $200,000 "inception fee" plus $5,000 to $10,000 per month.

All have denied any wrongdoing and said through their lawyers they were the first to report problems at RightStar to state authorities.

The trustees cooperated in a state criminal investigation of RightStar and "provided key testimony" in the prosecution of former RightStar president John Dooley on theft charges, Minkin said.

Dooley pleaded no contest last year to stealing some $50,000 from customer accounts and is now serving a five-year probation sentence.

He is the only former RightStar official to have been charged with a crime.

Now, Minkin said, the state is accusing the former trustees "of things like taking money out improperly and investing money improperly."

The money placed in Vestin II "had a better rate of return than the stock market during the period the trustees managed the trust funds," Minkin said.

Those investments haven't fared so well since, according to the recently completed audit.

For instance, $4,487,924 in 50th State Funeral Plan trust money originally placed with Vestin II now has dwindled in value to $706,847, auditors said.

An $887,491 Maui Funeral Plan Trust investment in Vestin II is now worth $100,631, according to auditors.

Despite all the losses, state and Vestin officials have continued to assure all customers that their contracts with RightStar for funerals and burials will be fully honored.

Although the trust funds are well below legally required minimums, there is enough money to satisfy all contracts now and into the future, Alston said.

Vestin has installed a "professional management team" at the companies and plans to build the businesses back to profitable levels and then sell them, Alston said.