I have only scanned Doug Cassity’s plea agreement once, but two issues jumped out from that document.  The plea agreement is based on the US Sentencing Guidelines, and Page 28 of agreement explains that the Government and the defendant did not agree as to whether guidelines relating to economic losses should be applicable to Mr. Cassity.   If those guidelines were to be applied by the court, Mr. Cassity reserved the right to challenge any ruling that would extend his sentence beyond 115 months.  The other issue regards a provision titled “Forfeitures” (Page 33).  The Government only has approximately $3.7 million of Cassity assets subject to forfeiture.        

 

How will the court evaluate the fact that less than 1% of a stated loss of $400,000,000 has been seized from Mr.Cassity’s assets, and that he successfully precluded that loss from being included in his plea agreement?   A recent Rueters article suggests that the sentencing guidelines regarding white-collar fraud are often viewed as advisory rather than mandatory.   And, Mr. Cassity has to be uncomfortable with the fact he will be standing near his investment advisor, and Mr. Wulf’s potential sentence of a few hundred years.

 Wikipedia explanation of the US Sentencing Guidelines

Representatives from Nebraska’s death care industry will be meeting this fall to discuss the Department of Insurance’s preneed legislative proposal, and the right of sepulcher will be among the issues for discussion.

Nebraska is among the states that have statutory provisions defining the priority of individuals who may claim the right of sepulcher (which is the right to control the disposition of the decedent’s body). This is an important issue for the death care industry because of the disputes that can arise after death. A law review article examining the Missouri right of sepulcher describes some of the legal disputes that funeral homes and cemeteries have encountered. While the Missouri law was a step forward in recognizing that an individual has the right to designate the ‘next of kin’, the law review article is on point with its recommendation that individuals need easier ways to give their right of sepulcher to a life partner, or an individual other than a surviving spouse or child.

Nebraska law is unique in that it lists a preneed contract as a document where a decedent could give instructions contrary to the law’s list of the ‘next of kin’. But the statute goes on to create a high threshold for designating the right of sepulcher. Unless an individual uses his/her will to address the right of sepulcher, the law requires a notarized affidavit. That requirement is very similar to that required by the Missouri law. The challenge for a Nebraska funeral home would be to convince a court that a decedent intended that the preneed contract to be used for purposes of either Section 38-1425 or Section 38-1426. The changes intended for Nebraska’s Pre-Need Burial Act provide the industry an opportunity to clarify when a preneed contract can be used to both vest the right of sepulcher and the manner of disposition.
 

The age of the internet has taken its toll on the industry’s trade associations. Instead of attending the state association convention, operators can now surf the net for what’s new in the industry. Providing new and unique content is difficult. Another challenge is that the 3 day convention. It is asking alot to have smaller operators leave their businesses for three to four days to attend a conference. When I received an invitation to the North American Death Care Regulators convention I gave serious thought to attending. Like so many of my clients, two or three days away from the office requires planning. But, the DCRA invitation came so late that I already had conflicting commitments. So I began reviewing the agenda to evaluate the sessions in terms of value to the intended audience, and the value to me.

Josh Slocum and Consumer Issues – The Funeral Consumer Alliance will probably try to remind the regulators that their duty is to protect the consumer, and that there is plenty of work to be done. Regulators are the front line when it comes to consumer issues, so I doubt they need reminding of their mission. The challenge is to fulfill their mission with limited resources. To increase efficiency, regulators need an understanding of their licensees’ business.

Missouri Division of Finance and Trust Fund Examinations – This one is at the epicenter of the Missouri/NPS problems. NPS bootstrapped their expansion into insurance states by converting the Missouri trusts to insurance investments. Knowing how the Division is adapting their examination process is worth the price of admission. (So far, the Division is advising ‘no tickee, no laundry’.)

CANA Panel and Cremation Trends – The cremation trend is rising, and revenues are declining. Tell me something we don’t already know. This description has no hooks for me.

Bill Williams and the Model Preneed Trust – I love models. I like Bill. FSI’s operations impress me. But, I already have my own opinions of how those other master trusts ran off the rails.

A St. Louis Cardinals baseball game – How much did you say I have to pay for a nose bleed seat? I don’t even know why I’m asking. If the Kansas regulators would play hokey, I would too. This is the only agenda item I would rank higher than Geno.

Attending the Wednesday agenda sessions were never an option because of my schedule conflict: the Kansas Cemetery Association Convention/Membership Meeting. The same was true for the Kansas Secretary of State staff. The Kansas Cemetery Association went dormant several years ago, at a time when the KSOS staff needed a unified industry voice the most. The Kansas legislature passed a cemetery law in the absence of an active KCA, and a handful of industry representatives stepped forward a year ago to revive the KCA.

Getting the word out to the hundreds of cemeteries subject to the Kansas cemetery law is a challenge. The KCA turned to the internet by posting a website. Email correspondence has also been crucial to engaging operators. The KCA chose a one day format to control costs to all attendees: operators, vendors and regulators. When a prospective attendee evaluates the agenda for valuable content, there is only one suspect session: the 11:00 slot.

To beef up that session, we are going to discuss four legal issues that relate to the cemetery’s trusts and invite the attending fiduciaries to participate on a panel. The four issues can be viewed by following the hyperlink, and to avoid blindsiding my panel members, this author’s answers are:

1) All of the above
2) The cemetery operator
3) False
4) (Sorry, no tickee, no laundry)

Attendance is recommended.
 

Missouri’s death care regulators will play host to their peers next week when the North American Death Care Regulators Association convention is held in St. Louis.  When you host a convention in NPS’ backyard, the agenda needs to include sessions on what went wrong.  The final session of the agenda will catch every regulator’s eye, but they should not overlook the Missouri Division of Finance session on Monday morning. 

Missouri’s has two principal death care regulators: the State Board of Embalmers and Funeral Directors and the Office of Endowed Care Cemeteries.  The stable of NPS related companies included one which owned and operated cemeteries in Missouri (and Illinois).  So when NPS collapsed, the OECC had its own issues to deal with.  But neither the OECC nor the State Board had/have jurisdiction over the NPS trustees.  As the recent Wulf conviction suggests, NPS exploited the jurisdiction gaps between the death care regulators and the trustees’ regulators.  But, the jurisdiction gap between death care regulator and the trustee regulator is a fairly common problem.  When the Illinois Comptroller came under criticism a few years ago, one press release suggested that the IFDA master trust could be better regulated by the banking regulators. 

Though not widely publicized, the Missouri death care regulators and trust regulators have been communicating.  The Division of Finance session could provide the Missouri death care industry a glimpse of what role the DOF will play in the oversight of their preneed trusts and care fund trusts.

The jury did not buy the Wulf defense, and now the former NPS fund manager faces a much, much longer prison term than Doug Cassity. To get a better understanding of the positions taken by the prosecution and the defense, we will seek briefs and jury instructions. However, the US Attorney’s press release gives some hints at what arguments were used to persuade the jury. The second paragraph of the press release states:

Wulf was appointed in the 1980’s to serve as the independent investment advisor to the preneed funeral trusts established pursuant to Missouri statutes by National Prearranged Services, Inc. (“NPS”). As the trusts’ advisor, Wulf was responsible for protecting, investing and managing the trusts’ assets, which included more than $150 million paid by customers who were told their funds would be kept safe until the time of need.

Two words jump out at this author: protecting and managing. The US Attorney argued that the fund manager had duties beyond providing investment advice. So, when NPS requested his consent to certain trust distributions, Mr. Wulf’s duty to protect and manage the trust assets required actions that he did not perform. At first blush, the prosecutor’s standard for the death care fund manager would seem substantially higher than compliance with either the prudent man rule or the prudent investor rule.
 

A Missouri preneed auditor recently requested an explanation from a client why certain accounts were underfunded.  The handful of accounts were “underfunded” by varying amounts of a few dollars to twenty dollars.  The common fact with each was an initial deposit or substantial deposit in the month preceding the Federal Chairman’s remarks that sent the investment markets tumbling.  The conservative government bond was especially vulnerable.  

It is inevitable that preneed auditors have to look beyond whether the consumer’s payments made it to the trust.  But, preneed trusts cannot remain parked in Govies and provide operators the return they need to keep pace with rising costs.  A diversified trust will have market fluctuations.  The challenge for auditors will be distinguishing normal investment fluctuations from excessive fees or impaired assets.

 

David Wulf may stand alone in the crosshairs of the criminal prosecutors, but his fate will impact the NPS preneed trustees (and possibly other registered investment advisors who manage death care funds).

Mr. Wulf had a situation that is unique from what existed in Illinois, Wisconsin, and Tennessee, but is familiar to other death care funds. Mr. Schainker was an employee of Merrill Lynch, which proved to be the deep pocket for the IFDA losses. The Hull brothers were employees of Smith Barney, which has been alluded to by the WFDA Receiver as one of those parties with liability exposure. (The same Smith Barney that had relationships with Mark Singer, the Clayton Smart advisor.) But, Mr. Wulf’s name has not been associated with any Wall Street brokerage firm. Rather, he seems to have been an ‘independent’ asset manager who relied upon his own reputation (or connections) to obtain clients, and only bound by the duties imposed by the type of securities license that he possessed, Missouri law and the contract he had with NPS and the preneed trustee. Knowing that Mr. Wulf has shallow pockets, prosecutors will seek to define the investment advisor’s duties under Missouri such that Mr. Wulf had responsibilities to both funeral homes and consumers. For this to be something other than an academic exercise, the government attorneys must show that NPS’ preneed trustees also shared Mr. Wulf’s duties to the funeral homes and consumers. If the government attorneys prove successful, preneed trustees that have delegated fund management should take note.
 

 In a post made June 30th, we discussed how the strategy behind the Wisconsin settlement proposal makes sense. But, a significant percentage of funeral homes have yet to sign on to the settlement. In terms of the Master Trust’s liabilities to consumers, funeral homes with 30% of those contracts are holding out. While both the Receiver and the WFDA’s attorney are putting a positive spin on the situation, the Receiver has gone public through his website to further pressure the dissenting funeral homes. Stressing consumer protection, the Receiver’s website lists the funeral homes that have, and have not, accepted the settlement and explains that:

Under this agreement, funeral homes that sign the settlement will ensure that their customers receive the benefits promised them under their burial agreements and, in exchange, will be protected from possible further court action. 

An implicit message that can be taken from this statement is that a dissenting funeral home is not willing to promise that their customers will receive the benefits promised them under the burial contracts. For most funeral directors, it is not a matter of keeping their commitment to the consumers. Accordingly, we can’t help but wonder whether some of the dissenting funeral homes are expressing the same concerns raised by IFDA funeral homes regarding the settlement agreement brokered by Merrill Lynch.

Yes, the funeral homes wanted to recover as much in damages as they could, but they did not trust Merrill Lynch to find a way out of the hole it had created. Merrill Lynch did not want to be trustee of the IFDA master trust, and that was more than apparent to many Illinois funeral homes.

The Wisconsin law that restricts preneed funeral trusts to depository accounts cuts both ways for the Receiver. While it provides a clear standard for holding fund managers and fiduciaries in breach of their duties, the law also restricts the Receiver’s options for improving the WMT’s investment performance. What the Wisconsin Master Trust needs is legislation to expand the permissible investments for preneed trusts, but the Receiver’s job description does not include being a lobbyist for the WMT.

Several factors make it difficult for the WFDA to sponsor such legislation, and as a result, some funeral homes may rather ‘bail’ out of the situation.

 Once again, I have spoken too quickly.

After lamenting to the Memorial Business Journal that the NPS plea bargains will deprive consumers and the industry the opportunity to hear how Doug and his crew perpetrated so many frauds, the sole remaining NPS defendant may grant my wish. As the Funeral Service Insider reports that Herr Wulf, even at the risk of life in prison, vows to fight the charges.

I was only following orders!

While the following statement will garner argument from the plaintiffs in the NPS civil trial scheduled next year, Missouri’s infamous Section 436.031 authorized a preneed seller to designate the preneed trust’s investment advisor, and the trustee was relieved of all liabilities for investment decisions. Herr Wulf will take the stand and declare 1) he had a different fiduciary standard than that of the preneed trustee, and 2) that his investment decisions satisfied the requirements of the Prudent Man Rule. When the prickly questions regarding the definition of the fund manager’s client are raised, and whether that includes the consumer and/or the funeral home, Herr Wulf will declare that NPS (Doug) was his sole client and that he was following orders. Unlike the original Nuremberg Trials, this tribunal can call the source for those orders to testify. The world may yet get the opportunity to see Doug squirm and sweat.

(Excerpts from the Memorial Business Journal and the Funeral Service Insider are reprinted with the understanding I will promote that readers should subscribe to each. Please refer to my blog when you do so.)

 This was not the ending that most expected. After decades of playing shell games with regulators and funeral homes, Doug Cassity accepted a plea bargain rather than go to trial. Brent Cassity also accepted a plea bargain, and the St. Louis Post Dispatch reports that attorneys for one of the remaining defendants were scurrying to the prosecutors before the deal was set to expire on July 3rd. Having run out of shells, Doug Cassity will now try to parlay his cupboard into a reduction of the maximum prison time of 115 months he faces. By now, federal prosecutors have determined that what assets remain in the Cassity cupboard belong to consumers and funeral homes, not any individual with the Cassity name. The industry will wait to see if federal prosecutors can turn the favor on Doug Cassity and play a different type of shell game.

For his full cooperation towards restitution, prosecutors could offer Father and Son Cassity a nicer and safer Federal penitentiary than the one in Florence, Colorado. To leverage their cooperation, prosecutors should also provide the Cassity duo the rules to surviving in a federal prison.

Offering either Cassity time off as exchange for restitution assets would be an insult to both funeral homes and consumers. The maximum time Doug Cassity faces is 9 years and 7 months. The prosecutors reference the NPS fraud at $600 million, but the actual loss to funeral homes is much higher, and will only increase as each year passes. Funeral homes and consumers will be dealing with the Cassity fraud much longer than 9 years and 7 months. And it is crucial that the public understand that a large percentage of these losses are voluntary on the part of funeral homes. As we have explained in prior blog posts, NPS was the primary obligor under many of the contracts, and many funeral homes are eating the losses voluntarily (regardless of what some regulators have said).

While funeral homes would welcome whatever prosecutors can recover from Doug Cassity, it will only be a drop in the bucket of losses incurred. No one will trade those drops for a day off for Mr. Cassity.