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Feds allege Missouri funeral scheme could cost $600 milion

Monday, August 10, 2009 | 5:28 p.m. CDT; updated 6:21 p.m. CDT, Monday, August 10, 2009

JEFFERSON CITY — An executive of a defunct funeral contract company is facing federal fraud charges in an alleged scheme to loot hundreds of millions of dollars from customers' prepaid funeral accounts.

Attorneys for Randall Sutton said Monday that he will plead not guilty at an arraignment Wednesday in federal court in St. Louis. Sutton was president and chief financial officer of National Prearranged Services Inc. and a director of two of its affiliated life insurance companies, all of which collapsed financially last year.

The indictment, unsealed Friday, alleges a decade-long scheme in which officials at National Prearranged Services altered documents to change the terms and beneficiaries of their customers' prepaid funeral contracts.

The St. Louis-based company is accused of using various financial transactions — often involving its Austin, Texas-based affiliates, Lincoln Memorial Life and Memorial Service Life — to siphon money from customers' accounts. It then sent reports to funeral homes showing false account balances, the indictment said.

Sutton, 63, of Chesterfield, faces eight mail or wire fraud charges, each punishable by up to 20 years in prison and fines of $250,000, and one money laundering count that carries a maximum penalty of 10 years in prison and a $250,000 fine. He was arrested Friday and released on $50,000 bond.

"Mr. Sutton is innocent of all of the charges brought against him," said Burt Shostak, his St. Louis attorney. "We're looking forward to presenting evidence at the trial to see that he is fully exonerated."

The pre-purchase of caskets, burial vaults and funerals has become a regular and important part of business for many funeral homes. Customers who buy a funeral package valued at $5,000, for example, are guaranteed to receive the same services even if the price has increased to $8,500 by the time of death.

Under such arrangements, money for a prepaid funeral generally is placed in a trust account that bears interest.

The collapse of National Prearranged Services and its affiliated insurance companies resulted in more than $600 million worth of losses on prepaid funeral accounts. States' insurance guarantee funds are covering the original face value of the contracts, but not the inflation-adjusted cost of the funerals themselves. That has left funeral homes on the hook for the rest of their costs.

Sutton is among 45 defendants named in a civil racketeering, fraud and fiduciary negligence lawsuit filed Thursday in federal court in St. Louis against officials of National Prearranged Services, its insurance affiliates and various banks, law firms, auditors and investment advisers connected to the consortium of companies.

The lawsuit was brought by Donna Garrett, the deputy receiver appointed to administer the companies after their failure, and by groups representing the insurance guarantee funds of about three dozen states. It seeks an unspecified amount of damages, which plaintiffs attorneys said Monday could surpass $1 billion.

"We think that there was a scheme to collect money from funeral homes and consumers," said Dan Reilly, a founding partner of Denver-based Reilly Pozner LLP, which filed the suit. "The money was intended to be available when the claims came down the road, but in fact the money disappeared in the process and is no longer available."

The failure of National Prearranged Services led Missouri lawmakers to tighten oversight of the prepaid funeral industry.

A law that takes effect Aug. 28 will require regular and random state audits of prepaid funeral sellers and increase the amount of money they must keep in trust to pay for funerals. It also allows a state regulatory board to seek court injunctions against prearranged funeral sellers for failing to deposit money into a trust or for pulling too much money out of trust fund accounts.

 


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