Hynes refuses to release funeral trust fund documents

Bruce Rushton

State Comptroller Dan Hynes is refusing to release records showing what his office did to safeguard a troubled funeral trust fund that has spawned claims of financial mismanagement and fears of bankruptcy from funeral home directors who are on the hook for tens of millions of dollars.

Under state law, the comptroller’s office is responsible for regulating the funeral industry. The law also gives the comptroller broad auditing power to ensure the safety of money paid by consumers to ensure their funerals are paid for before they die.

Hynes is refusing to release copies of audits and financial reviews of a pre-need trust fund formerly administered by the Illinois Funeral Directors Association and believed to be worth $300 million. Hynes also won’t release correspondence his office received last year from Regions Bank, which considered taking over the trust, but backed out.

In 2006, Hynes ordered the IFDA to submit weekly reports on the association’s progress in becoming a licensed fiduciary. The comptroller’s office is also refusing to release those reports.

In response to a records request from The State Journal-Register, G. Allen Mayer, special counsel and freedom of information officer for the comptroller’s office, said the agency doesn’t audit the pre-need trust fund.

Mayer also said the requested records are exempt from disclosure under the state Freedom of Information Act and that the state Department of Financial and Professional Regulation should be given a chance to withhold the records.

The newspaper appealed the denial, pointing out that exemptions in the Freedom of Information Act are discretionary, not mandatory, and arguing that release of the records wouldn’t violate any laws. The newspaper also noted that an official with the comptroller’s office used the term “audit” in 2006, when the comptroller issued a “Notice Of Audit Findings” to the IFDA, stating that the fund had a $39 million deficit and the situation was “intolerable.”

In response, Keith Taylor, Hynes’ chief of staff, told the newspaper the comptroller had already disclosed several records without being asked, including some that were not required by law.

“Your appeal did not provide any legal basis for why the records you requested are not covered by the cited exceptions to the FOIA,” Taylor wrote. “The IOC (Illinois Office of Comptroller) will continue to focus on protecting the interests of pre-need consumers.”

The records might eventually be released via a lawsuit filed by funeral home directors against the IFDA. Edward Wallace, an attorney for the plaintiffs, said he intends to demand the records during the discovery process in the Cook County lawsuit.

It shouldn’t take a lawsuit to get the records from the comptroller, according to a funeral home director-turned-lawmaker and an expert on the state Freedom of Information Act.

“Provide the documents, answer the questions,” said state Rep. Dan Brady, R-Bloomington, who still holds a funeral home director’s license from the state. “It’s not only reasonable to ask, it’s imperative to ask. It’s imperative for some 49,000 Illinois residents who put their trust in the IFDA that they get answers.”

Springfield attorney Don Craven, who often handles FOIA litigation on behalf of plaintiffs seeking public records, said the comptroller should release the documents.

Craven disputed the comptroller’s contention that audits and financial reviews are exempt under a section of the Freedom of Information Act that says “preliminary drafts, notes, recommendations, memoranda and other records in which opinions are expressed or policies or actions are formulated” aren’t subject to disclosure.

“It’s an audit,” Craven said. “It’s final. It’s over. It’s done. We’re not formulating policy. We’re not making recommendations on whether we should use bigger widgets or smaller widgets. It’s a final document. It’s not pre-decisional in any manner.”

Craven also disagreed with the comptroller’s logic in refusing to release status reports from the IFDA on its progress in becoming a licensed fiduciary.

“If you ask Agency One for records, they’re not exempt because Agency Two has an interest,” Craven said.

Funeral home directors who are suing the IFDA say the trust fund started losing money in 2001. Five years later, the comptroller’s office notified the IFDA that the fund had a deficit of nearly $40 million.

Brady, who has introduced a House resolution calling for a legislative task force to investigate the pre-need fund, said the comptroller should make public whatever records it has that show what was done to keep track of the fund over time.

“This isn’t their (the comptroller’s) money,” Brady said. “The people have a right to know.”

Bruce Rushton can be reached at (217) 788-1542 orbruce.rushton@sj-r.com.

License suspended for salesman who sold life insurance policies to finance trust fund

SPRINGFIELD -- The Illinois secretary of state’s office has suspended the license of a Merrill Lynch employee who sold life insurance policies to finance a pre-need funeral trust fund that is in deep financial trouble.

The secretary of state says Edward Louis Schainker, a Merrill Lynch investment adviser and salesman, broke state law when he sold hundreds of policies to the Illinois Funeral Directors Association.

Through his attorney, Schainker denied any wrongdoing.

“I don’t know what the (secretary of state’s) securities department looked at or what they were given or who’s behind this,” Carl Draper, Schainker’s lawyer, said Wednesday. “They’ve got some wrong information and issued an order without even asking ‘What’s your side of this?’”

Schainker expects to meet with the secretary of state’s staff on Friday, Draper said.

“We want to get this cleared up as soon as we can,” the lawyer said. “There’s no basis for this.”

Under the suspension, issued Feb. 24, Schainker is prohibited from acting as an investment adviser or selling securities.

Tanya Solov, director of the securities department in the secretary of state’s office, said her office suspended Schainker’s license as quickly as possible.

“At the first inkling that there is a problem, we want to say ‘Stop doing your business,’” Solov said. “That’s what this is.”

Solov said she could not reveal how the secretary of state’s office got involved, but allegations in the suspension order mirror a lawsuit against the IFDA filed in January by funeral home directors who allege financial mismanagement. Schainker is named as a defendant along with several IFDA officials. His lawyer disputes the plaintiffs’ allegations.

“We would not agree that that lawsuit accurately portrays what happened here,” Draper said.

According to the suspension order, Schainker received a commission from every insurance policy sold to the IFDA. While state law requires that purchasers of pre-need contracts give permission before insurance policies are purchased, neither the IFDA nor Schainker obtained permission before policies were purchased, the secretary of state says.

The policies insured the lives of funeral home directors and IFDA officials, not pre-need contract purchasers, according to the lawsuit and suspension order.

Draper said his client provided investment advice to the IFDA and was in no position to notify contract purchasers or get their permission to buy any life insurance policies.

“He had absolutely no involvement with those consumers,” Draper said.

Schainker performed no analyses to determine if the policies were appropriate for the pre-need trust, according to the order, and recommendations to purchase the policies were “unsuitable” and in violation of state law. Plaintiffs in the lawsuit against the IFDA say the life expectancies of the insured funeral home directors and association insiders do not match the life expectancies of pre-need contract purchasers.

Draper said Schainker took pains to determine the needs of the IFDA, its investment goals, risks and the investment tools that were appropriate. The IFDA made the final calls, the lawyer said.

“Always, the customer makes the decision to determine where to invest,” Draper said. “Mr. Schainker as an investment adviser presented information and options or recommendations. It still all rested with the (IFDA) board.”

Merrill Lynch also is a defendant in the lawsuit.

“We’re cooperating fully with the state officials and will continue to do so,” said Bill Halldin, a spokesman for Merrill Lynch.

Duane Marsh, the IFDA’s executive director, declined comment.

According to internal IFDA audits and association bulletins to funeral home directors, the fund’s deficit went from $41.5 million in 2006 to $28.4 million in 2007 to $59 million last fall, when the fund was written down by 25 percent.

The IFDA has said the swings were due to the fluctuating value of securities. Rather than pay fixed benefits, the life insurance policies purchased by the IFDA pay out based on the value of investments made with premium monies, according to the lawsuit.

Draper said Schainker provided prudent investment advice to the IFDA.

“He was not involved with risky, speculative investments,” the lawyer said. “Ed Schainker has been a respected member of this community for many years. He would really like his reputation in this area to be restored as quickly as he can.”

--Bruce Rushton

Burris won't talk about his role in funeral trust oversight

SPRINGFIELD -- U.S. Sen. Roland Burris, D-Ill., won’t say why he allowed the Illinois Funeral Directors Association to oversee a pre-need funeral trust that has turned into a financial catastrophe.

State Comptroller Dan Hynes in 2007 stripped the IFDA of its power to administer the pre-need fund, saying the association should never have been granted a license to manage the money. The IFDA got its license in 1980, when Burris was Illinois comptroller.

Through a spokesman, Burris declined to say why he allowed the IFDA to manage the trust or whether he agreed with Hynes’ decision to revoke the association’s license.

“I’ve got nothing for you,” said Jim O’Connor, Burris spokesman. “It’s 30 years ago.”

Burris, however, was involved with the fund as recently as 2007, when the IFDA hired him to lobby the comptroller’s office, which regulates the funeral industry and was scrutinizing the trust. Burris sat in on at least one meeting with the comptroller’s staff, and he wrote a letter to Hynes asking for a meeting to discuss the trust.

Reminded of Burris’ recent role as an IFDA lobbyist, O’Connor stuck to his answer.

“We’re just saying it was 30 years ago,” O’Connor said.

--Bruce Rushton