The Average Joe's Madoff

Regulators and congress are outraged and appalled, as they always are, at the enormity and longevity of the Madoff ponzi scam. Despite the fact that for years the writing was on the wall, with flashing strobe lights, and at times right in their hands, somehow it was overlooked that Madoff was delivering miraculous returns, using a "trading strategy" that in no way could generate returns of that magnitude for long periods of time in various economic environments, and the auditor of this multi-billion fund was a one-man shop in a strip mall. Huh? I could go on and on, but Madoff is not my point.

The ponzi that should be in the spotlight involves a maze of intertwined companies under the umbrella of Missouri-based National Prearranged Services, including Lincoln Memorial Life Insurance Co. and Memorial Services Life Insurance Co., which was relatively quietly forced into liquidation in March 08. Unfamiliar...here's a thumbnail sketch...

NPS sold pre-need funeral contracts through funeral homes in 19 states, over 200,000 contracts nationwide. The pitch is to pre-pay funeral expenses at today's prices and avoid higher inflation adjusted prices later. What did my grandma always say...when it seems to good to be true, it probably is...then she would promptly box my ears for failing to see the obvious.

In a perfect world, NPS would take a percentage of the pre-paid funds and place them in a trust, which is used to buy a whole life insurance policy on the contract holder, which generates interest. When you die, NPS pays the funeral expenses within 24 hours and are reimbursed from cashing out the life insurance policy with interest. The insurance policies are, of course, purchased from their sister companies, Lincoln Memorial and Memorial Services. Keeping it all in the family...

In an imperfect world, a/k/a reality, NPS allows the insurance policies to lapse or cancels the whole life to buy a cheaper, non-interest bearing term-life policy. When you die, they "honor" the old contract with proceeds from new contracts sold. No harm, no foul. Except that you cannot sustain this model, it is illegal and is by any definition a classic ponzi! Aside from the fact that the percentage they are required to put into trust varies by state, with Missouri law allowing NPS to keep 20% of funds in commissions, and of course keep the interest. From the get go, a $10,000 contract is really worth $8,000, allowing consumers the privilege of paying $2,000 in inflation protection. I can feel my grandma's hands coming...

But, like Madoff, NPS operated with a relatively deaf ear from regulators. With it's various businesses...insurance, cemeteries, funeral homes...it fell into one of those gray, murky areas of oversight...insurance? funeral industry? contract law? Like a quick game of hot potato...don't be the last to hold it, or you are the state agency forced to do your job!

NPS was poison from inception. Founded in 1979 by James Douglas Cassity, a disbarred Springfield, MO attorney who served time in federal prison in the early 80's for an unrelated tax shelter fraud. His name rarely appears, instead placing the ownership interests of all of the kissing cousins in various Cassity family trusts and other family members.

FIRST FLASHING STROBE LIGHT
In 1992, the attorney general of MO began investigating NPS, resulting 8 years later in a 2000 court ruling which scolded NPS and told them to tighten up their financial records and make sure proper coverage is in place, with no further or ongoing regulatory monitoring guidelines.

SECOND FLASHING STROBE LIGHT
In 2005, under the cleverly named "Operation Grave Concern", the MO attorney general targeted funeral homes and pre-need contract sellers. A handful funeral directors and contract sellers were charged, and NPS, the godfather of pre-need contract fraud, was harshly scolded for failing to ensure proper coverage in relation to one charged funeral director, and paid an out of court settlement of $10,000 and once again agreed to tighten their financial records, with no further or ongoing regulatory monitoring guidelines.

MORE SPOTLIGHTSIt apparently was not important that according to the National Institute of Money & Politics, NPS ranked in the top 10 funeral industry lobbyists and political contributors, giving around $109,000, much to none other than MO attorney general Jay Nixon and MO governor Matt Blunt. It almost feels like I'm talking about Illinois! Where's Blago when you need him...

RESULT
In March 08, Texas forced NPS into liquidation, as the two primary insurance companies were headquartered there, noting that the businesses were "inextricably intertwined". Not surprisingly, the Chap. 11 agreement personally exempts the Cassity's and about 50 other entities, including the Nantucket home that Doug Cassity sold last year for over $16M to Google CEO Eric E. Schmidt. In receivership, the unfortunate individual appointed to try to unravel this mess has stated that NPS will honor the existing contracts, but does not state at what value, and the payout will come no later than 60 days of filing the claim. 60 days! That's not much solace for the family who is forced to pony up thousands now for the at-need funeral they believed was paid for in advance, with the pat on the head that they will receive some to all of that money back within 60 days.

Several states, including Iowa, Texas, Missouri, Kentucky and Ohio are investigating, as is the FBI, who preliminarily have stated the loss at around $500,000,000. And various knee-jerk, sloppy and reactionary pieces of legislation have been proposed, with all of them failing to pass.

And the sordid story continues today...with no conclusion and little to no press coverage. At least they weren't deemed too big to fail.

NFDA Stat Lacks Integrity-Fun With numbers

The great thing about statistics, and numbers in general, is that they can be manipulated to demonstrate whatever "fact" you are supposedly substantiating. Depending on so many variables, statistics are almost by design the perfect way to make fact out of fiction, allowing you to paint the canvas with the most appealing picture to influence others to your point.

The National Funeral Directors Association (NFDA) provides the 2006 average cost of a traditional funeral at $7,323, which most people who have arranged and paid for an at-need funeral know is much lower than they actually paid. Based on what I know and my background in finance, I simply do not believe that number. Skeptical curiosity got the best of me and I felt compelled to look into the statistical validity and integrity of that number, and...drum roll please...it is bogus. Oh, don't get me wrong, it's an average of something...but not what I believe is the average cost of a funeral. Funny how a single fact can ruin a good argument.

I will clearly demonstrate, using the NFDA's actual data, why that number is misleading at best, just plain wrong at worst.

Here are some facts (per the NFDA, but with no date reference):

• There are 20,080 funeral homes in the U.S.
• Over 10,200 funeral homes are members of the NFDA in the U.S. and internationally (they do not provide a breakdown of U.S. vs international membership)
• The NFDA provided 2006 average cost of a "regular adult funeral" is $7,323
• The average was calculated based upon member survey responses
• 3,000 member funeral homes, or 29% of it's membership, were invited to respond
• The response rate was 38%

Okay, now it gets interesting.

There is no explanation as to why only 3,000 members, or less than 1/3, were sent the survey or the diversification of the invitees, the notes do not specify whether the 3,000 invitees operated in the U.S. or if international funeral homes were also included, there is no indication of the selection process to identify those 3,000 invitees...were they "cherry-picked" or randomly selected? All of these, among others, very simple points can and will drastically determine the outcome.

Let me break it down...

• A 38% response rate equates 1,140 responses
• 1,140 represents about 11% of NFDA member funeral homes, and only about 5.4% of total U.S. funeral homes
• If survey invitees were not random, then inviting responses from targeted funeral homes in rural areas, financially depressed or disadvantaged areas, funeral homes whose business is influenced by providing goods and services to the homeless, mentally challenged or prisons, and family-owned vs corporately owned, basically allows the NFDA to handcraft a statistic to their advantage.
• The NFDA took a set number of goods and services and priced only these items from the submitted general price lists. This list is decidedly vague in what exactly was being included, providing the average cost of a "viewing or visitation", but did not specify the number of days, time of day, weekday vs weekend, etc...things that can change that number, thus the overall average, by HUNDREDS of dollars
• The average was NOT calculated from actual funeral receipts, but rather from only a pre-selected number of goods and services as determined by the NFDA.

Questions to the NFDA:

1) How would the average change if funeral home invitees were primarily located in the lowest median household income areas or rural areas? For instance, how would the prices differ from a funeral home operating in Liberty, MS (pop. 676) differ from one operating in Los Angeles, CA (pop 3.8M)?Or, funeral homes operating in Atherton, CA, with the highest median household income compared to those in Detroit, MI, with one of the lowest median household incomes?

2) Since when does information from 5.4% of total practitioners equate to "statistical integrity", as stated on the NFDA website? That's news to me...

3) What is the degree of influence from international funeral homes?

4) How were the 3,000 invitees determined?

5) Why did only 38% respond? A reasonable person might conclude that those funeral homes with higher prices operating in higher income, metropolitan areas may decline to respond knowing that they would influence the average up.

6) The funeral industry generates $11B annually...why weren't actual funeral receipts used as opposed to only the selected goods and services determined by the NFDA?

I could go on and on, but I believe my point is clear. When any type of analysis is prepared from unclear, misleading and manipulated data, the result is unclear, misleading and manipulated statistics. Only some of us can learn by other people's experiences...the rest of us have to be the other people.

Don't be the other people. Learn more about how to protect yourself and your loved ones by developing a thoughtful, comprehensive pre-need funeral plan at http://www.funeralplannersinc.com/.