Trust company didn’t post bond, avoided oversight
Officials scrambling in hopes of recovering money for disabled clients
First of two parts
Desert State Life Management is a decadesold nonprofit company with a mission to provide asset management, trust services and life planning for individuals who are “decisionally incapacitated and require protective oversight.”
Now that state and federal authorities allege that millions of dollars in client assets were siphoned off into private businesses and personal accounts of Desert State’s CEO, Paul Donisthorpe, families with loved ones whose trust accounts have been decimated are asking where were the protections and can they recoup their money?
As for the financial protections, officials say they can find no evidence Desert State ever posted a surety bond or in the alternative provided other evidence of financial responsibility as required by state law. And, the company was last audited by the state in 2008.
As for recovering the money for the estimated 70 affected clients, state officials aren’t offering much hope.
The state, however, is looking at possible insurance coverage and is seeking to place Desert State into court-ordered receivership. The FBI, meanwhile, has filed a federal civil action
to seize two properties owned by Donisthorpe and his wife.
Donisthorpe has reportedly suffered brain damage from a stroke, fall or suicide attempt that occurred within days of the state’s beginning its examination of Desert State’s books. Neither he nor his wife, criminal defense lawyer Liane Kerr, has responded to Journal requests for comment.
No bond posted
Mike Unthank, the state superintendent of Regulation and Licensing, told the Journal last week that his agency is planning to introduce legislation in the 30-day session to strengthen the legal requirements for New Mexico’s nonprofit certified trust companies, of which there is currently just one: Desert State.
“I think it certainly begs the question of how do we go about ensuring to the public that their funds are safe and sound in these different institutions that claim to be nonprofit,” Unthank said.
New Mexico law requires state certified trust companies, both for-profit and nonprofit, to file a surety bond or otherwise prove financial responsibility in case anyone is damaged by a company’s negligence, fraud, embezzlement or breach of trust.
But Regulation and Licensing officials told the Journal it appears no surety bond was posted when the company obtained its initial certificate to operate as a trust company in the early 1990s — or when Donisthorpe took over in 2006.
And the alternative proof of financial responsibility?
There’s no way to tell from state Financial Institution Division files what information was ever provided to regulators to ensure the company’s clients were protected, Unthank said.
“It’s my understanding that the (state Financial Institutions Division) director at the time felt they were financially sound to operate the not-for-profit trust company,” said Unthank, who has overseen the state Financial Institutions Division as head of RLD since 2014.
The irregularities at Desert State surfaced after Chris Moya, acting director of the FID, ordered a long-overdue financial examination of the company’s books at the end of last year. For several years, Desert State had made excuses as to why it couldn’t submit to such an examination, but Moya insisted, according to court records.
Under state law, the division has the authority to perform such an examination annually, but isn’t required to do so.
Unthank said FID in recent years has “been very, very diligent about increasing the number of exams” but there are only 17 full-time examiners to do financial examinations of 11,000 entities that are registered with or fall under the Financial Institutions purview.
He told the Journal that one lesson learned from the Desert State case is “to make sure we have the opportunity to examine these folks on a regular basis.”
CEO’s political ties
In the mid-1990s, Desert State reported on tax forms revenue of up to $3 million, primarily from contracts with the state Attorney General’s Office and the New Mexico Department of Human Services.
Desert State back then primarily provided guardianship and conservator services for the developmentally disabled or others who were incapacitated in some way.
The nonprofit company specialized in special needs trusts, which are designed for beneficiaries with disabilities, either physical or mental. The trusts are written to allow the beneficiary to receive essential government benefits while maintaining eligibility for distributions from trust accounts — which can come from lawsuit settlements or other money set aside by the clients’ families.
“In the early days, it was the most wonderful thing because they (Desert State) really filled the need that other people wouldn’t do,” said Albuquerque attorney Susan Tomita. “This is so sad about what’s happened.”
The state contracts had dried up by the time Donisthorpe, a CPA, took over, and he essentially downsized the operation, tax records show.
News stories describe him as an investment banker, and he has served as a former deputy state fair manager and as a municipal adviser for Bernalillo
County.
Donisthorpe comes from a politically prominent Republican New Mexico family.
His brother Bruce, who died in 2016, was a Republican consultant and pollster. His mother, Christine Donisthorpe, represented San Juan County as a Republican in the state Senate from 1979 to 1996.
Donisthorpe ran for state Treasurer as a Republican in 1986 but lost in the general election to Democrat James Lewis.
Before becoming CEO of Desert State, Donisthorpe prepared the nonprofit trust company’s tax returns.
Donisthorpe has operated Desert State from an office on North Fourth Street where his wife has a law office.
Desert State at one time had three board members, including Donisthorpe. Former Democratic state Sen. Tom Rutherford served on the board until 2016, the state’s petition states.
The other board member besides Donisthorpe is Helen Bennett, who has helped state examiners with their investigation, according to the receivership petition filed by the state.
Insurance mystery
On its 990 tax form filed in March 2015, the most recent available to the public, Desert State reported receiving more than $200,000 in fiduciary fees. Donisthorpe paid himself $12,000 as CEO.
He also reported expenses that included about $20,000 for two insurance policies: general liability and a second policy for directors and officers of the company.
Unthank said that when state financial examiners began to probe into the company’s books, they discovered that the premium payment on one of the insurance policies was “either expiring or had expired.”
“We’re looking at those (insurance) issues right now to determine just exactly what, if anything, is there?” Unthank said last week. Such insurance policies typically provide coverage to directors and officers who are sued for making mistakes that harmed others, or for failing to fulfill their fiduciary responsibility.
It’s unclear whether that coverage would extend to what the FID petition described as alleged theft.
Bennett, through her attorney A. Blair Dunn, recently met with the FBI. Dunn said Bennett decided to pay the premium for the directors’ and officers’ policy out of her own pocket.
She was named in a lawsuit filed June 6 by the nonprofit Ayudando Guardians Inc. on behalf of seven of its clients who had assets with Desert State. The lawsuit seeks damages and an accounting of their funds held by the trust management company.
In a response filed late Friday, Bennett stated that she was a volunteer member of the board with no access or control over Desert State’s corporate or trustee assets.
She also filed a motion for a temporary restraining order to keep Donisthorpe and his wife from transferring, disposing or converting assets that potentially derive from the alleged fraud, embezzlement or conversion of funds.
Nonprofit loophole?
Unthank is critical of the section of state law that exempts nonprofit trust companies from having to provide capitalization to ensure there are adequate internal resources to operate the company.
Capitalization of up to $500,000 is required for trust companies that operate as “for profit,” of which there are seven currently certified by the state. Four banks also have trust departments that are overseen by state regulators.
“It does open the door ... Just think from the standpoint, ‘hey, here’s a business I can get into pretty easy. I don’t have to put much capital in it and now I have control over a large number of people’s assets and it doesn’t require me to do very much,’ ” he said, referring to nonprofit trust companies.
Nonprofits may not have the capitalization required of bigger trust companies. But Unthank said there’s no way to reassure the client base “that I have the ability to actually manage that, because I don’t have to demonstrate any kind of bond or any type of responsibility other than that vague language that’s whatever’s acceptable to the director at the time.”
Unthank stressed that he’s not advocating changes for the operation or certification of New Mexico’s for-profit trust companies.
“They have very substantial portfolios compared to this entity, which had a pretty small portfolio, albeit that every dollar of that is important to people who had their money in that trust company.”