California's Secret Stash
In 1990, when current Lt. Gov. Gray Davis was midway through his two terms as California's controller, his office approved a seemingly minor change to a virtually unknown contract with politically powerful Boston bank. As a result of that alteration, tens of thousands of people have never been notified by the state that it is in possession of more than $100 million in stocks, bonds, cash and other property that is rightfully theirs. The following is a investigation into what went wrong and why. When Ruth Bedell moved into a nursing home three years ago at the age of 95, her body was still healthy but her mind was beginning to go. Luckily, she had a nephew, 70-year-old David Pellissier, who could to step in and take over her financial affairs. It wasn't an easy job. With the cost of the nursing home and doctor's bills running at about $3,500 a month, it didn't take long before Pellissier, a retired sheep rancher living in the Inyo County town of Big Pine, began to worry about the tremendous drain on his aunt's bank account. How would he manage to keep paying her bills once the money ran out? Then the phone call came. A clerk in the Unclaimed Property Division of the state Controller's Office had a document with Bedell's name and the address of her longtime residence. Though Bedell had already moved into the nursing home, her number was still listed, so the clerk's 1993 call to directory assistance put her in touch with Pellissier, who had moved into his aunt's house. Once the clerk verified that Pellissier was related to Bedell, she told him the good news. "The state has $50,000 that belongs to your aunt," said the clerk. "There were some stocks she owned that were turned over to us. They've been sold by the state, but we have the money." The woman patiently explained what needed to be done to claim the cash. And then she said something that caught Pellissier by surprise. "Please don't tell anybody how you found out about the money," she asked. "I'm not supposed to contact you like this. It's against the rules, and I could get in trouble if they find out." "I knew that my aunt had owned these stocks," Pellissier said in a recent phone interview, "but I never could find out what had happened to them. I tried to locate where they were, but never could run down what happened to them because her records were kind of vague. And then I get this call from the woman at the state, who was doing this out of the goodness of her heart. I always wanted to write and say thanks, and tell her how much it meant, her doing what she did. I didn't, though, because I didn't want anything to happen to her." That clerk's name is Irene Durham, who left her job with the Controller's Office late last year for an assignment in another state agency. Though she still worries there might be repercussions for revealing what she did, Durham agreed to talk on the record about what happened with Bedell and her money in the hope it will help draw attention to a problem that, for the past five years, has helped block tens of thousands of people from recovering more than $100 million in lost assets that is rightfully theirs. And maybe yours. The word is escheat. Literally it means "that which falls to one." The term's origins can be traced back to Medieval England. Under feudal law, if a serf died with no heirs, any property owned would escheat to the lord of the manor. Nowadays, it is the government that gains control of the property. But it's not only the property of those who die without heirs that gets escheated to the state. In 1959, the California Legislature passed a law intended to protect the assets of bank customers whose accounts fell idle. Prior to that time, the banks would stop paying interest and, over the years, drain the accounts through service fees. The Legislature put a stop to that by ordering banks to try and notify any customer with an account that was dormant for more than seven years. If unable to make contact, the banks would then turn the money over to the state, which would hold the money in perpetuity. And it wasn't just banks that fell under these escheatment laws. If a utility owes you a refund, or a company has your stock dividends, or the landlord has a security deposit that has to be returned and you didn't leave a forwarding address--all that, according to law, must be relinquished to the state. The state, in turn, is supposed to make its own attempt to find the property owner. We are talking about staggering amounts of money. In the 1993-94 fiscal year alone, $280 million from about 450,000 individual accounts was escheated to the state. Which brings us to State Street Bank and Trust and its Unclaimed Property Clearinghouse, both of which are subsidiaries of the State Street Boston Corp., a Massachusetts firm that has offices worldwide. The escheatment business has blossomed into a lucrative sideline for State Street, which audits companies throughout the country to find assets--predominantly stocks and dividends--that should be turned over to individual states. State Street gets paid not only by the companies it audits but also by the recipient states, which provide a fee to the bank based on a percentage of the total amount for each account escheated. Along with getting paid at both ends, State Street also makes a profit in the middle, earning interest on the money in the accounts while they are in its possession. The deal got even sweeter in 1990, when, with Gray Davis serving as California's elected controller, the contract with the State Street was renewed with a seemingly insignificant change. Instead of handing over the stocks, bonds and cash dividends and then getting paid (a maximum of 16 percent at the time), State Street managed to get approval to take its fee out before sending the assets to California. For example, if someone was owed $1,000, State Street would take out fees totaling as much as $160 and then turn the remainder over to the state. The person that money belongs to would be paid the full amount, however, with the state making up the difference--if the owner found out where it was. As it turns out, that became a very big if. The contract revision had one major consequence. Because State Street started taking out its fee prior to turning the money over to the state, the accounts were all considered to be out of balance. Problem is, the Controller's Office computer system is programmed to accept only files that are in balance. In other words, accounts that don't contain the full amount can't be posted on the Controller's Office computer system. The bottom line: No account State Street has handled for California since that contract change in 1990 has been posted on the computer. Zero! That fact--which Connell's office confirmed after the News & Review learned about it through independent sources--is crucial. If a record isn't posted on the computer, you won't be notified via mail (as is the case with other accounts) that the state is in possession of your assets. End result: Since 1990, no one with an account handled by State Street has received a letter from the Controller's Office notifying them that the state is in possession of his or her property. The Controller's Office also has a toll-free hotline people can call to see if the state is holding any property belonging to them. However, if the account was being handled by State Street and you didn't know that fact, you would be told that the state didn't have property belonging to you. In recent weeks, as the California Alternative News Bureau has pressed its investigation of the Unclaimed Property Division, aides to Controller Kathleen Connell have repeatedly insisted that one point be made very clear: This problem began in 1990--when Lt. Gov. Gray Davis sat in the Controller's Office--and that Connell, who took office in January, acted to change the situation as soon as it came to her attention. "The problem identified ... occurred before the current controller, Kathleen Connell, took office and she is not responsible for the problem having occurred," Connell special assistant Carol Thorp said in a written statement. "Once Controller Connell became aware of the problem, she acted to resolve it." According to Thorp, the situation was discovered by Connell while making a department-by-department review soon after taking office in January. Connell has also contracted to have an independent audit of the office. That audit, released in late May, failed to disclose the problem caused by State Street withdrawing its fee early, but it did find another point of concern. If a company misses its annual deadline for escheating lost property to the state, it must pay late fees and penalties. They are mandatory. But according to the audit, the Controller's Office under Davis helped make it possible for State Street to waive those late charges. As a result, companies filing late had an incentive to go through State Street. Another result was that California, over the past four years, has lost out on $3 million in late fees that, by law, should have been paid. Connell has ordered that the policy be changed. But that $3 million is dwarfed by a problem affecting perhaps as many as 80,000 individuals exists because of the change in the State Street contract that allows the bank to withdraw its fees prior to submitting accounts to the Controller's Office. Connell admits that. At the same time, however, her aides are attempting to downplay the significance of the issue. "The Unclaimed Property Division receives approximately $250 million in unclaimed property each year," explained Thorp. "The State Street accounts amounted to approximately $100 million between 1990-1994, or an average of $25 million a year--about 10 percent of the total of unclaimed property in each of those years. While $100 million is a substantial sum on its own, it should be put into context vis-à-vis unclaimed property totals." In other words, says Thorp, that $100 million represents only a 'minuscule percentage' of the $1.7 billion in unclaimed property that has been escheated to the state since the law went into effect in 1959. But taken on their own, the numbers seem anything but tiny as the cash continues to pile up in both California's coffers and State Street's vaults. Between 1990 and 1995, a total of $115 million has been escheated to California through two private contractors--State Street and North American Property Placement Company (NAPPCO)--which have contracted with the state to conduct audits and escheat assets to California. But State Street is by far the bigger player of the two. According to the Controller's Office, NAPPCO handled about $2 million worth of accounts in 1993 and zero last year. By comparison, State Street handled $25 million in 1993 and almost $40 million last year. In return, it was paid $3.2 million in '93 and $4.2 million the following year. And, as Thorp points out, it has all been perfectly legal. Also legal were the campaign contributions State Street sent Gray Davis' way as he geared up to make his run for lieutenant governor. According to campaign finance reports filed with the Secretary of State's Office, Davis received at least $25,000 from State Street and its top corporate officers in '93 and '94. (Davis raised a total of $4 million for the race.) Connell, by comparison, received $4,000 from State Street during the same period. Davis' chief of staff, Garry South, points out that ''State Street Bank and Trust is a major financial institution that serves as financial custodian for California's major public pension funds'' and is consistently a contributor to officeholders statewide. Given that, he said, it would be unfair to imply that there was any quid pro quo regarding the change in the contract and financial contributions to Davis as he ran for lieutenant governor. In fact, Davis claims to have had absolutely no knowledge of that contract change or the problems that it caused. Moreover, Davis feels he should be given credit for all the good things that happened in the Unclaimed Property Division during his time as controller. "It is abundantly clear that Controller Davis had a strong interest in returning unclaimed property to its rightful owner," South said. For example, of the $530 million in unclaimed property that has been returned to its owners since the escheat law was passed in 1959, fully $392 million, or 74 percent, was returned to individuals and organizations during the eight years Davis was controller, reported South. As to the troubles with State Street that occurred during the final four years he was controller, Davis claims not to have known about the contract change or the problems it caused. He said that because of other difficulties involving the controller's computer system during the same period, it is unlikely the State Street files would have been entered in any event. Those problems were the result of the Legislature's decision to shorten the time a bank could hold an idle account open before escheating money to the state. With the time frame shortened from seven to five years in 1989 and five years to three the following year, the Controller's Office was deluged with a huge backlog of unclaimed property reports. "Even if there had been no change in the State Street contract, this backlog still would have resulted," claimed South. South also insists his boss is not the one to blame for the change in the State Street contract. "That was amended at the behest of the Department of Finance," he said. According to two sources from the Controller's Office, both of whom confirmed South's version of the story, the Deukmejian administration was looking to make cuts in the state's budget wherever it could, and by allowing State Street to extract its fee before escheating stocks and dividends to the Controller's Office, payments didn't show up in the office's budget. Another source in the controller's office, who also requested anonymity, claims it was Davis who had more to gain by making it look like he was keeping expenses in his office under control, and that he was the one who wanted the State Street payments off the book. The News & Review was unable to verify either version of the story, but this much is certain: No one wants to claim responsibility for the change in the State Street contract. One other piece of information was imparted by Davis' staff. Despite the fact that State Street accounts weren't showing up on the computer, some people were still able to get their money back. "According to our information, the Controller's Office daily makes three to four inquiries of State Street Bank to resolve claims by potential account holders and approximately 50 accounts per month are paid as a result of that process," said South. That works out to approximately 600 people per year. According to information from the Controller's Office obtained by the Alternative News Bureau, State Street handled approximately 20,000 accounts last year. For much of the four years she worked as a program technician in the Controller's Office, Irene Durham's primary responsibility was dealing with the accounts sent to California by the Unclaimed Property Clearinghouse, a division of Boston's State Street Bank and Trust Company. Durham filed away literally thousands upon thousands of reports. And when people did find their way through a maze of bankers and bureaucrats, she could usually reunite them with their money. Because they were not listed on the controller's computer, the key to success was for people to find out at some point that the person they needed to contact was Durham. People like Bruce Sarchet. An Elk Grove lawyer, Sarchet had purchased Orange County municipal bonds through First Interstate Bank years ago. By the early 1990s, when the bonds were called due, he had moved several times, so he never received notification. By 1992, Sarchet began wondering what had happened to his money and started making phone calls. After writing several letters and then waiting about six months, he finally obtained a check for the $18,000 owed him. But the process was actually more complicated than it appeared. First Interstate had merged with Bank of America, and somewhere along the way, according to documentation obtained by the News & Review, most of the information connected with Sarchet's account, along with at least 12 others with a total value of $1.7 million, had been 'purged' from Bank of America's computer files. For some reason, the bank turned the accounts over to State Street instead of escheating them directly to the state. By the time they got to Durham's desk, they contained only account numbers and dollar amounts. At some point--it's not clear when--names were re-connected to the account numbers. (As a result of the News & Review inquiries regarding the issue, Connell sent auditors this week to Boston to find out why accounts were submitted with no names, and to take a broader look at the handling of unclaimed property accounts. State Street representatives repeatedly refused to answer News & Review questions regarding this story.) Calls and faxes went back and forth between Sacramento and Boston until Durham finally tracked down where the money was. But to Sarchet, it all seemed fairly simple. "It wasn't that much a problem," he said. "It just took some time." Not everyone is as fortunate as Bruce Sarchet. There's no way to tell how much money from State Street accounts has made its way back to its owners--the Controller's Office doesn't keep track of that information. After all, it's not like they can just run the numbers through the computer ... But Durham is convinced that significant numbers of people have lost out because of the way the system worked--or didn't work depending on your point of view. "I felt sorry for all those people who had money in those accounts," Durham said. "They were just ordinary people who didn't know about the system. What was going on there just wasn't right. There were people who needed that money and were suffering because of what was happening." For the most part Durham followed orders--the result of the Legislature curtailing phone outreach as a budget-cutting measure--and didn't attempt to contact the vast majority of the people named in the files sent her way. Having already received a written reprimand for the phone contact she had with one distressed property owner, the soft-spoken Durham wasn't looking to make any waves. But for some reason, the morning the document with Ruth Bedell's name on it crossed her desk, Durham knew instantly that she just couldn't let it be business as usual. "I saw this report and I just had a feeling," she recalled. "I can't describe it any other way. The only way I can explain it is that I'm a religious person, and that somehow I knew that this person really needed that money." The rules said Durham was prohibited from contacting any of the people listed in the reports that crossed her desk. But in the case of Ruth Bedell, she considered herself to be answering to a higher authority. "I just knew what I had to do," she said. As she talked about all the others she wasn't able to reach out to, Durham's face creased with concern. "What was happening to those people's money, it just isn't right." Kathleen Connell agrees. According to her special assistant Thorp, neither State Street nor NAPPCO will be allowed to take fees from accounts prior to turning money over to the state once new contracts take effect July 1. Also, a new program will allow the state to begin putting out-of-balance accounts onto its computers in November of this year. But State Street has been handling about 5 percent of the approximately 450,000 accounts turned over to the state annually, which means that there is a backlog of tens of thousands of files dating back to 1990 that will have to be entered into the computer. So there is no telling how long that task will take to complete. Ruth Bedell, meanwhile, still lives in the same Big Pine nursing home, where her mental condition has deteriorated to the point where "she doesn't even recognize me anymore," laments her nephew. But at least she is safe and comfortable, and Pellissier has been able to receive a measure of relief from the financial worries that hovered over him not that long ago. And he is fortunate, too, that Irene Durham happened upon his aunt's file when she did. Since then, her name has been dropped from the telephone directory, which means she might never have been found and had her $50,000 returned. SIDEBAR Have You Been Escheated?: Following The (Lost) Money Author: Curt Guyette CANB Background: Until a few years ago, the state actively went looking for people whose property was escheated to the state. Working with the Franchise Tax Board, it tried to find people`s most recent addresses and sent out notifications to anyone who`d lost property valued at $25 or more. And the names of those owed $50 or more would be published in newspapers. Length: 800 words Cost: free to members of the CANB; other papers contact Alternet. ____________________________________________________________ The stream of revenue is steady, and it is huge. Year in and year out, about $200 million keeps rolling in to the states general fund to pay for everything from school books to legislative salary increases. The only problem is, all that money belongs to someone else. What began as a consumer protection measure in the late 1950s has evolved into a source of income for cash-strapped California government. It has to do with lost property, with property in this case mostly meaning money that is left idle in bank accounts too long and turned over to the state for safekeeping. The term used to describe all this is escheatment. But it`s not just banks, and it`s not just cash. Jewelry and expensive watches kept in safety deposit boxes, refund checks from insurance companies, layaway deposits, endowments, court settlements, inmate trust funds, stocks and dividends: Anything of value that is yours or owed to you and never collected by law must be turned over to the state, which, in turn is supposed to do its best to get it back to you. You will notice the use of the word supposed. Until a few years ago, the state actively went looking for people whose property was escheated to the state. Working with the Franchise Tax Board, it tried to find people`s most recent addresses and sent out notifications to anyone who`d lost property valued at $25 or more. And the names of those owed $50 or more would be published in newspapers. There was also a special unit in the state Controller`s Office--responsible for collecting and dispersing this lost property--which worked to try and track folks down so that they could be paid what`s owed them. You`ll notice the use of the past tense, here, too. According to the state`s unclaimed property laws, which are covered under the code of civil procedure, the state should still be mailing notices to everyone and posting names in newspapers. But it`s not. In 1993, in a budget-cutting move, the Legislature started putting restrictions on how much the Controller`s Office could spend on outreach. A $35,000 limit was placed on mail notifications, which means that only about 100,000 of the 450,000 people who have property escheated to the state each year are sent letters notifying them of the fact. The Legislature also put a limit of $150,000 on newspaper notifications. As a result, instead of listing names in newspapers, the Controller`s Office must be content with running ads twice annually that list a number people can call to find out if the state has their property. "We want to get the money back to the people it belongs to" said Carol Thorp, a special assistant to Controller Kathleen Connell, "`but we can only do what the Legislature lets us do." One thing that has not been eliminated is the unclaimed property hotline. If you don`t have a problem account--one that has been sent to the state with incomplete information, or has gone through the State Street Bank and Trust (see main story)--you can call the hotline at 1-800-992-4647 and they will put your name into the computer and tell you whether there is anything for you to claim. The good news is, that despite all the reduction, the amount of money being returned to people has more than doubled between 1990 and last year, going from $45 million to $88 million. That`s happened because the length of time a bank account can remain idle has been shortened. When the unclaimed property law was first written, money had to sit idle in an account for seven years before a bank could turn it over to the state. Now that the time has been reduced to three years, it is often much easier to find the rightful property owner. The bad news is that even with that increase, the vast majority of people who have unclaimed property never find out that the state is holding it for them. Even in the best years, about 70 percent of the money remains with the state. But don`t worry. Even though it`s being used to help balance the budget, it will always be there, held in perpetuity until you show up to claim it. As Thorp said, "That money never goes away." You just have to know where to find it.