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Improper rollover of 401k account to IRA

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Need some suggestions about this situation:

1. Participant is on deathbed, calls into provider (recordkeeper) and gives verbal authorization to transfer her account balance (approximately $160K) to an IRA at the same provider (to accommodate a partial distribution request). Provider complies with verbal direction. Prior to the transfer, the participant's beneficiaries are her 2 children.

2. Money moves to IRA. The participant's 2 children, who have power of attorney, request and receive distribution of $60K on the participant's behalf (for medical expenses).

3. Participant dies. The 2 children file claim against IRA for benefits. They are told that they are not set up as the beneficiaries for the IRA.

4. The 2 children approach the provider and state that the correct procedures weren't followed for the transfer to the IRA and want it restored back to the plan. The provider agrees that the transfer was not legitimate, but is not willing to restore the $60K that was taken out by the participant (via power of attorney) during the short time the funds were in the IRA.

Any ideas of the best way to unwind this mess? Help!

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