According to the Sept. 4 complaint, Southeast Financial in 2002 contracted with former CUNA Mutual Executive Benefits Specialist Daniel Balogh to develop a supplemental deferred compensation for the credit union's president/CEO, John Simmonds, in order to retain him until his 62nd birthday on May 11, 2009. The Franklin, Tenn.-based credit union said it was not interested in strategies that would cause loss of deposits or principal.
Balogh proposed a deferred compensation plan following 457(f) rules, recommending that Southeast Financial make a $1.3 million deposit towards the plan. A portion of the deposit was a "set aside" so that it could accumulate earnings at 7% annually. Simmonds was set to receive more than $608,000 in interest upon his retirement, with $1 million returned back to Southeast Financial, according to the complaint. A second portion worth more than $297,000 would be used for universal life insurance, which Simmonds could purchase at retirement.
Southeast Financial said the nearly $1.3 million was not used as a deposit but to purchase a variable annuity and a variable life insurance plan, according to the complaint. The credit union said the "deposit" invested in products that exposed the principal to market forces. Southeast said both products "were comprised of risky and volatile [publicly] traded equity and debt instruments."
"What Mr. Balogh and CUNA repeatedly portrayed as a 'deposit' was in fact a gamble with Southeast Financial's money," the complaint read, adding that both continued to say the credit union would get its deposit back. Balogh was terminated in November 2007 in what the complaint notes as a "litigious departure" from CUNA. Prior to then, the credit union said it received account statements from CUNA "sporadically."
"We would hope that CUNA Mutual would reach out to us and try to make this right," said Elizabeth Ferguson, the attorney representing Southeast Financial. "Besides Mr. Simmonds, there are other defendants that will be added to the suit later."
When contacted by Credit Union Times on Sept. 8, CUNA Mutual Senior Media Relations Manager Rick Uhlmann said the company is reviewing the suit and cannot comment.
Balogh also developed another 457(f) plan requesting a $4.5 million deposit to offset losses from the first plan, according to the complaint. Southeast said he used the amount to buy a fixed annuity that could not deliver on a lump sum payout for Simmonds by an agreed-upon date. Balogh said Southeast Financial would have to provide monthly income to Simmonds starting on May 11, 2012, in the amount of $61,94 "to make up for the lost benefits." To accomplish this, Balogh recommended the credit union make the $4.5 million deposit with CUNA assuring that the principal and interest were guaranteed. Southeast Financial made the transfer but discovered it was used to buy a fixed annuity product.
"[That,] due to its low implicit interest rate and surrender charges, could not have yielded the $1,389,425 lump sum by Mr. Simmond's 65th birthday," according to the complaint. That amount was for the required benefit and $4.5 million was for the return of principal.
Southeast Financial is seeking recovery through several counts: violation of SEC rule 10b-5, which deals with unlawful securities sales, a similar code under Tennessee law, breach of fiduciary duty and negligence.
"Our claims are pretty much laid out in the complaint," Ferguson said. "We are in the process of undertaking discovery" for the case against CUNA Mutual.