The CU regulator's Office of Inspector General conducted a material-loss review of the New London, Conn.-based CU to determine the causes of failure and the resulting loss to the NCUSIF. The OIG also assessed NCUA's role in supervising the CU. Ultimately, the office suspected fraud led to New London's liquidation due to a misappropriation of the CU's $12 million in investment funds by an investment account manager. It was discovered that 82-year old Edwin R. Rachleff controlled all of the CU's investment activity. Rachleff committed suicide on July 28, 2008, the day of NCUA's liquidation of New London.
New London management also failed to implement adequate internal control over the CU's investment activity, NCUA's OIG report read. For instance, the account manager made the investment purchase and sale decisions, executed investment transactions and submitted reports and recommendations to the board with little or no CU oversight. Beyond contracting with external auditors to perform annually required work, the CU's supervisory committee was inactive for more than four years despite an NCUA document of resolution that repeatedly recommended the committee become more active or contract out quarterly reviews for such things as internal control reviews.
The OIG said NCUA recommended New London execute a safekeeping/custodial agreement with a third party independent of the account manager. According to NCUA examination documents, the New London board passed a resolution to have a safekeeping arrangement with its investment brokerage firm and the CU's attorney reviewed this agreement to ensure the credit union's interests were protected. However, NCUA staff was unable to locate a written safekeeping agreement, which could have shown that the CU's interests were protected.
The lack of controls goes even further, the OIG found. Although the external auditor purportedly obtained annual independent confirmations from the brokerage firm, the confirmations received were not sufficient to ensure the investments existed.
"We determined there were several confirmation responses the external auditor should have questioned and performed additional confirmation procedures. For example, one confirmation request was mailed to the brokerage firm's headquarters in St. Louis, Mo., but the confirmation response received was from the account manager's office in Waterford, Conn.," the OIG said in its report.
Additionally, for the six years of confirmations NCUA reviewed, two confirmations were not signed and the last two years' confirmations were not in the external auditors' work papers. The external auditors failed to challenge the third-party confirmations, thereby allowing the suspected fraud to go undetected, the OIG said.
NCUA examiners also failed to adequately evaluate the risk in New London's investment program, according to the OIG. Investments accounted for more than 90% of the CU's assets. While NCUA examiners noted the high concentration of investments and the lack of controls over investments, including the lack of a safekeeping agreement, they failed to elevate these repeated issues for stronger supervisory actions. "Consequently, examiners did not expand examination procedures when they should have done so," the OIG said.
There were instances where NCUA examiner work-paper documentation contradicted the information found in the external auditor's work papers. Examiners also failed to ensure that New London management took corrective action on repetitive document of resolution issues.
"As a result, NCUA missed opportunities to mitigate the loss to the NCUSIF caused by New London's failure," the OIG said.
New London's troubles were gargantuan for a CU of such small size. Chartered in 1936, member deposits were limited to mostly $100 per month. The CU had one employee, a manager, who handled most business activities such as manually maintaining books and records and authorizing and posting cash receipts and disbursements. New London also had five board members and three supervisory committee members. In 1988, the CU changed investment brokerage firms, and the firm's account manager who managed the CU's portfolio, also served on New London's board of directors from 1985 to 2004. The OIG doesn't name Rachleff as that account manager in its report. As of June 30, 2009, the CU reportedly had approximately $12.7 million in assets with net investments totaling $12 million. At the time of its failure, New London had 365 members and with over 94% of its assets in investments, the CU operated primarily as an investment club, the OIG said.
New London received monthly brokerage statements for an investment account and a deferred compensation account. NCUA examiners compared both June 2008 statements to each other and noticed that the investment statement differed in appearance from the deferred compensation statement. It was soon determined that the existence of one brokerage account, the New London Security FCU deferred compensation account, held approximately $55,000 in investments as of July 2008. The assistant manager for the investment firm told examiners the account number used for the investment account did not belong to New London. Examiners later determined that the account number used by the account manager was actually the account number for a shoe company that was owned by the family of the account manager's wife. A criminal investigation, which was closed after Rachleff's suicide, led to the discovery of evidence suggesting he was involved in the suspected fraud.
CU Card Site for Consumers Launched
Card Analysis Solutions, a CU card consultancy run by Ondine Irving, has launched a Web site, dubbed Credit Card Connection, designed to help consumers find consumer-friendly credit union credit cards.
"This new Web site was created from my vision to provide the best credit card options to American consumers in the wake of the unfair and deceptive practices prevalent with the major credit card market," Irving said. "I knew the majority of credit unions offer the most fair and ethical credit card programs in the market, yet no one was getting the word out effectively. Through communication with nationally known personal financial expert, Suze Orman, we have collaborated to get the word out to America that there are alternative options," Irving added.
Irving explained that each credit union's credit card program is being rated on a five-star system. A fair and ethical credit card program is deemed as one with either fixed or variable rates of less than 18%, no balance-transfer fees, no annual fees, late fees at or less than $25 and no penalty pricing.
"Most credit unions have been receiving a five-star rating," Irving said. "It is highly unlikely those credit unions which have sold their credit card programs to banks will be eligible for the registry, as most of these programs have rates that exceed 18% along with other typical bank fees."
Irving said that, as of its launch, more than 200 credit unions had signed up to take part in the site and that credit unions can register for inclusion in the CCC site through Card Analysis Solutions (www.cardanalysissolutions.org).