Nearly two months after the NCUA filed a suit against Wells Fargo for negligence in the case of a deceased financial adviser who worked with member investments at the defunct New London Security Federal Credit Union, the agency has filed a complaint against the CU's accounting firm to recover losses.
According to the March 19 complaint, the NCUA claimed that Beller Shepatin and Co. allegedly committed professional malpractice because the accounting firm failed on several counts to detect fraudulent activity in an investment account held by New London. As a result, the CU was unable to prevent or mitigate the damages caused by the fraudulent investment account, ultimately losing virtually all of its assets. In September 2007, Beller Shepatin merged with Ed Lorah and Associates LLC, which is named as the defendant in the complaint.
Edwin Rachleff was an investment broker and financial adviser for A.G. Edwards & Sons Inc., which later merged with Wachovia Securities and then Wells Fargo, who handled investments for New London. Rachleff allegedly created fake account statements that showed the CU was worth $11.8 million, according to the regulator. The funds were supposedly deposited into the CU's account from 1998 to 2003. However, the NCUA found during an audit that $11.6 million in deposits were not there. As a result, the CU was declared insolvent and then liquidated. Rachleff committed suicide in July 2008 on the same day that NCUA liquidated the CU.
Since at least 1994, New London used engaged Beller Shepatin to conduct audits and reviews of its financial statements, including accounts with A.G. Edwards. In several reports, the accounting firm concluded that the CU's statements "fairly presented, in all material respects the financial condition of the credit union." Issued in October 2001 and October 2007, the auditor's reports showed the CU's assets at $10.4 million and more than $12.4 million, respectively. New London continued to make deposits into the A.G. Edwards account based on the reports' standings. Around July 2008, it was discovered that an investment account did not exist at Wachovia, formerly A.G. Edwards.
Acting as the liquidating agent, the NCUA said Beller Shepatin "had a duty to exercise the degree of skill, diligence, and professional care that an accounting firm should exercise in performing audits and reviews in accordance with the code of professional conduct," but the firm failed to meet those standards. The firm also failed to properly request confirmation of the accounts being audited, to adhere to proper standards by maintaining control over the entire confirmation process and failed to detect, identify and question the inconsistencies and differences in the account statements it received for the two separate CU accounts at A.G. Edwards, among other lapses, the suit charges.
"As a direct and proximate result of Beller Shepatin's professional malpractice, the credit union lost the opportunity to take affirmative steps to prevent or mitigate the damage caused by the fraudulent use of its investments," NCUA wrote in the complaint.
This complaint against New London's accounting firm is the latest effort by the NCUA to recoup the $9.7 million the NCUSIF had to pay out for the insured investments. On a Jan. 29, the regulator filed a complaint against Wells Fargo, claiming it had a duty to supervise Rachleff and should also be held accountable for the CU's losses.