The five members who are suing the NCUA for what they claim was negligence on the agency's part in the collapse two years ago of New London Security Federal Credit Union will have to wait to recover any monetary damages.
As the liquidating agent, the NCUA said by law, it is the party, not members or others, to pursue actions first. The agency was responding to a suit initially filed by five members of New London in June that sought $4 million, claiming board members, staff, the credit union's accounting firm and others were negligent in supervising its financial adviser, Edwin F. Rachleff, who is now deceased. Rachleff's mismanagement led to the credit union's liquidation in 2008.
"As liquidating agent, the NCUA board by law is the successor in interest to the rights of the members and therefore the correct party to pursue such actions," wrote John McKechnie, NCUA director of public and congressional affairs, in a Dec. 13 e-mail to Credit Union Times.
In July, five former members filed a motion in the U.S. District Court in Bridgeport, Conn., claiming the NCUA was negligent in oversight of New London, which lost nearly $12 million after Rachleff allegedly committed fraud with the credit union's investment accounts.
The plaintiffs cited the NCUA Office of Inspector General material-loss review report released in fall 2009 that said New London's management failed to implement adequate internal control over the CU's investment activity. The IG also acknowledged that the NCUA's examiners failed to adequately evaluate the risk in New London's investment program. The IG recently reiterated that examiners failed to expand its procedures or follow through with stronger supervisory actions. The latest report also provided more details on the failures of 10 other credit unions [CU Times, Dec. 8, 2010, page 1].
The same five plaintiffs who named the NCUA in their July motion filed a suit in June against five New London board members, a credit union manager, Wells Fargo Advisors, auditing firm Beller, Shepatin & Co., Rachleff's wife, who is executrix of his estate, and a law firm that served as general counsel to the CU. Rachleff was an investment broker with A.G. Edwards & Sons Inc., which later merged with Wachovia Securities and then Wells Fargo. The plaintiffs are seeking to recoup $4 million.
In July, Beller Shepatin denied the NCUA's claim that it failed to detect fraudulent activity, an allegation made by the agency in a March 19 complaint. Starting at least in 1994, New London used the firm to conduct audits and reviews of its financial statements, including accounts with A.G. Edwards & Sons. In several reports, the accounting firm concluded that the statements fairly presented, in all material respects, the financial condition of the credit union, the NCUA said in its March complaint.
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 agency said.
The suit also charges that, among other lapses, the firm failed to properly request confirmation of the accounts being audited, failed 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.
Earlier this year, the NCUA filed a complaint against Wells Fargo, claiming it too had a duty to supervise Rachleff and should also be held accountable for the New London's losses.