It's not over until it's over. Call that the top-line of the NCUA's Jan. 10 filing of an "offer of additional allegations" in the case of NCUA vs. Siravo, et al., where the fight is over who is at fault for the implosion of Western Corporate Federal Credit Union and who will be held accountable for the losses.
That had seemed settled in late December when presiding Judge George Wu issued a draft decision that dismissed charges against WesCorp's outside directors. Wu's ruling allowed charges to proceed against WesCorp's officers-Robert A. Siravo (WesCorp's former president/CEO), Todd M. Lane (former chief financial officer) and Thomas E. Swedberg (former vice president). In the same preliminary opinion, Judge Wu dismissed complaints against WesCorp's former executive vice president Robert Burrell.
But in issuing his draft judgment, Judge Wu gave the NCUA until Jan. 10 to amend its arguments, which the NCUA has now done. The judge also gave the defendants until Jan. 24 to respond to any NCUA amendments.
Key to the new NCUA argument is that the judge erred in his draft dismissal of complaints against Wes-Corp's directors because, argues the NCUA, the very stature of the outside directors means they should have known better and that they had to ignore red flags as WesCorp set a course toward financial wipeout.
WesCorp directors amounted to a credit union all-star team that included CUNA's Bill Cheney, Robert Harvey (CEO of Seattle Metropolitan Credit Union), James Jordan (CEO of Schools Financial CU), Timothy Kramer (CEO of Keypoint CU), Robin Lentz (CEO of Cabrillo CU), John Merlo (CEO of Premier America CU), Gordon Dames (former CEO of Mountain America CU), Warren Nakamara (CEO of Honolulu Federal CU), Brian Osberg (CEO of Potelco United CU), David Rhamy (CEO of Silver State Schools CU) and Sharon Updike (CEO of Eagle Community Credit Union). All are named defendants in the NCUA filing.
In its 20-page filing, the NCUA extensively documents what it believes constitutes "abdication of duty" by the outside directors, an abdication that in turn was exploited by WesCorp officers, according to the NCUA.
"The officer defendants, and in particular Siravo and Lane, exploited the director defendants' abdication of their responsibilities to make independent judgments," the agency wrote in its courting filing.
Burrell, too, came back into the NCUA's sights in this filing. "Burrell...exploited the director defendants' failure to exercise judgment because he was compensated in part on the returns earned by WesCorp's investment portfolio," said the NCUA.
Central to the NCUA argument is that outside directors in 2005 through 2006 ignored red flags as WesCorp sharply increased the risk of its mortgage-backed securities investments in order to hit desired income targets, which had gotten more difficult to attain as returns on higher quality investments were shrinking. Thus, in 2005, per the NCUA, "WesCorp...increased the risk in its portfolio by purchasing lower tranche MBS, which would absorb any losses in the mortgage pools before the higher tranches and so had a higher risk and paid a higher yield."
Those investment decisions, argues the NCUA, ought to have prompted the board to inquire into material risks associated with the change in WesCorp investment strategies. That discussion never happened, said the NCUA, and this constitutes a "breach of duty," the NCUA maintains.
Bottom line, per the NCUA's argument: "In these acts and omissions, the director defendants abdicated their responsibilities as directors and failed to perform their duties with such care, including reasonable inquiry, as an ordinary prudent person in a like position would use as a director of a $30 billion corporate credit union."
The usual exculpatory argument on behalf of directors in similar cases is the so-called business judgment rule which said that a director cannot be held at fault for decisions that go awry if the director exercised normal prudence and acted in good faith. The NCUA, in its filing, explicitly contends "it has stated a claim against the directors that is not barred as a matter of law by the business judgment rule."
Asked to comment on the NCUA amended filing, Pat Keefe, CUNA spokesperson, said in an e-mail: "The defendants have until Jan. 24 to file their reply, and we'll hold off on any comment until after that reply is filed (if we have any comment at all)."
Jay Morris, a senior vice president at NAFCU, said: "While this has been a very difficult period for credit unions, we have long stressed the need for transparency and accountability in stabilizing and reforming the corporate credit union system. The decisions made by the second-largest corporate credit union impacted thousands of natural person credit unions and their members; if there is liability under the law, the management and board members of Wescorp should be held accountable for their actions."
The NCUA, for its part, e-mailed: "The purpose in making this filing was to show the court additional acts of negligence by the defendants in order to persuade the court to deny the defendants' motions to dismiss."