Judge Strikes Down Another Suit in New London Case
In the ongoing pursuit to recover alleged mismanaged funds, another lawsuit tied to the collapse of New London Security Federal Credit Union has been dismissed.
This time around, a suit filed by Wells Fargo Advisors LLC was dismissed by a Connecticut district court judge for failure to demonstrate a right to indemnity or contribution.
According to its complaint, Wells Fargo sued several former New London board members alleging negligence by Edwin Rachleff, the financial adviser who allegedly mismanaged the credit union’s investments. Rachleff was also an investment broker with A.G. Edwards & Sons Inc., which later merged with Wachovia Securities and then Wells Fargo. He committed suicide on the same day the NCUA liquidated New London in 2008.
U.S. District Senior Judge Warren Eginton said a state statute on joint liability in third-party negligence that Wells Fargo presented in its case did not apply because all alleged losses are purely commercial in nature.
Last September, it was announced that a lawsuit filed by five members of New London was dismissed by a federal court because the plaintiffs failed to file their suit within the six-month deadline window after the NCUA board denied their initial administrative claim. The members alleged that New London board members, staff and the credit union’s accounting firm, among others, were negligent.
In a motion filed in July with the U.S. District Court in Bridgeport, Conn., the members claimed the NCUA was negligent in oversight of New London, which lost nearly $12 million after deceased financial adviser Rachleff committed alleged fraud with the CU's investment accounts.
The members cited a NCUA Office of Inspector General material loss review report released in 2009 that said New London's management failed to implement adequate internal control over the credit union’s investment activity. The OIG also acknowledged that NCUA's examiners failed to adequately evaluate the risk in New London's investment program.
In June, the five plaintiffs filed a suit against five board members, a New London manager, Wells Fargo Advisors, auditing firm Beller, Shepatin & Co., Rachleff's wife, who is executrix of Edwin’s estate, and a law firm that served as general counsel to the CU. The plaintiffs were seeking to recoup $4 million.
The NCUA had previously filed lawsuits against Wells Fargo and the CU’s auditing firm, Beller Shepatin, for professional malpractice for allegedly failing to detect fraudulent activity.
New London’s case goes back to 2008 when Rachleff allegedly created fake account statements that showed the credit union was worth $11.8 million, according to the NCUA. The funds were supposedly deposited into the New London’s account from 1998 to 2003. However, the funds were not found by the NCUA. As a result, the credit union was declared insolvent and then liquidated by the regulator.
In December 2009, the NCUA said it was discussing a possible settlement with Wells Fargo and New London's outside accounting firm, The regulator said that, at the time, if a settlement was not reached, it would pursue legal action.
The NCUA said as a result of Wells Fargo's negligence, New London became insolvent and the NCUSIF had to pay out $9.7 million for the insured investments, according to the suit. At the time, the regulator said it continued to remain exposed to liability for additional sums stemming from claims for the uninsured investments of member investors who may have claims against the insolvent estate.
In its material loss review report, the OIG listed several reasons why New London ultimately collapsed, including a failure by the credit union's management to implement adequate internal controls over investments and the lack of a safekeeping/custodial agreement with a third-party independent of the account manager.
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 credit union’s assets. While NCUA examiners noted the high concentration of investments and the lack of controls over investments, they failed to elevate these repeated issues for stronger supervisory actions.