Broome County Teachers FCU officials failed to conduct properdue diligence when the failed Binghamton, N.Y. institution extendedcredit to a mother-and-son team that defrauded the credit union for $14 million, according to a CEOclose to the case.

Scott Lonzinski and his mother, Laura Conarton, pleaded guiltyTuesday to fraud after the two created phony documents, forgedsignatures and created a fictitious persona in order to obtainapproval for share secured loans from BCTFCU for a total of $14million.

According to court documents, Conarton was a loan administrationmanager at a People's National Bank for approximately 10 years, andused her knowledge of the bank's policies to create fakecertificate statements, signature cards and security agreementsfrom PNB pledging the non-existent certificates as collateral forthe loans.

The credit union shirked its due diligence by structuring themember business loans as consumer loans, said Frank E. Berrish, president/CEO of the $3 billion VisionsFCU. Visions, located in Endicott, N.Y., purchased and assumed BCT's assets after the NCUA placed thecredit union into conservatorship as a result of losses from the fraud.

“The credit union had no experience in making commercial loans,”Berrish said. “They handled it as though it was a shared securedloan, so they didn't do their due diligence.”

Additionally, the shares pledged as collateral were held byanother institution, which is also bad risk management, Berrishsaid. He added that he heard the NCUA was critical of the loansbefore it was revealed they were fraudulently obtained.

“A $50 million credit union doesn't make $6 million and $8million loans, risking all its reserves for one member,” Berrishsaid. “It was not normal and what they did was out of ignorance.And for whatever reason, the board approved it.”

Credit union attorney Andy Keeney, partner in the Norfolk, Va., firm of Kaufman andCanoles, agreed that the credit union failed to exercise proper duediligence, saying BCT either lacked proper member business lendingpolicy or didn't follow it. Additionally, share secured loansshould be secured by deposits at the lending institution, notanother institution, he said.

“They definitely should have called the bank to confirm thevalidity of the certificates,” Keeney said. “In fact, they probablyshould have talked to bank management.”

Berrish said to his knowledge, the loans BCT extended toLonzinski and Conarton were funded after Lonzinski's constructioncompany completed a remodel of a branch facility in Montrose, Pa., which is now aVisions FCU location.

Regardless of the timing, Keeney said loans to vendors require aseries of checks and balances, similar to when loans are made tovolunteers, to ensure proper due diligence.

Berrish said Visions retained all BCT employees when itpurchased and assumed the failed credit union's assets, with theexception of employees dismissed by NCUA at the time of theconservatorship, which include former BCT CEO Karen White.