The NCUA has revealed more details on what may have led to thecollapse of New London Security Federal Credit Union after afinancial adviser that worked with the cooperative for yearsallegedly cooked the books that resulted in a $12.1 millionloss.
The CU regulator's Office of Inspector General conducted amaterial-loss review of the New London, Conn.-based CU to determinethe causes of failure and the resulting loss to the NCUSIF. The OIGalso assessed NCUA's role in supervising the CU. Ultimately, theoffice suspected fraud led to New London's liquidation due to amisappropriation of the CU's $12 million in investment funds by aninvestment account manager. It was discovered that 82-year oldEdwin R. Rachleff controlled all of the CU's investment activity.Rachleff committed suicide on July 28, 2008, the day of NCUA'sliquidation of New London.
New London management also failed to implement adequate internalcontrol over the CU's investment activity, NCUA's OIG report read.For instance, the account manager made the investment purchase andsale decisions, executed investment transactions and submittedreports and recommendations to the board with little or no CUoversight. Beyond contracting with external auditors to performannually required work, the CU's supervisory committee was inactivefor more than four years despite an NCUA document of resolutionthat repeatedly recommended the committee become more active orcontract out quarterly reviews for such things as internal controlreviews.
The OIG said NCUA recommended New London execute asafekeeping/custodial agreement with a third party independent ofthe account manager. According to NCUA examination documents, theNew London board passed a resolution to have a safekeepingarrangement with its investment brokerage firm and the CU'sattorney reviewed this agreement to ensure the credit union'sinterests were protected. However, NCUA staff was unable to locatea written safekeeping agreement, which could have shown that theCU's interests were protected.
The lack of controls goes even further, the OIG found. Although theexternal auditor purportedly obtained annual independentconfirmations from the brokerage firm, the confirmations receivedwere not sufficient to ensure the investments existed.
“We determined there were several confirmation responses theexternal auditor should have questioned and performed additionalconfirmation procedures. For example, one confirmation request wasmailed to the brokerage firm's headquarters in St. Louis, Mo., butthe confirmation response received was from the account manager'soffice in Waterford, Conn.,” the OIG said in its report.
Additionally, for the six years of confirmations NCUA reviewed, twoconfirmations were not signed and the last two years' confirmationswere not in the external auditors' work papers. The externalauditors failed to challenge the third-party confirmations, therebyallowing the suspected fraud to go undetected, the OIG said.
NCUA examiners also failed to adequately evaluate the risk in NewLondon's investment program, according to the OIG. Investmentsaccounted for more than 90% of the CU's assets. While NCUAexaminers noted the high concentration of investments and the lackof controls over investments, including the lack of a safekeepingagreement, they failed to elevate these repeated issues forstronger supervisory actions. “Consequently, examiners did notexpand examination procedures when they should have done so,” theOIG said.
There were instances where NCUA examiner work-paper documentationcontradicted the information found in the external auditor's workpapers. Examiners also failed to ensure that New London managementtook corrective action on repetitive document of resolutionissues.
“As a result, NCUA missed opportunities to mitigate the loss to theNCUSIF caused by New London's failure,” the OIG said.
New London's troubles were gargantuan for a CU of such small size.Chartered in 1936, member deposits were limited to mostly $100 permonth. The CU had one employee, a manager, who handled mostbusiness activities such as manually maintaining books and recordsand authorizing and posting cash receipts and disbursements. NewLondon also had five board members and three supervisory committeemembers. In 1988, the CU changed investment brokerage firms, andthe firm's account manager who managed the CU's portfolio, alsoserved on New London's board of directors from 1985 to 2004. TheOIG doesn't name Rachleff as that account manager in its report. Asof June 30, 2009, the CU reportedly had approximately $12.7 millionin assets with net investments totaling $12 million. At the time ofits failure, New London had 365 members and with over 94% of itsassets in investments, the CU operated primarily as an investmentclub, the OIG said.
New London received monthly brokerage statements for an investmentaccount and a deferred compensation account. NCUA examinerscompared both June 2008 statements to each other and noticed thatthe investment statement differed in appearance from the deferredcompensation statement. It was soon determined that the existenceof one brokerage account, the New London Security FCU deferredcompensation account, held approximately $55,000 in investments asof July 2008. The assistant manager for the investment firm toldexaminers the account number used for the investment account didnot belong to New London. Examiners later determined that theaccount number used by the account manager was actually the accountnumber for a shoe company that was owned by the family of theaccount manager's wife. A criminal investigation, which was closedafter Rachleff's suicide, led to the discovery of evidencesuggesting he was involved in the suspected fraud.
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CU Card Site for Consumers Launched

Card Analysis Solutions, a CU card consultancy run by OndineIrving, has launched a Web site, dubbed Credit Card Connection,designed to help consumers find consumer-friendly credit unioncredit cards.
“This new Web site was created from my vision to provide the bestcredit card options to American consumers in the wake of the unfairand deceptive practices prevalent with the major credit cardmarket,” Irving said. “I knew the majority of credit unions offerthe most fair and ethical credit card programs in the market, yetno one was getting the word out effectively. Through communicationwith nationally known personal financial expert, Suze Orman, wehave collaborated to get the word out to America that there arealternative options,” Irving added.
Irving explained that each credit union's credit card program isbeing rated on a five-star system. A fair and ethical credit cardprogram is deemed as one with either fixed or variable rates ofless than 18%, no balance-transfer fees, no annual fees, late feesat or less than $25 and no penalty pricing.
“Most credit unions have been receiving a five-star rating,” Irvingsaid. “It is highly unlikely those credit unions which have soldtheir credit card programs to banks will be eligible for theregistry, as most of these programs have rates that exceed 18%along with other typical bank fees.”
Irving said that, as of its launch, more than 200 credit unions hadsigned up to take part in the site and that credit unions canregister for inclusion in the CCC site through Card AnalysisSolutions (www.cardanalysissolutions.org).
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