The NCUA stood firm last week in Los Angeles federal court, refusing to provide documents regarding what role managers and NCUA examiners played in the failure of four corporate credit unions and one natural person credit union.
The documents were subpoenaed in a suit brought by the U.S. government, not the NCUA, alleging ratings agency Standard & Poor's deliberately manipulated ratings on mortgage-backed securities to further its own financial interests in the years leading up to the financial meltdown.
Four failed corporates – U.S. Central Federal Credit Union, Western Corporate Federal Credit Union, Members United Corporate Federal Credit Union and Southwest Corporate Federal Credit Union – were included in the federal government's argument, ensnaring the NCUA as a third party in the suit. The failed Eastern Florida Financial Credit Union was also named as one of the government's 21 failed entities that S&P allegedly defrauded.
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In its case, the government claimed the five credit unions lost hundreds of millions of dollars as a result of S&P's alleged misrepresentations.
In a June 13 court order, U.S. District Judge David O. Carter wrote that S&P has repeatedly insisted that both the government and third parties have "stiffed" it on its discovery requests.
S&P subpoenaed records from the NCUA in January and February of this year requesting documentation regarding its regulatory oversight of the credit unions as they purchased the securities.
Requested documents included reports, evaluations, assessments, studies, finding or analyses regarding the accuracy of ratings issued by agencies, investigations of any credit union for fraud, deceptive practices or mismanagement, and losses as a result of investments in residential mortgage backed securities or collateralized debt obligations.
Specifically, S&P said it is interested in documentation from the three corporates that were assigned full-time examiners that were required to be onsite on a monthly basis – U.S. Central, WesCorp and Southwest.
"In light of NCUA's oversight duties over five of S&P's alleged victims, documents in its possession are relevant," Carter wrote in the June 13 court order. "Several defenses pleaded by S&P, such as 'unclean hands,' raise the question of whether the victim institutions were at fault for their losses."
The NCUA's documents could also answer questions of causation, such as whether S&P's ratings were material to the credit unions' investment decisions.
Carter rejected the NCUA's argument that its regulations mandated that the credit unions could only purchase securities with certain credit ratings, and as a result, its supervision could not affect the force of the regulations. The judge reasoned that argument would only hold water if the regs stripped the credit unions of the ability to choose one security over another.
"Obviously, that is not the case," Carter wrote.
Carter also rejected the NCUA's argument that documents supporting its material loss reviews were irrelevant because they addressed only the general causes of the failures.
While the judge ruled against the NCUA's arguments of privilege, Carter stopped short of demanding the NCUA hand over the documents. Instead, he allowed the NCUA to file an additional motion if it can better argue its position that the documents are protected by deliberative process privilege.
An S&P spokesman said after the July 29 session that the issue is still being argued and the parties will return to court in August.
Stuart Perlitsh, CEO of the $341 million Glendale Area Schools Federal Credit Union, led a lawsuit filed by seven credit unions in November 2009 that alleged negligence and breach of fiduciary duty by WesCorp management and volunteers that caused the corporate's failure.
The plaintiff credit unions agreed to allow the NCUA to take over as the plaintiff in the suit, which was eventually settled. Perlitsh said as part of the agreement between the credit unions and the NCUA, the original plaintiffs could not revive the suit if documents revealed now implicate WesCorp management or volunteers for the loss.
However, he added that should such information go public, it would provide some closure to the corporate crisis.
"S&P's lawyers here are bringing up our same complaint," Perlitsh said.
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