Two former Connecticut credit union executives claimed they werefired in retaliation for exposing alleged fraudulent financialreporting practices. And, they claimed the funds paid the CEO'sbonuses and a monthly retirement allotment of more than$45,000.

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Former CFO Timothy Ross and Shannon Hall, vice president oflending for the $387 million Nutmeg State Financial Credit Union inRock Hill, Conn., filed the wrongful discharge and defamation civillawsuit on May 31 in Connecticut Superior Court.

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Ross and Hall claimed Nutmeg StateFinancial CU President/CEO John Holt allegedly encouragedaccounting practices that were inconsistent with GAAP and contraryto state and federal laws. The suit also claimed Holt allegedly didso in an attempt hit profit targets, which allowed him to receivecompensation bonuses and fund his $45,000 a month supplementalexecutive retirement plan.

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Download and read the lawsuit here.

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“Nutmeg State Financial Credit Union has always acted incompliance with all federal regulations as well as with GenerallyAccepted Accounting Practices (GAAP), as confirmed by anindependent external audit performed by Nearman, Maynard, Vallez,CPAs, P.A.,” Nutmeg State Financial SVP/Chief Engagement OfficerLisa Asadourian said. “The outsider auditors directly refute thesensationalized claims made in this lawsuit and reinforce the factthat the lawsuit has no merit.”

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Indeed, the auditor's letter said that the accounting itemslisted in the complaint were not issues or irregularities foundduring a 2015 audit.

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“This is further supported by a management representation letterprovided to us (the auditors) during the audit,” Vallez wrote. “Themanagement representation letter is a letter written by creditunion management which attests to the accuracy of an audit.”

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That letter was signed by Ross and Holt.

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Nevertheless, in the 23-page lawsuit, Ross andHall cited specific examples of questionable accountingpractices.

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For example, Hall claimed Holt forced her to manipulate thecredit union's allowance for loan and lease losses, instructed Hallto push the losses out to a future date rather than record thelosses within that month as required by GAAP.

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These conversations allegedly happened multiple times per month,Ross and Hall claimed. By pushing out the losses, they artificiallyinflated the credit union's profits, which allowed Holt to receivehis bonus and to fund his SERP.

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“Indeed, based upon defendant Holt's manipulation, the truecondition of defendant NSFCU was concealed in violation of stateand federal law, to the detriment of the credit union and itsmembers but to the benefit of defendant Holt,” according to thelawsuit.

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As of March 31, 2016, NutmegState Financial's provision for loan and lease losses jumped to0.82%, up from 0.59% as of Dec. 31, 2015, according to NCUAFinancial Performance Reports. In 2015, the credit union reported a0.39% provision in the first quarter and 0.34% in the secondquarter, increasing that amount to 0.54% in the third quarter of2015.

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On its financial summary, Nutmeg State Financial increased itsALLL by 10.8% in the first quarter of 2016, to $3,232,099. As ofDec. 31, 2015, the credit union's ALLL was $2,918,046, up from$2,645,862 in the first quarter.

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As of March 31, 2016, Nutmeg State Financial's delinquent loanswere 0.77% and net charge offs were 0.69%. As of Dec. 31, 2015, thecredit union reported delinquent loans of 0.70% and net charge offsof 0.72%. In the third quarter of 2015, the credit union reporteddelinquencies and net charge offs of 0.66% and 0.69%, respectively.Second quarter 2015 delinquencies were 0.67% and net charge offswere 0.58%. First quarter delinquencies were 0.68% and net chargeoffs were 0.70%.

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Reviewthe credit union's financial data here.

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In 2014, Nutmeg State Financial's provisioning remainedrelatively steady, between 0.35% and 0.37%. Its ALLL was $2,767,132as of Dec. 31, 2014.

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Delinquencies were higher in 2014, ranging from a low of 0.84%in the first quarter to a high of 1.20% in the third quarter. Netcharge offs ranged from a low of 0.57% in the third quarter to ahigh of 0.97% in the first quarter.

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Ross and Hall also alleged the inaccuratereporting of the valuation of properties, including a facility thatwas allegedly overstated by about $1 million based on the creditunion's own appraisal. However, Holt allegedly refused to let Rossrecord the property at its appropriate valuation in violation ofstate and federal laws, according to the lawsuit.

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The former executives also alleged that during a state exam inNovember 2015, Holt told his management team that communicationsand interactions with examiners should be held to a minimum and tonot offer any information beyond what was required, which violatedstate and federal reporting laws and NCUA policy, according to thelawsuit.

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The lawsuit alleged that Holt concealed information fromregulators, including the underfunding of the ALLL, the overvaluingof certain assets and the overstating of short-term earnings toavoid regulatory scrutiny of the credit union's financial reportingand Holt's compensation package.

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“As part of the annual review, examiners from both theConnecticut Department of Banking and NCUA did express concerns toMr. Ross regarding the size of defendant Holt's compensation andbenefit plan (both bonus and SERP) and its effect on defendantNSFCU's finances,” according to the lawsuit.

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Holt, senior management and examiners met in mid-December. Thelawsuit claimed that examiners discussed some of their concernswith Holt's compensation and SERP benefits, and its potentialnegative effect on the credit union's finances. However, thelawsuit alleged that Holt ended the meeting, saying he did not wantto discuss his compensation in front of senior management.However,Asadourian asserted Nutmeg State Financial's strong financials.

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“The outside audit further confirms that the financial health ofthe credit union is stronger by comparison to other credit unionsin the Northeast United States, with a higher net worth ratio andhigher return on average investments and lower delinquent loanratio,” she said. “Nutmeg remains committed to the financialwell-being of our members, as we have always been, and willcontinue to provide the best in rates, service and financialstability every member has come to expect.”

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Nutmeg State Financial's net worth as of March31 was 13.23%, compared to a peer average of 10.83%, according tothe NCUA. The credit union's 0.77% delinquency was slightly lowerthan the 0.78% peer average.

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However, Nutmeg State Financial's return on average assets waslower than peer average as of March 31, at 0.45% compared to thepeer average of 0.50%. And, during 2015, the credit union reportedROAA that was lower than peer average each quarter.

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ROAA in 2014 was higher, increasing throughout the year from0.61% in the first quarter to a high of 0.78% as of Dec. 31.

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Ross also alleged that on Jan. 5, 2016, at least two otherinvestments were overstated. In addition, both Ross and Halldetermined that the ALLL funding for December 2015 should haveamounted to $400,000. But Holt disagreed and fired them both onJan. 6, according to the lawsuit.

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Their tenure at the credit union was short-lived. Ross was hiredon July 12, 2015, and Hall was hired Oct. 5, 2015.

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In addition to wrongful discharge, Hall is suing Nutmeg State Financial CU for defamation.

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He claimed that the credit union defamed him with accusations ofacting erratically that put the organization at risk. Hall alsoclaimed that the credit union knew these accusations were false andused them to fire him.

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Both Ross and Hall are seeking compensatory damages, includingback pay with interest and lost benefits, punitive damages, and thecost of re-location and emotional distress damages.

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