Two former Connecticut credit union executives claimed they were fired in retaliation for exposing alleged fraudulent financial reporting practices. And, they claimed the funds paid the CEO's bonuses and a monthly retirement allotment of more than $45,000.

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

Ross and Hall claimed Nutmeg State Financial CU President/CEO John Holt allegedly encouraged accounting practices that were inconsistent with GAAP and contrary to state and federal laws. The suit also claimed Holt allegedly did so in an attempt hit profit targets, which allowed him to receive compensation bonuses and fund his $45,000 a month supplemental executive retirement plan.

“Nutmeg State Financial Credit Union has always acted in compliance with all federal regulations as well as with Generally Accepted Accounting Practices (GAAP), as confirmed by an independent external audit performed by Nearman, Maynard, Vallez, CPAs, P.A.,” Nutmeg State Financial SVP/Chief Engagement Officer Lisa Asadourian said. “The outsider auditors directly refute the sensationalized claims made in this lawsuit and reinforce the fact that the lawsuit has no merit.”

Indeed, the auditor's letter said that the accounting items listed in the complaint were not issues or irregularities found during a 2015 audit.

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

That letter was signed by Ross and Holt.

Nevertheless, in the 23-page lawsuit, Ross and Hall cited specific examples of questionable accounting practices.

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

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

“Indeed, based upon defendant Holt's manipulation, the true condition of defendant NSFCU was concealed in violation of state and federal law, to the detriment of the credit union and its members but to the benefit of defendant Holt,” according to the lawsuit.

As of March 31, 2016, Nutmeg State Financial's provision for loan and lease losses jumped to 0.82%, up from 0.59% as of Dec. 31, 2015, according to NCUA Financial Performance Reports. In 2015, the credit union reported a 0.39% provision in the first quarter and 0.34% in the second quarter, increasing that amount to 0.54% in the third quarter of 2015.

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

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

Review the credit union's financial data here.

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

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. Net charge offs ranged from a low of 0.57% in the third quarter to a high of 0.97% in the first quarter.

Ross and Hall also alleged the inaccurate reporting of the valuation of properties, including a facility that was allegedly overstated by about $1 million based on the credit union's own appraisal. However, Holt allegedly refused to let Ross record the property at its appropriate valuation in violation of state and federal laws, according to the lawsuit.

The former executives also alleged that during a state exam in November 2015, Holt told his management team that communications and interactions with examiners should be held to a minimum and to not offer any information beyond what was required, which violated state and federal reporting laws and NCUA policy, according to the lawsuit.

The lawsuit alleged that Holt concealed information from regulators, including the underfunding of the ALLL, the overvaluing of certain assets and the overstating of short-term earnings to avoid regulatory scrutiny of the credit union's financial reporting and Holt's compensation package.

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

Holt, senior management and examiners met in mid-December. The lawsuit claimed that examiners discussed some of their concerns with Holt's compensation and SERP benefits, and its potential negative effect on the credit union's finances. However, the lawsuit alleged that Holt ended the meeting, saying he did not want to discuss his compensation in front of senior management.However, Asadourian asserted Nutmeg State Financial's strong financials.

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

Nutmeg State Financial's net worth as of March 31 was 13.23%, compared to a peer average of 10.83%, according to the NCUA. The credit union's 0.77% delinquency was slightly lower than the 0.78% peer average.

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

ROAA in 2014 was higher, increasing throughout the year from 0.61% in the first quarter to a high of 0.78% as of Dec. 31.

Ross also alleged that on Jan. 5, 2016, at least two other investments were overstated. In addition, both Ross and Hall determined that the ALLL funding for December 2015 should have amounted to $400,000. But Holt disagreed and fired them both on Jan. 6, according to the lawsuit.

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

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

He claimed that the credit union defamed him with accusations of acting erratically that put the organization at risk. Hall also claimed that the credit union knew these accusations were false and used them to fire him.

Both Ross and Hall are seeking compensatory damages, including back pay with interest and lost benefits, punitive damages, and the cost of re-location and emotional distress damages.

Instant Insights /

Former Execs Sue Nutmeg State Financial CU

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