St. Francis Campus was closed by state regulators in February 2014. At that time, the local police and the FBI launched an investigation but no charges have been brought against Cofell. In other cases in which credit unions have been closed after embezzlement is uncovered, it takes several years for federal authorities to file charges.

After the NCUA liquidated the Minnesota credit union, its 3,400 members, assets, shares and loans were assumed by the $960 million Central Minnesota Credit Union in Melrose.

By December, the NCUA filed a proof of loss with CUMIS for $3,086,755. CUMIS, however, rescinded the fidelity bond agreement because Cofell lied on its application to extend the employee dishonesty coverage from $2.25 million to $2.75 million in April 2013.

On the CUMIS application, Cofell checked no to two questions that asked whether she or any director, officer, board committee member or employee had knowledge or information of any act, error or omission, or any claims, demands or lawsuits that may lead to a claim against them or the credit union.

"Cofell's responses to the above questions are clear misrepresentations as they were made while Cofell was allegedly perpetrating her fraudulent lending scheme, and these misrepresentations unequivocally constitute an increase in the risk of loss under the CUMIS bond since they directly relate to the claims as issues in this case," CUMIS lawyers argued in court documents.

In addition to rescinding the bond agreement in June 2015, CUMIS returned an $18,795 premium check to the NCUA that was paid earlier by the credit union.

It wasn't until January 2016 when the NCUA sued CUMIS for not paying the $3 million bond claim. The federal agency contended in its complaint that while CUMIS claimed that Cofell lied on the bond application, the alleged misstatements cannot be imputed (or attributed) to St. Francis Campus because the former CEO was acting in her own interest that was adverse to the credit union's interest.

Cofell's lies and whether she was acting in her own interest contrary to the credit union's interest was the key legal question, which led a federal judge to deny CUMIS' summary judgement motion. The judge's decision meant CUMIS cannot rescind the fidelity bond contract under Minnesota law.

As a general rule, a company is bound by an employee's authorized actions and the company is attributed to the employee's knowledge during those actions. The exception to this general rule, however, is that the company is not attributed with the knowledge of the authorized employee who is acting adversely to the interest of the company.

In legal terms, this is called the "adverse interest exception."

"The only reason that Cofell did not disclose the existence of her theft was for her own benefit and to the detriment of the company," U.S. District Court Judge Donovan W. Frank wrote in his March 17 ruling. "Moreover, neither side disputed that was her motive. Thus, the adverse interest exception applies to Cofell's misrepresentation on the insurance application."

Judge Frank also wrote in his ruling that Cofell's only misrepresentation was about the fraud itself as opposed to misrepresentation tangentially related to the fraud such as the existence of internal controls. The judge was referring to another case involving a company, Pioneer Industries, in which a CFO embezzled $500,000 and the company held insurance coverage for theft by employees.

In that case, because the CFO misrepresented Pioneer's internal controls on the insurance application, the company argued that the CFO's misrepresentations could not be attributed to Pioneer. But an appeals court determined that the CFO's misrepresentations were attributable to Pioneer because the company had specifically authorized the CFO to purchase the insurance and any misrepresentations about the internal controls he made were attributable to Pioneer.

"Credit unions can take comfort in the fact that if the fraudster is a senior person and lies about stealing in the application, it's not going to give the carrier an out," said John C. Eichman, a partner with Dallas-based Hunton & Williams, who specializes in complex commercial and fiduciary litigation. "But if the fraudster lies about internal controls, or the existence of internal controls, that's something that is going to potentially create some problems."

Eichman also said credit unions need to be very careful when they fill out these insurance applications and make certain their representations about internal control procedures are accurate. Insurance carriers, he said, are going to take a very close look at the application when a claim is made to see if the credit union made any misrepresentations.

"It's probably a good idea to have the insurance application prepared and reviewed by more than one senior person at the institution," Eichman said.

But Henry Wirz, retired president/CEO of the $2 billion Safe Credit Union in Folsom, Calif., and a CPA, said insurance companies may be insuring credit unions without the proper assessment of the risk. The main problem, he pointed out, is that some smaller credit unions have weak internal controls, their CPAs miss obvious red flags during audits and exams by regulators are inadequate.

Indeed, the NCUA's civil lawsuit against Cofell filed in U.S. District Court in Minnesota in January is a prime example of the problems that Wirz described.

Cofell had total control of the credit union that lacked internal controls.

About 15 years ago, Cofell began fabricating loans under inactive or fictitious member accounts. The funds from these loans went into her own account, her boyfriend's account and accounts of her family members. She also used unauthorized loan advances to cover severely overdrawn accounts of several business members. Losses attributed to Cofell using loan advances to cover overdrawn accounts totaled $1 million.

Though the credit union once had a credit committee, it was dissolved years ago at Cofell's request when she told the board there was no need for the committee because she was capable of handling the entire process of approving loans. That enabled the former CEO to approve loans without scrutiny.

What's more, the board never reviewed external audit reports even though board members recalled seeing the auditor in the credit union from time to time. Cofell, who selected a local auditor that she reportedly was friends with, controlled the extent of the auditor's review of the credit union's financial records. The auditor also received loans from the credit union, according to court documents.

To conceal the financial losses, Cofell manipulated the general ledger and other accounts to make it appear that cash deposits of members were being converted to short-term investments of low interest rates to loans to members at higher interest rates. She also manipulated the books to hide delinquencies of fraudulent loans.

Even when the former CEO in 2014 admitted in writing after confronted by NCUA examiners that she began her scheme 15 years ago, a forensic auditor later hired by the federal agency was only able to obtain complete transactional documentation from 2011 to 2014 because Cofell destroyed the data processing system's back up information prior to 2011.

"It appears as if Ms. Cofell was engaged in a scheme to defraud the credit union from at least the mid-1990s up to the time at which when she was suspended on Jan. 23, 2014," according to court documents. "While Ms. Cofell purged much of the earlier financial detail, member statements in connection with a number of fictitious accounts showed the existence of fictitious loans well in excess of $1 million as of 2000 thereby suggesting that the scheme had been ongoing for some time prior to 2000."

Although the forensic auditor was able to document $3 million that Cofell allegedly embezzled, the loss to St. Francis Campus was more than three times that amount.

"The total loss to the credit union likely exceeded $10 million," the forensic audit report concluded. "However, due to critical transactional information being destroyed, it was only possible to document a small portion of the loss. Cofell's actions resulted in the eventual collapse of the credit union."

When contacted by CU Times, Cofell's attorneys declined to comment on behalf of their client.