10% loss `worst case' scenario for credit unions, banks affected by sale of bogus CDs, regulators foresee

<p>FRANKFORT, Ky. – Nearly three months after Bentley Financial Services was sued by the Securities Exchange Commission for investment fraud, credit unions affected continue to reassure members that their money is insured and capital numbers are solid enough to weather the outcome. Robert Bentley, owner of BFS and Entrust Groups was named in the SEC suit for allegedly selling bank-issued, federally insured certificates of deposit that were later determined to be uninsured securities, the SEC discovered. On Jan. 10, Bentley’s wife, Lynn, was added to the complaint because the agency determined that she “directly or indirectly received proceeds of the fraudulent conduct.” A court order was issued requiring Lynn to “disgorge those proceeds,” according to the SEC complaint. In all, 3,500 financial institutions had invested nearly $320 million in Bentley’s firms. NCUA has urged credit unions that invested with Bentley’s firms to submit copies of relevant documentation to the federal court-appointed receiver, David Marion, who is expected to have a full accounting by March 7. For many involved, a 10% loss is expected to be the norm, said Ella Robinson, commissioner of the Kentucky Department of Financial Institutions, the regulator of state-chartered credit unions. Federal regulators expect to recover at least 90% of the nearly $320 million that BFS invested for banks, credit unions and non-profit groups. Meanwhile, at least 20 credit unions in Kentucky worked with Bentley over the years and some have reluctantly been put in the spotlight over a matter that came without warning and despite due diligence. Kentucky Employees Credit Union (KECU) had a 10-year relationship with Bentley and not once was there a red flag to suspect any shady dealings, said John Graham, president/CEO. “Two things we’ve tried to emphasize to our members is their money is insured up to $100,000 and our capital ratio is well above our peer group,” Graham said. “That will probably reassure 99.5% of our members. For the others, we will gladly sit down with them explain what we know and if they choose, we can arrange their accounts so that they can have additional coverage.” KECU, which serves 7,700 members and has $45 million in assets is “well capitalized” should losses occur. Two days after hearing of the SEC complaint last October, Graham said he met with KECU’s board of directors to strategize on the “best and worst case scenarios.” It was determined that KECU’s worst case would be a 10% loss, a recovery that could take place by the end of the year, Graham said, but the board emphatically denies any talk of insolvency or merger. For further reassurance, Larry Moore, KECU’s board chairman, recently posted a letter to members on the credit union’s Web site reassuring them that “KECU is NOT closing! We are NOT in financial trouble. Your savings with us are NOT at risk. NOTHING has changed in our day-to-day operations.” “The lesson here would probably be to not make assumptions especially when you have a comfort level with the firms you work with,” Graham said. Piper Swanson, manager of Metro Employees Credit Union in Lexington said business is as usual for its 2,792 members and like KECU, they are “more than adequately capitalized” to handle a 10% loss. “We invested a very small amount of money, and it’s our understanding we will get the money back,” Swanson said. “We have plenty of liquidity and we’re not accruing any interest on the money invested.” Like many affected, C&O United Credit Union in Edgewood, Ky., has submitted all documentation it accrued over its three-year relationship with BFS to the receiver and is confident that losses will be minimal. “We’ve reassured our members and it has not been a concern for them,” said Alla Holland, president/CEO of C&O. While hard breakouts on the numbers of banks, credit unions and non-profit groups affected by Bentley are hard to come by, most of his clients were credit unions, said Amy Norwood, assistant regional director of the SEC’s Denver office. Regulators urge all financial institutions to periodically check the credentials of brokerage firms through the National Association of Securities Dealers. -</p> <p>[email protected]</p>