The scheme worked like this. Over the next 12 years, Bert Fingerhut systematically targeted mutual banks throughout the country that had not yet converted to stock ownership, by opening as many accounts as possible in his own name and the names of his co-conspirators.

When any of the banks where he and his conspirators controlled accounts announced a stock conversion, Fingerhut would have his conspirators submit stock order forms for the maximum amounts of stock available to each depositor. Each time, the conspirators certified that they were buying shares only for their own accounts and not through any arrangement to transfer the shares or their proceeds after selling them.

“Each of these statements was false,” the SEC said. “Bert Fingerhut funded both the opening of the nominees' accounts and the nominees' stock purchases, and the nominees had agreed in writing to transfer either the shares or the subsequent sale proceeds to Bert Fingerhut. In short, Bert Fingerhut secretly owned all the accounts, all the subscription rights and all the stock issued to those account holders.”

The scheme was also fairly complicated. In order to get around the requirements, particularly on the part of the credit unions and former credit unions, Fingerhut recruited Robert Danetz to travel around the country and open as many accounts as possible.

Essentially, Robert Danetz opened single accounts in his own name and joint accounts with members of the Danetz and Fingerhut families, the SEC said. He even traveled around the country with multiple copies of the social security cards and passports for Bert Fingerhut and his wife, their two daughters, Danetz's own wife, and their two children.

Once he established accounts at a given bank, he then opened additional accounts by mail in the joint account holders' names and added new joint accounts with other names. To open accounts at those banks outside New York and New Jersey that prohibited depositors from outside the local area, Robert Danetz paid friends and acquaintances to add his name to their utility bills or leases so that he could show “proof” of local residency. He also used the acquaintances' addresses to fraudulently obtain state identification cards.

In resolving the case, Bert Fingerhut agreed to forfeit $11 million he obtained by the scheme and may face a maximum sentence in prison of five years, at the discretion of a federal judge. Bruce Fingerhut has forfeited $181,269, plus prejudgment interest, and will pay a civil penalty in the amount of $150,000. Stephen Danetz has agreed to disgorge his ill-gotten gains of $137,975, plus prejudgment interest, and pay a civil penalty in the amount of $120,000.

Impact On Conversion Debate?

Reaction to the news depended a bit on where you fell on the spectrum of debate about credit unions converting to mutual banks, which is to be expected, but may have a stronger impact because of the banks involved, several of whom have been noted in the CU-to-bank conversion discussion.

For example, Viewpoint Bank is the institution that resulted from the hard fought conversion of the $1.4 billion Community Credit Union, still the largest conversion. AGE FCU, which became Heritage Financial Group, is the bank that Lee Bettis, current executive director of the Coalition for Credit Union Charter Options, took from being a credit union to being a bank and First Pactrust Bancorp is the organization that resulted from the controversial conversion of Pacific Trust FCU.
Another, Jade Financial, formerly IGA FCU, has already revealed in legal papers how insider trading effectively prevented many of the former CU members from taking part in a stock offering.

Calls to Viewpoint Bank and Lee Bettis were not returned as of press time.

Jim Blaine, CEO of the $14 billion State Em-ployees' Credit Union and one of the founders of the National Center For Member Trust said credit union members should not be surprised.

“For a long time there has been a lot of suspicion and worry that there were insider trader opportunities and chances for folks to get money they shouldn't be able to have in these conversions,” Blaine said. “Now that has just become much more tangible.”

Blaine applauded the agencies for the arrests and the prosecutions, but added that they had only brought to the light of day a practice which had been known about but not discussed for sometime, which is the opening of investor accounts in credit unions which might convert or in former credit union banks.

He also noted that these sorts of things have happened in a high percentage of the CUs that convert to banks and then to stock-issuing banks. According to CU Financial Services, 19 credit unions have converted to banks and then gone on to issue stock either as a straight stock issuing company or as part of a mutual holding company structure. The revelation from the SEC meant that 42% of the CUs that have converted to banks and then to gone on to issue stock have had some sort of fraud involved in the stock offering.

But Hans Ganz, CEO of Pacific Trust Bank, formerly Pacific Trust FCU, said that none of the banks involved could have known about the fraud when it was taking place.

“If a depositor sends me a slip saying that he or she wants to purchase stock,” Ganz said, “how am I going to know whether they are using money from their deposit account or money they got from somewhere else? There is no way I could ever know this.”

And Alan Theriault, president of CU Financial Services and a consultant on CU to bank charter conversions, argued that the capture of Fingerhut and his co-conspirators indicated that the SEC and Office of Thrift Supervision are doing their jobs correctly.

“From my perspective, it looks like they are doing things right and capturing the bad guys,” said Theriault. “After all, 99% of people are going to follow the rules but you need to have the rules for the 1% who won't.”
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