The NCUA has moved forward filing a suit to recover $12 million from the defunct New London Security Federal Credit Union after discussions to reach a settlement fell through.
According to the Jan. 29 suit, the case involves Edwin Rachleff, a deceased investment broker and financial adviser for A.G. Edwards & Sons Inc.(which later merged with Wachovia Securities and then Wells Fargo), who handled investments for New London. Wells Fargo is named as the defendant in NCUA's suit. Rachleff allegedly created fake account statements that showed the CU was worth $11.8 million, according to the regulator. The funds were supposedly deposited into the CU's account from 1998 to 2003. However, the funds the NCUA is seeking was not there. As a result, the CU was declared insolvent and then liquidated. Rachleff committed suicide in July 2008 on the same date of the CU's liquidation.
In December 2009, an NCUA spokesman told Credit Union Times that the agency was discussing a possible settlement with Wells Fargo and New London's outside accounting firm (CU Times, Dec. 16, 2009). The regulator said that at the time if a settlement was not reached, it would pursue legal action.
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The NCUA said as a result of Wells Fargo's negligence, New London became insolvent and the NCUSIF had to pay out $9.7 million for the insured investments, according to the suit. The regulator said it continues to remain exposed to liability for additional sums stemming from claims for the uninsured investments of member investors who may have claims against the insolvent estate.
According to a Dec. 10, 2008, letter filed with the New London Probate Court in Connecticut, there was only one account kept in the credit union's name with A.G. Edwards, the Elmore Shoe Co., which was at some point owned by the Rachleff family. In its suit, NCUA said Rachleff's relatives and acquaintances signed A.G. Edward forms and documents related to New London's accounts. He also used misleading physical addresses and a tax identification number as well listing Elmore Shoe as the accountholder. The CU's funds were also comingled with the shoe company's account.
A June 2008 statement that accompanied the December letter listed the credit union's accounts at A.G. Edwards, including investments in the Federal Farm Credit Banks, Federal Home Loan Banks and the Federal Home Loan Mortgage Co. As of March 2009, Rachleff's will listed $37,275 in assets, with shares in various companies, according to his probate file.
The NCUA said Wells Fargo had a duty to supervise Rachleff and should had known he had access to things like blank brokerage statements bearing A.G. Edwards letterhead, which he used to conduct transactions.
In a material-loss review, the NCUA's Office of Inspector General listed several reasons why New London ultimately collapsed, including a failure by the CU's management to implement adequate internal controls over investments and the lack of a safekeeping/custodial agreement with a third-party independent of the account manager. (CU Times, Dec. 23, 2009). NCUA examiners also failed to adequately evaluate the risk in New London's investment program, according to the OIG. Investments accounted for more than 90% of the CU's assets. While NCUA examiners noted the high concentration of investments and the lack of controls over investments, including the lack of a safekeeping agreement, they failed to elevate these repeated issues for stronger supervisory actions. "Consequently, examiners did not expand examination procedures when they should have done so," the OIG said.
There were instances where NCUA examiner work-paper documentation contradicted the information found in the external auditor's work papers, the OIG said, adding examiners also failed to ensure that New London management took corrective action on repetitive document of resolution issues.
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