SCU was supposed to present these drafts for payment to the purchaser. However, in early 2011 about $400,000 in drafts, representing funds already paid to Carbills, were returned to the credit union as unpaid, according to an FBI investigation.

Stockton hid the unpaid drafts by opening "dummy" SCU member accounts under King's name. Each of the overdrawn accounts represented an unsecured loan to Carbills that exceeded Stockton's lending authority and SCU's legal lending limit to any lending relationship, the FBI investigation showed.

None of these credit extensions to Carbills was included on SCU's internal watch list, which identifies problem credit agreements to auditors, examiners, the board of director and others, investigators said.

Although external auditors caught the $400,000 in unpaid drafts, and SCU continued to allow Carbills to receive immediate credit, Stockton never responded to the audit and failed to report it to the board of directors, according to the FBI.

By the time Stockton was fired in September 2011 for withholding "material information" from the board, the Carbills debt had grown to $1.6 million and brought SCU to the brink of failure, court records show.

King, who federal investigators allege was behind the fraudulent scheme that Stockton attempted to conceal, is scheduled to have a plea hearing in U.S. District Court on Dec. 19.

According to Assistant U.S. Attorney James Blankinship, King has agreed to plead guilty to one count of bank fraud.

Prosecutors allege King made false representations and promises to the credit union. He also fraudulently persuaded the credit union that he was operating Carbills in conformity with floor plan financing agreements, while converting simultaneously the credit union collateral and fraudulently inducing the SCU to fund credit beyond the scope of their agreements.

SCU, which served 2,667 members, merged with the $794 million Firstmark Credit Union in San Antonio on Nov 1, according to a FirstMark CU prepared statement.

NCUA financial performance reports show SCU was having financial challenges. Its loan income plunged from $2.6 million in 2008 to $1 million in 2012. 

Though the cooperative had a net income gain of $29,662 in 2012, it posted total net losses of $2 million from 2008 to 2011, according to NCUA financial performance reports. What's more, the credit union recorded an additional net income loss of $647,239 by the end of the third quarter ending Sept. 30.