Rostohar Fraud Impacts Felt Widely

When Sheri Sicka thinks about her former mentor and boss, whom she respected and admired for 30 years, she weeps.

“I spoke with Sheri in March, May and August, and all three times, Sheri could not help crying,” an FBI agent wrote in an email to a federal attorney who prosecuted and convicted CBS Employees Federal Credit Union President/CEO Edward Rostohar for stealing $40 million from the Studio City, Calif., financial cooperative. “She said that when she thinks about what happened, tears well up and she feels so betrayed and hurt.”

The human impact and collateral reputational damage to the California credit union industry will be felt for a long time from the biggest and most shocking credit union embezzlement case. What’s more, a new FBI email filed with other federal court documents reveals more details about how the former CEO managed to steal and conceal so much money over two decades, which led to the financial collapse of the credit union that had $21 million in assets and once served CBS employees and their families.

The FBI email noted the massive fraud scheme has led the NCUA to make examination changes in hopes that it will prevent similar embezzlements in the future. The current total loss from the CBSEFCU fraud, the NCUA estimated, ranges from $39,873,001 to $41,373,001.

The independent federal agency declined to comment about the examination changes, but it did inform the FBI that Rostohar’s fraud represented 65% of all annual credit union losses in a typical year and 27% of losses on a 10-year average from 2007 to 2018, which included the Great Recession and the taxi medallion crisis that significantly increased NCUA losses.

The 62-year-old Rostohar was sentenced in September to 14 years in federal prison.

According to the FBI email, Rostohar seemed proud of how he outsmarted NCUA examiners. He previously worked as an NCUA examiner for two years and knew how not to raise any red flags. However, plenty of other convicted CEOs who never worked as NCUA examiners managed to hide their multimillion-dollar schemes for years from NCUA examiners as well.

Another reason the CBSEFCU fraud may have a lingering impact is a multimillion dollar class action lawsuit that was filed by longtime member Victor Webb of Los Angeles, Calif., against former board directors and supervisory committee members. If Webb wins a favorable judgement, it may serve as a wakeup call for credit union boards across the nation to step up their executive oversight.

According to the FBI email, Sicka began working at CBSEFCU more than 30 years ago when she had just turned 18. Rostohar taught her everything about how to run a credit union and became a trusted father figure with whom she confided personal and professional matters. The credit union became a cozy home for her and a place where she took pride in providing personalized service to members. She knew some members as they became young parents and then grandparents, thus serving three generations of members. To some members, she pitched the credit union’s CDs, which boasted the highest rates among all competitors in Los Angeles. Unbeknownst to Sicka, the CDs were the primary source of Rostohar’s theft.

One day, Rostohar walked into Sicka’s office and screamed at her not to talk to NCUA examiners.

“Sheri blames herself for not picking up on that,” according to the FBI email.

But on March 6, Sicka accidentally saw another red flag that finally exposed the long-running scam.

While she was looking for a copy of a stop payment check, she stumbled across a $35,000 check made out to Rostohar. Concerned, she conducted an audit that uncovered numerous checks were made out to her boss from January 2018 to March 2019 that totaled more than $3.7 million. Six days later, in front of Sicka, the staff and board members, Rostohar was told he was being suspended pending the outcome of an investigation that detected his theft. After gathering his belongings, he was escorted out of the branch office without saying a word.

The FBI email described Rostohar’s fraud as “sophisticated,” and said he was systematically cautious, which may explain, in part, how he managed to hide it for so long.

Rostohar spent nearly a week prior to filing AIRES (Automated Integrated Regulation Examination System) uploads by carefully removing all evidence of the CDs from the credit union’s system. He would then key in information for his quarterly uploads into the AIRES system, making certain to manipulate the numbers so everything balanced. After that information was uploaded, the former executive re-entered the CDs back into the CBSEFCU system. In stealing the CD funds for his own use, he made certain he was the only person at the credit union who had access to the corporate account. This arrangement lasted until February 2018 when the credit union was forced to change its corporate account from Wells Fargo to Catalyst. Although this gave Sicka limited access to the Catalyst corporate account information, it was apparently enough access to allow her to expose Rostohar’s fraud.

According to the FBI, Rostohar moved the money from CD accounts to a credit union account (99999-S1), which was used to pay the credit union’s bills and other expenses. From that account, the CBSEFCU system allowed him to generate checks. He then used an electric typewriter to key in his name or the name of one of his affiliated LLCs as a payee on the check. He then deposited that check in another bank.

Rostohar also made certain he was the only person who performed the reconciliations of the 99999-S1 account, and that he was the only person to provide documents to NCUA examiners or other auditors.

He held more than $23,000 in a Citibank account, and an undisclosed amount of funds in five Bank of America accounts and two Wells Fargo accounts, court documents showed. Federal authorities are also going after possessions such as luxury vehicles and watches, properties including a Nevada coffee shop and Mexican resort, jewelry, precious coins and more than $275,000 in cash found in the trunk of one of his cars. The former CEO told investigators he blew much of the money he stole during casino parties and trips he took on private jets with women half his age to international vacation resorts.

It’s believed that the civil lawsuit filed against CBSEFCU’s board members and supervisory committee is a legal action that is quite rare at least in the credit union industry. Unless the lawsuit is dropped, dismissed or settled out of court, it may take years before a judge or jury determine based on evidence and testimony whether the board and supervisory committee members neglected to perform their fiduciary duties and failed to supervise Rostohar.

Members of the board and supervisory committee can argue they relied on information from Rostohar to be accurate and true. But whether that reliance was reasonable or sufficient will depend on the specific facts and circumstances that occurred at CBSEFCU, Gene Takagi of the NEO Law Group in San Francisco, Calif., said. His practice specializes in nonprofit law.

In seven material loss review reports that looked at fraud or possible fraud committed by a CEO, all of them described oversight by the board and supervisory committee as lacking, weak, inadequate or ineffective, and contributed to the collapse of the credit unions, according to the NCUA’s Office of Inspector General.

Henry Wirz, a retired president/CEO of the Folsom, Calif.-based SAFE Credit Union and a former member of the credit union oversight committee for California’s regulator, applauded Webb’s lawsuit.

“Talk with any CEO who is honest about what is happening and they will tell you that the NCUA’s oversight of the board and management – the M in CAMEL is very deficient,” he explained. “There is an oversight problem. Boards are not doing their job. Members are not doing their job. The NCUA is not doing its job. CPA firms are not doing their job.”

Other issues that Wirz has seen occur over and over again in fraud cases include hiring a CPA firm that has no experience in auditing financial institutions, failing to follow up on audit and exam findings to assure changes have been made, and not having anyone on the board or supervisory committee with experience in auditing, accounting and internal controls.

In his experience, Wirz has also seen board or supervisory committee members taking an adversarial position in opposition to examiners in favor of the CEO.

“It should be apparent to anyone who is paying attention that the frequency and severity of credit union fraud indicates a serious problem in internal control and both regulatory exams and the exam process, as well as CPA review of internal control,” he said.