Lawsuit Claims $5.4 Million Embezzlement Conserved Georgia Credit Union

A new civil lawsuit claimed a $5.4 million embezzlement led to the 21-month conservatorship of the $42.2 million Southern Pine Credit Union in Valdosta, Ga.

The alleged embezzlement was detailed in court documents filed by the credit union on June 7 in federal court that said Southwest Marine and General Insurance Co. declined to pay a $5,471,518 verified proof-of-loss claim stemming from an alleged 17-year internal theft scheme by former President/CEO Leah Lehman and former Controller Teresa Paulo, according to court documents.

Southern Pine alleged the embezzlement began in June 2003 when Lehman created a loan account in her husband’s name, took an advance of $7,850 and transferred the proceeds into the joint share draft account she shared with her husband. According to the credit union, over the next 17 years, Lehman continued to use her own joint accounts, her husband’s account and accounts belonging to other family members to take out fraudulent loans, and used those funds for personal reasons and to conceal her theft.

By 2006, Paulo allegedly began transferring funds from relatives’ accounts “for temporary cash flow needs.” A year later, she created a loan account that was purportedly secured and took advances to pay credit card bills and for other spending, according to court documents.

Her alleged fraud expanded rapidly.

For example, by July 1, 2014, she had allegedly created approximately $42,000 in fraudulent loans, and by Jan. 1, 2015, that amount grew to approximately $103,000. In successive one-year periods, however, the balance grew to approximately $270,000, $529,000, $750,000, $945,000 and $1,170,000, according to the credit union’s claims in court documents.

Claimed losses from Paulo’s loans amounted to $1,233,201 and claimed losses related to Lehman’s loans totaled $4,238,317.

Southern Pine’s allegations were based from a “Special Procedures Report” by Lillie & Company, a Sunbury, Ohio-based CPA firm, which specializes in internal fraud investigations.

Court documents showed an investigation has been launched by the FBI, but as of Wednesday afternoon no charges have been filed by federal prosecutors. An FBI spokesperson in Georgia declined to comment.

Lehman did not respond to CU Times‘ phone and email requests for comment. Paulo did not respond to CU Times‘ phone requests for comment. A man who identified himself as Paulo’s husband said he would relay a message to her regarding CU Times’ request for comment.

According to court documents, Southern Pine “froze” Lehman’s and Paulo’s pensions and they have agreed to forfeit their pension amounts totaling approximately $125,000.

Sometime in the first or second quarters of 2020, through sources outside of Southern Pine, the NCUA became aware of questionable transactions involving Lehman and Paulo. By June 11, 2020, they were fired and the credit union was placed into conservatorship. Southern Pine, which serves nearly 1,500 members, was released from conservatorship in March 2022.

In early 2020, Southwest Marine automatically renewed Southern Pine’s fidelity bond insurance that covered losses of up to $2.5 million for acts of employee and director dishonesty. The policy was renewed after the credit union submitted, at the request of Southwest Marine, a copy of Southern Pine’s most recent supervisory committee audit, information related to the increase in credit unions’ delinquency loans since 2018, the execution of the renewal proposal and a premium payment.

In December 2020, Southern Pine submitted a bond claim with the insurance firm. According to court documents, Southwest Marine reviewed the claim and said in its preliminary findings that the representations made by the credit union in connection with its application for bond coverage included one or more misrepresentations, omissions, concealments or incorrect statements of material fact.

“The negative net income reported with the adjusted financials as of June 30, 2020, suggests that the credit union had actually been steadily losing substantial amounts of money every year for the preceding several years,” Southwest Marine wrote in its report. “Substantial losses every year are consistent with the credit union’s assertion that the alleged fraud started approximately 17 years earlier and steadily grew, until it was growing by a rate of tens and hundreds of thousands of dollars each year from 2014 forward.”

Based on the adjustments made by Southern Pine to its reported financial condition in light of the alleged fraud, it appears the credit union’s total assets, net worth and net income were substantially overstated in the Sept. 30, 2019, financial reports submitted in connection with the bond application, the insurance report noted.

As reported in the bond application, Southern Pine had a net worth/total assets ratio that was 6.21 points higher than its peer institutions. But after the credit union adjusted its financial information in light of the alleged fraud, the net worth/total assets ratio fell by 12.48 points and was 6.46 points lower than Southern Pine’s peer group.

In its lawsuit, Southern Pine alleged Southwest Marine’s denial of coverage is unlawful because it is contrary to the credit union’s reasonable expectations that hidden and undetected embezzlement would be covered.

A Southwest Marine spokesperson declined to comment when reached by CU Times. As of Wednesday, the insurance company has not filed an answer to the credit union’s lawsuit.