Insurance Company Countersues Credit Union Over $5.4 Million Embezzlement Claim

Southwest Marine and General Insurance Company countersued Southern Pine Credit Union alleging some previous statements it made were fraudulent regarding the safeguarding of loans.

The Valdosta, Ga.-based credit union has denied these allegations, according to its court documents.

In June, the $42.4 million Southern Pine filed a federal civil lawsuit against the Morristown, N.J.-based insurance firm for declining to pay a $5,471,518 verified proof-of-loss claim stemming from an alleged internal fraudulent loan scheme by former President/CEO Leah Lehman and former Controller Teresa Paulo.

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

In 2020, Southern Pine posted a loss of $5,844,935, but returned to profitability in 2021 and so far in 2022, according to NCUA financial performance reports.

The credit union is suing Southwest Marine for $3,746,000. The insurance company’s countersuit is asking U.S. District Court Judge W. Louis Sands in Valdosta, Ga., to preclude coverage of the credit union’s bond claim.

Lehman and Paulo allegedly began embezzling from the credit union in 2003 and 2006, respectively.

In 2014, Southwest Marine issued Southern Pine a three-year fidelity bond for employee and director dishonesty coverage of up to $2.5 million. The insurance policy had been renewed twice.

The credit union said in its original insurance application and renewal applications that it had separation of duties among its employees. But Southwest Marine claimed that based on information and documents provided by the credit union, nearly all of those separation of duties were performed by Lehman and Paulo. According to court documents, however, the credit union has denied that most of the separation of duties were performed by Lehman and Paulo.

The credit union also said in documents provided to the insurance company that it audited loan files and that its supervisory committee reviewed loans to officials, employees and their immediate family members and also reviewed activity on employee accounts.

In its response to Southwest Marine’s countersuit claims, Southern Pine said the supervisory reports did not specifically identify concerns regarding the then-undiscovered and unknown embezzlement. Court documents also showed the credit union had undergone examinations by state regulators and the NCUA.

Nevertheless, it appears that a lot of red flags were apparently missed despite the supervisory committee audits, state and federal examinations, and other financial oversight reviews the credit union and its board of directors said they performed.

Based on a forensic audit conducted by Lillie & Company, a Sunbury, Ohio-based CPA firm, which specializes in internal fraud investigations, 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 allegedly transferred those funds into the joint share draft account she owned with her husband.

According to the Lillie audit, over the next 17 years, Lehman continued to use this joint account, 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.

Paulo allegedly began transferring funds from relatives’ accounts “for temporary cash flow needs” in 2006, 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 the Lillie audit.

Paulo’s 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 Lillie audit.

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. At that time, the credit union had five employees who were insured by the Southwest Marine policy.

By June 11, 2020, Lehman and Paulo were fired and the credit union was placed into conservatorship. Southern Pine, which serves more than 1,400 members, was released from conservatorship in March 2022.