NL credit union theft may have gone on for decades

The late Edwin F. Rachleff's embezzlement of funds from a small New London credit union could have gone undetected for decades, and trying to find what happened to the $12 million he presumably stole will be a painstaking process, federal authorities said Tuesday.

"He was a pretty savvy guy," John J. McKechnie III, spokesman for the federal agency that regulates credit unions, said in a phone interview.

McKechnie said the government will be pursuing several avenues to recoup nearly $10 million in insurance-fund losses.

The National Credit Union Administration already has sued Rachleff's estate, which reportedly had assets of less than $40,000. It also is discussing a possible settlement with the New London Security Federal Credit Union's outside auditing firm as well as with Wells Fargo, successor to the A.G. Edwards and Wachovia Securities brokerage firms where Rachleff had been employed.

The credit union's outside auditor for years was Bell Shepatin & Co. of New London, but its business was later picked up by another city firm, Ed Lorah & Associates. Lorah, contacted Tuesday, declined to comment, citing the ongoing investigations.

"If we do not reach settlement, we may pursue legal action," McKechnie said in an e-mail response to questions.

McKechnie said the NCUA has referred its concerns about Rachleff's activity to both the federal Securities and Exchange Commission and the Financial Industry Regulatory Authority, or FINRA. The SEC would not confirm whether it is conducting an investigation, but a search of the FINRA Web site showed that Wells Fargo last month filed a complaint against Rachleff in which it alleges "misappropriation through fraud" and puts the damages at $7.5 million.

It was unclear Tuesday whether the $7.5 million was related to funds missing from the credit union or whether the brokerage firm itself was bilked of yet more money.

A Wells Fargo spokeswoman declined to comment about the case.

McKechnie said he was under some constraints about discussing the ongoing investigation of how Rachleff apparently managed to embezzle $12 million. But he offered assurances that authorities have no doubt the longtime broker was the culprit.

"The truth is, we can trace the funds that entered the account, but it's not as easy to trace where it went," he added.

Hobbling the investigation, according to McKechnie, is the time frame during which the fraud apparently occurred, "years, if not decades," possibly going back before electronic records existed.

While some local people may call the Rachleff case a "mini-Madoff" - referring to infamous stock trader Bernard Madoff, found guilty this year of perpetrating the largest Wall Street fraud in history - Rachleff, according to investigators, may have kept his scheme going far longer.

Glenn Hamler, a broker for Stifel Nicolaus in New London, said the ability of a broker to escape scrutiny for so long defies all his experiences and paints the brokerage industry with a reputation it doesn't need. He said most brokerage houses have much stronger oversight of their employees.

In a report by the NCUA's inspector general issued last month, the credit union's outside auditors, along with its board and agency examiners, came in for criticism because of lapses in judgment that allowed Rachleff to defraud credit-union members and, ultimately, the federal government. Local depositors lost about $800,000 when the credit union failed, according to the NCUA, but the agency itself paid out $11.8 million.

The NCUA report, which indicated Rachleff's culpability in the credit-union failure and said he likely embezzled $12 million in depositors' funds over the years, came more than a year after the institution's closure. But McKechnie said the gap between the credit union failure and the most recent report on its causes should not give people the wrong impression.

"The fact we're quiet doesn't mean we're not active," he said. "We're active."