New London - An apparent $12 million embezzlement scheme carried on for decades by the late stockbroker Edwin F. Rachleff continues to have ripple effects, the latest being a lawsuit filed against a city accounting firm.

Ed Lorah & Associates LLC, which took over much of the business of Beller, Shepatin & Co. in September 2007, has been sued in U.S. District Court in New Haven by the board of the National Credit Union Administration. The NCUA is the federal agency that uncovered Rachleff's fraud shortly before closing a local credit union where he served as an investment adviser.

The agency, citing the former Beller, Shepatin's "negligent and careless" auditing services for the now-defunct New London Security Federal Credit Union, charges in the suit that the accounting firm's "misleading" characterization of the financial institution's investment accounts led to a fraud that continued for years longer than it otherwise would have.

Edwin Lorah, the sole owner of the company that merged with Beller, Shepatin and therefore is considered by the NCUA to be its successor, has previously pointed out that his New London firm has never audited the credit union. He had no comment about the suit on Wednesday.

"The audits and reviews Beller, Shepatin performed were not performed by a person having adequate technical training and proficiency as an auditor of an institution such as the credit union," according to the suit, filed last week.

Beller, Shepatin was charged with scrutinizing the credit union's books from at least as far back as 1994 until federal regulators closed the financial institution in July 2008 after it was declared to be insolvent.

The NCUA, in a report on the case issued last year, cited Rachleff, the credit union's longtime financial adviser, as the perpetrator of a massive fraud who diverted funds meant for the credit union to an account only he controlled. The scheme unraveled after a routine audit by the NCUA in June 2008 and ended with the closure of the credit union and Rachleff's suicide on the same day, according to the report.

Rachleff reportedly used blank account statements with the A.G. Edwards brokerage letterhead to create fraudulent account statements, according to the NCUA. But Beller, Shepatin failed to properly request a separate confirmation that the accounts existed, neglected to determine the statements' authenticity and failed to question inconsistencies in the credit union's accounts, the suit contends.

"Had Beller, Shepatin performed proper audits and reviews, the credit union would have uncovered the fraudulent investment account years sooner," according to the suit.

The suit says statements audited and reviewed by Beller, Shepatin had indicated one account purportedly owned by the credit union had grown from $6.5 million in January 1995 to $11.6 million in June 2007, the last time the accounting firm reviewed the financial institution's books. Yet a year later, the NCUA discovered that the account was not in the name of the credit union; it had, since 1988, been in the name of the Elmore Shoe Co., a defunct former store once owned by the family of Rachleff's wife, Naomi, according to the suit.

"The action for damages arises out of Beller, Shepatin's professional malpractice, and breach of contract in performing audits and reviews of the financial statements of the New London Security Federal Credit Union," according to the suit, filed by Robert E. Kaelin and Ka Fei Wong of the Murtha Cullina law firm in Hartford.

The NCUA's insurance fund paid out $9.7 million to credit union members, but an additional $570,000 was not covered by insurance, according to the suit.

In addition to suing the accounting firm, the NCUA earlier this year filed suit against Wells Fargo Advisers LLC, successor to the brokerage houses A.G. Edwards and Wachovia Securities, for which Rachleff worked. It also has sued Rachleff's estate, which had less than $40,000 in assets.

l.howard@theday.com