Federal regulators' alleged negligence in overseeing the failed New London Security Federal Credit Union, as documented by its own oversight panel, contributed to the substantial losses of five credit union investors.
That's the latest legal accusation filed in U.S. District Court in Bridgeport as a 40-page amendment and 32-page exhibit to a lawsuit filed in July by attorney Robert Reardon of the New London-based Reardon Law Firm.
Last month, Reardon sued the insolvent credit union's board, auditors, legal advisers, brokerage firm and the widow of its longtime investment adviser, Edwin F. Rachleff, on behalf of the investors. Those investors include New London residents Melvin Goldblatt and Douglas C. Antupit, along with Joan Lazerow of Waterford, Mark D. Fetcher of Florida and Gloria Johnston of California.
Rachleff committed suicide on July 28, 2008, the same day federal authorities declared insolvent the credit union he had guided for decades. The regulator, the National Credit Union Administration, has itself sued the brokerage and accounting firms involved in the case.
Now, the plaintiffs are seeking to add the NCUA as a defendant. The NCUA's Office of Inspector General, which analyzed the credit union failure and the NCUA's role in it, is responsible for conducting independent audits and investigations of the parent agency.
The OIG filed its report last October, and Reardon obtained it through the Freedom of Information Act.
"That gave me a very good basis to bring my lawsuit because they'd done a very detailed analysis of why this terrible financial loss occurred," Reardon said Wednesday.
Using the words of the OIG against the NCUA, Reardon cites 21 individual counts of failings by federal authorities to adequately oversee a credit union run by only one man - Rachleff - that proved unaccountable to its managers or NCUA examiners.
"Examiners did not consider New London's lack of internal controls over investment safekeeping or supervisory committee inactivity as a serious enough risk to the credit union's assets to warrant more aggressive supervision," the report reads. "To compensate for New London's lack of internal controls, NCUA should have expanded its examination procedures."
Areas of concern
The NCUA examiners failed to bring to the attention of supervisors the lack of corrective action on repeated areas of concern by the credit union "when they should have known that not doing so would place depositors' funds at substantial risk of embezzlement, misappropriation and financial losses," the lawsuit states.
Specifically, the amended lawsuit charges that NCUA examiners failed to:
? adequately review multiple external audits performed by the credit union's certified public accounting firm;
? verify whether investment activity was properly confirmed by Rachleff, when investments, in fact, were not being made by him;
? report that one person, Rachleff, controlled all investment transactions;
? periodically rotate external auditors as required by the NCUA;
? institute a "red flag review" when multiple reviews justified it; and
? determine that the credit union had no "safekeeping agreement" with Rachleff, thereby permitting investment fraud. (Safekeeping is the holding of a client's securities on their behalf in the client's name.)
Reardon is seeking compensation for his clients that includes interest on losses, attorney's fees and punitive damages totaling $4 million.
"This clearly involves a question of who pays," Reardon said Wednesday. "My clients are depositors who clearly are not guilty of any wrongdoing, and they deposited sums of money with the NLSFCU, and they have not received their money back," beyond what insurance paid out. "All of these different entities are blaming someone else, but the depositors are totally innocent. They're the victims."
Reardon originally sought restitution for his clients in February, but his claims were denied this month. Since six months have elapsed since the claims were filed, the investors are entitled to take legal action, Reardon said.
"My clients would like very much to have closure," he added. "They have lost a lot of money, they trusted this credit union, they trusted that the government was overseeing its operation and obviously there was gross failure involving everyone in overseeing this credit union."
In the report, the OIG determined that in June 2008, the credit union listed $12.7 million in assets, of which $12.1 million were accounted for as investments, yet "approximately $12 million in investments did not exist and … investment brokerage statements appeared to be fabricated."
In fact, more than 94 percent of the credit union's assets were in investments, yet only $55,000 was in the accounts by July, the OIG report states.
The OIG also determined that credit union management "failed to implement adequate internal controls," including allowing Rachleff to "handle all investment activity without adequate oversight" and relying on a supervisory committee that was "inactive for more than four years."
Through all of this, the report states, NCUA examiners failed to "adequately evaluate the risk" in the credit union's investment program, the OIG states.
"As a result," the OIG concludes, "NCUA missed opportunities to mitigate the loss to the (National Credit Union Share Insurance Fund) caused by New London's failure. … In addition, … we determined New London's lax internal control environment created an environment susceptible to fraud."
A spokesman with the NCUA said via e-mail that the agency "cannot comment on the suit pending receipt and review."
Most of the five plaintiffs in the case are retired, Reardon said, and two are over age 70, so he is planning to seek an expedited jury trial, since the court has provisions for that.
"Most are retired and live on limited incomes," Reardon said. "They could certainly use these funds and always intended to use these funds to support themselves in their retired years."