Blockbuster Trial To Bare Details Of U.S. Central Failure

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BIRMINGHAM, Ala. – Barring a last-minute settlement, past and present credit union leaders are scheduled to go on trial Aug. 1 for their role in the 2008 conversion of $450 million of temporary capital in U.S. Central FCU into permanent capital that was erased within weeks by growing losses at the one-time $52 billion central bank for credit unions.

Scheduled to take the witness stand in the trial are: CUNA President Bill Cheney, who sat on the board of U.S. Central at the time; Francis Lee, who was the CEO of U.S. Central; Joseph Herbst, who was both chairman of the U.S. Central board and president of Members United Corporate FCU; David Dickens, U.S. Central’s head of asset liability management who was the only individual fired prior to the corporate’s failure; and Thomas Bonds, the president of Corporate America CU, one of the few credit unions that survived the corporate meltdown unscathed which has brought the suit.

The Alabama corporate claims the directors and officers of U.S. Central knew the capital would soon be consumed by growing losses when U.S. Central’s board and NCUA approved the conversion, as part of the regulator’s failed effort to staunch the decline in U.S. Central’s Wall Street ratings, and to enhance its dwindling borrowing capacity. “Converting callable (membership capital shares) funds to (PIC II), Tier1 capital is an important facet of broader efforts to maintain robust debt ratings for US Central,” then-NCUA Chairman Michael Fryzel said on Dec. 12, 2008.

The trial, if it goes off as scheduled, could bare some of the secrets behind the demise of U.S. Central and the role of NCUA, which had its own examiner on site at the corporate five days a week, even as the corporate giant slid into insolvency in late 2008.

Just six weeks after the conversion, on Jan. 28, 2009, NCUA agreed to an emergency $1 billion capital infusion to prop up the failing corporate, then took it over in March 2009. At that point, Fryzel said the regulator no longer trusted the accuracy of the U.S. Central numbers, which showed almost $12 billion in unrealized losses on its mortgage backed securities.

The former central bank for credit unions, which provided key investment and payment services to the entire credit union system, is part of a massive liquidation of five failed corporates – including WesCorp FCU, Members United, Southwest Corporate FCU and Constitution Corporate FCU – that once held more than $100 billion of credit union assets.

Corporate America’s suit claims that top U.S. Central officers and directors, including U.S. Central President Lee, worked to conceal $1.2 billion in losses U.S. Central conceded in January of 2009, after claiming for months that losses were much lower.

The suit claims the officers and directors either knew or should have known when U.S. Central converted $450 million of membership capital shares in December into so-called paid-in-capital II that the PIC II was to be extinguished soon thereafter when the $1.2 billion of losses came to light.

Also named as defendants in the suit are: U.S. Central Chairman Herbst, and fellow directors Charles Thomas, Robert Siravo, Larry Eisenhauer, James Hansen, Greg Moore, all of whom were corporate CEOs sitting on the U.S. Central board; Bill Cheney, who as president of the California CU League at the time was representing the Association of Corporate CUs; and CUNA’s Senior Vice President John Franklin, who was CUNA’s representative on the board.

Corporate America said it plans to call Lee, Herbst, Eisenhauer, Thomas, Dickens and Bonds as well as First Carolina Corporate CU's David Brehmer, as witnesses, and may also put Cheney, Siravo, Franklin, Hansen and Moore on the stand. Cheney and Siravo are among a group of officers and directors for WesCorp who are being sued by NCUA for the failure of the one-time $34 billion corporate.

The Alabama corporate, which is poised to merge with Louisiana Corporate CU and be one of survivors of the corporate shakeout, claims it is entitled to repayment of its capital and damages, which could add as much as $10 million to its own diminished capital base. An affirmative court ruling likewise would boost the capital for the other surviving corporates.

A pre-trial conference is scheduled for July 25.


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