BOCA RATON, Fla. – IBM Southeast Employees FCU last week filed suit against CUMIS Insurance Society over the credit union insurer’s refusal to cover legal expenses and what is expected to be millions of dollars in damages to be paid to dozens of members who lost their savings in a fraudulent investment scheme.
The members, most of them IBM employees, have filed a class action suit claiming the credit union should have known that bonds they were sold through the credit union’s Southeast Service Organization CUSO, purportedly to finance churches and other faith-based products, were really financing low-income housing and other speculative real estate projects.
In a May letter to the credit union, CUMIS attorneys said it will only cover up to $100,000 in legal defense costs and will not indemnify the credit union against the class action suit. The reasons cited were that the suit lies within the investment exclusion of the Directors, Volunteers and Employees Policy and Supplemental Entity Litigation Policy, which does not cover investments that have gone bad.
The credit union’s CUSO invested the members’ funds in bonds issued by Wellstone Securities and its Georgia affiliate, Cornerstone Ministries. But instead of investing the money in faith-based projects, Cornerstone ended up investing funds gathered from the credit union and other investors in low-income housing, retirement homes and other risky real estate projects. The company, which sold $142 million of bonds to more than 3,600 church-goers and other investors, filed for bankruptcy in February 2008, costing investors tens of millions of dollars of losses.
Officials with the credit union insurer declined to comment.
