For dozens of credit unions awaiting repayment from the ill-fated investments with defunct Bentley Financial Services the check's not quite in the mail.
An initial payout of $128 million to credit union victims from the rogue broker's estate is waiting for resolution from the Internal Revenue Service, which is exploring whether to file a claim on the $370 million now being held in federal receivership.
"The court has approved the initial distribution but the receiver can't make any payments until the IRS signs off," said Jo-An Sanders, president of Cheney, Wash.-based Cheney FCU, which is on the hook for $10.7 million. "We're anticipating a substantial distribution over the next 30 days."
Bentley, a popular CD broker for small and mid-sized credit unions, and its sole owner, Robert Bentley, were found by a federal court to have operated a massive fraud by which it was purportedly selling federally insured CDs in the investors' names, but in fact investing the funds on its own behalf. Federal authorities seized the brokerage and its subsidiaries last year and the U.S. District Court for the Eastern District of Pennsylvania issued a permanent injunction against Bentley and his firm in December. A criminal investigation is also pending.
The court found that Bentley was operating a classic "Ponzi" scheme with which it was selling bogus CDs and paying off early investors with the proceeds of later investors to make it appear the scheme was legitimate. In fact, several credit union investors said they never suspected a thing because they received regular payments from Bentley.
"We've been doing business with their organization for over 10 years; they never missed a check. I sent them my money and they gave me my return like clockwork," said Tony Black, president of BCM FCU, Houston, which has $6.7 million in claims against the firm.
The status of the claims, for which a final payment could take years, has severally hindered the $25 million credit union. "We have no investment income," said Black. "We've been very fortunate to be able to keep our doors open."
The scheme was apparently concealed for several years because high interest rates allowed Bentley to invest the proceeds and to make current payments to investors, sources said. But when interest rates plummeted over the past few years, the firm's revenue stream dried up and the fa?ade was penetrated. What resulted was an "interest rate vice," according to Michael Kuss, an attorney representing Clawson Community FCU, Clawson, Mich., which has the largest single claim at $15.8 million.
The federal receiver has told investors they can expect to get as much as 95% of the principal back on their investments, but no interest, an optimistic projection according to some who have been involved with such large-scale receiverships, which are usually tied up in the courts for years while claimants battle over the remains.
"Every time they appear to make some progress, someone, more or less, stops the progress with a new suit. It slows it down," said Sandy Lazzara, president of Pittsburgh Police FCU, which had $5.6 million invested.
As a result, credit unions are expected to lose as much as $25 million of their $214 million in Bentley investments, which would make it as the largest brokerage-related loss ever in CU history.
NCUA has instructed the 112 credit unions with Bentley investments to write down 5% of their investments and set aside another 10% for allowance for loan losses. The accounting action pushed several of the credit unions, like Cheney FCU, into a loss for last year. Most of the credit unions have seen their capital reduced, as well.
Most of the credit union victims were small or mid-sized and did not have in-house investment expertise.
"If people would have done their due diligence I believe there would have been more questions asked early on," said Lazzara of Pittsburgh Police FCU, who was hired after the investments.