Details Emerge In CU Shutdown

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WASHINGTON-The CEO of tiny Vensure FCU insisted before a federal judge that his credit union has a plan to exit the business of processing online bets and offer loans and deposits like a traditional credit union. But NCUA officials, pointing to the millions of dollars in fees the credit union earned processing online poker bets, said they doubt the promises, which is why the agency took over the Mesa, Ariz., credit union over April 15 because it is not a viable business without the processing revenue.

The court proceedings, with te credit union retaining powerful and well-known litigators, were a challenge to the NCUA conservatorship.

Vensure is on pace to earn $4 million this year handling poker bets for its largest depositor Trinity Global Commerce, which processes bets for the two biggest online poker sites, PokerStars.com and FullTiltPoker.com. With no loans on its books, that amounts to 99% of its income.

"This is not a credit union, as far as serving members," Elizabeth Whitehead, director of NCUA's Region Five told federal Judge Rosemary Collyer during the hearing on the validity of the NCUA takeover. "It was basically serving Trinity Capital."

NCUA said it acted to take the credit union under conservatorship hours after the U.S. Justice Department charged 11 international figures with violating federal gambling laws and froze $3 billion of their funds in some three-dozen financial institutions, including the Trinity account at Vensure.The agency, which had been struggling with the credit union's business for some time, feared the government will not only seize the $2 million in the Trinity account, but seek seizure of the fees the credit union earned from the illegal gambling activity-so-called claw back, according to Whitehead. That would render the credit union insolvent.

Most of the funds in Vensure, which had 33% net worth-about $1.6 million-when NCUA took it over, have already been dissipated since the conservatorship. The credit union's net worth stood at just 4.5%, or just $212,000 late last week, according to Whitehead. That's because high overhead without the lucrative processing revenues are spending down the credit unions capital. "It's going to be insolvent in a couple of weeks," said Whitehead.

A Run On Shares

In addition, the credit union's largest depositor, a board member, withdrew $600,000 since the NCUA takeover, creating what Whitehead called a "run on shares."

John Iorello, CEO of Vensure, told the judge the credit union has put together a comprehensive plan to offer traditional credit union services after it exits the bet-processing business. He said it has been offering Internet banking and electronic bill payment services for the past few months and have one loan application pending. To facilitate the plan, said the CEO, Vensure has purchased and implemented software programs, trained staff and conferred with NCUA examiners.

But NCUA's Whitehead said the credit union agency doubted the seriousness of the business plan. "We have allowed this credit union months to become a legitimate credit union before we did the conservatorship," she said.

Vensure's Iorello countered by saying it has given Trinity a 180-day notice of termination of the company's processing agreement. But he did not mention that in the letter to NCUA it says the termination will only be completed if it is definitively determined that the processing of online poker bets is illegal.

Throughout the hearing both sides debated the legality of the credit union's processing of Internet bets. NCUA asserted that the practice is illegal under the Uniform Internet Gambling Act. "We are fairly certain that this is an illegal activity," said Whitehead.

The CU insists online bets are legal in several states so processing them is a legal practice. Meanwhile, according to minutes of a closed NCUA board meeting, the actual grounds for the decision to conserve Vensure were summarized by NCUA Board Member Michael Fryzel, who said, "We are going to have to be taking action on it at the last minute in order to make sure that we are not embarrassed further."

NCUA Chairman Debbie Matz responded: "I echo your comments," according to the administrative record of the closed board meeting submitted as part of Vensure's challenge to the takeover.

Fryzel also stated, "now, at this late date, we sit here attempting to take action before the Justice Department moves in and embarrasses us even further."

The credit union lawyers said none of NCUA's five stated reasons for the conservatorship were valid, and even if one was invalid it would qualify the conservatorship as "arbitrary and capricious," and thus, illegal.

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