WEST PALM BEACH, Fla. – A group of IBM employees sued IBM Southeast Employees FCU last week claiming their credit union should have known that bonds they were sold purportedly to finance churches and other faith-based products were really financing low-income housing and other speculative real estate projects.
The class action suit filed in federal court here by the members claims the credit union is responsible for millions of dollars of their losses because it solicited member investments and even advertised in its newsletter for a third-party investment house, Wellstone Securities to sell bonds issued by one of its affiliates, Cornerstone Ministries of Cummings, Ga., which went bust last year.
Cornerstone, which financed thousands of faith-based projects, 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 Feb. 2008 amidst the crash of the mortgage markets, costing investors tens of millions of losses. Investors in the bonds like the ones sold to members at IBM Southeast are expected to recover between eight cents and 30 cents on the dollar.
Credit union officials last week denied responsibility for the bond sales. "Wellstone Securities, at times used offices in the credit union," Carroll Scarborough, the credit union’s chief financial officer. But he insisted the credit union made clear to members the brokerage was unaffiliated with the credit union.
He also asserted that three sales representatives cited in the civil suit were not employees of IBM Southeast. "They were employees of Wellstone Securities and have never been employees of the credit union," Scarborough told The Credit Union Journal.
"None of the three people," said Michael Lozoff, an attorney for IBM Southeast, "were ever employees of the credit union. This is a very significant element."
Claudia Schorrig, an IBM employee who bought the bonds at the credit union offices, said based in the credit union’s recommendation, she initially invested $50,000 in Cornerstone bonds. Then she bought another $10,000.
The case brings to the forefront the issue of third-party responsibility when a credit union leases or otherwise provides office space and an implicit endorsement–such as the newsletter tout–in the sale of faulty products or services. The members allege that "the credit union not only recommended Wellstone, which in turn, sold Cornerstone’s worthless securities to unsuspecting investors," said the suit. "The credit union would so descend to actively soliciting members to purchase Cornerstone securities through Wellstone."
