For the more than 200 financial institutions, most of them credit unions, bilked by the massive Ponzi scheme known as Bentley Financial Services, the check is in the mail for a partial payout of their claims.
Receivers for the defunct CD brokerage said last week they plan to issue checks for about 60% of total claims to more than 120 credit unions and other victims of Bentley Financial by the end of this week. Frank Mayer, a Philadelphia attorney appointed to manage the $370- million receivership, the largest in the history of the Securities and Exchange Commission, said last week they have been notified by both the Internal Revenue Service and the U.S. Justice Department that neither will file a claim on the massive estate, thus clearing the way for a partial payout to claimants.
"We are now in a position to distribute $220-million to those individuals and institutions who have a claim in the case," said Mayer.
Both federal agencies could have tried to attach some of the Bentley funds to satisfy tax claims or criminal penalties, which are expected as part of a Justice Department investigation. "We had to make sure the two issues were resolved before paying any claims. Otherwise, the checks would have been subject to liens," said Mayer.
Credit unions and other victims could expect to receive as many as two additional checks toward their claims by the end of the year, he said.
However, the investors in Bentley are expected to lose as much as 15% of the principal of the investments, not to mention lost interest, meaning credit unions could stand to lose as much as $50 million on their $220 million investments, marking it as the biggest credit union loss related to a brokerage case.
Bentley was shut down and seized by the SEC last year after the regulators determined that the CD sales amounted to a massive fraud. A federal court found that instead of selling federally insured bank CDs in investors' names, Bentley was using the funds to invest in securities in its own name. By using funds paid in by later investors to pay off the earliest customers, Bentley was running a classic Ponzi scheme by making it appear the earliest investors were being legitimately paid off.
SEC Takes Action
The SEC has permanently enjoined Robert Bentley, the owner of the firm, and several of his salesmen. The salesmen have agreed to repay about $1.5 million in restitution to go to receivership. A financial settlement with Bentley is still pending, according to Mayer.
The receivership has also filed suits against several institutions that apparently received full payment of their investments before they matured and is seeking repayment of some of those funds, said Mayer.
Some of the biggest investors in Bentley were credit unions, including: Houston Energy CU ($13.9 million); Texaco Houston CU ($10.2 million); Ukrainian Self-Reliance Michigan FCU ($8.2 million); Entex CU ($7.5 million); Government Employees CU of Maine ($7.2 million); Kentucky Employees CU ($7.1 million); Mutual CU ($6.5 million); Defense Contracts South FCU ($4.6 million); Central Jersey FCU ($4.6 million); Ascension School Employees CU ($4.2 million); Texas Gulf FCU ($4.1 million) and North Oakland Community CU ($4.7 million).
The Bentley case, and at least two previous instances in which credit unions lost money in fraudulent CD purchases, prompted NCUA last month to issue new guidelines and require additional disclosures on the purchase of CDs on their call reports.