NEWARK, N.J. – Attorneys representing credit unions and unsecured creditors of U.S. Mortgage Corp. are seeking information the government may have on some $125 million of credit union funds stolen by the owner of the company, but have little hope any of the money is available.
"It’s all gone," said Howard Brownstein, a partner in Philadelphia turn-around specialists NachmanHaysBrownstein, which is winding down operations of U.S. Mortgage and its CU National Mortgage unit.
A federal bankruptcy court has appointed an examiner in the case to try and locate the money, which Michael McGrath, president of U.S. Mortgage, confessed to stealing. McGrath pleaded guilty in June to selling off as much as $138 million in mortgages the company held on behalf of about three dozen credit unions to Fannie Mae. He has agreed to forfeit about $13 million of his own assets, leaving the $125 million hole.
McGrath told the judge at his plea hearing he lost the money on day trading in the stock market, with large bets on several stocks, including Fannie Mae. According to a transcript of the hearing, McGrath said he first started selling off credit unions loans in 2004 to cover big losses his company was accruing on mortgage-backed securities. Then he started selling more credit union mortgages to feed a day-trading habit in one of the worst bear markets in history.
"There isn’t any left," said James Forte, a New Jersey lawyer representing Picatinny FCU, one of the credit unions burned in the scheme.
The credit union for the Picatinny military arsenal in Dover, N.J., Picatinny FCU has one of the largest exposures to the fraud. U.S. Mortgage held $52 million of its mortgages, $14 million of which were sold to Fannie Mae and are the subject of the lawsuit.
But several other credit unions also had significant exposure, including Suffolk FCU, Proponent FCU, Sperry Associates FCU, Treasury Department FCU, Novartis FCU, Educational Systems FCU, County Educators FCU, Energy FCU, Rutgers FCU, Piedmont Aviation FCU, Pinnacle FCU, Velocity County FCU, TCT FCU, Lassen County FC, JM Associates FCU, Miami Firefighters FCU, First Florida CU and Newark Board of Education Employees CU.
Representatives at the U.S. Attorneys office declined to comment on a potential recovery. "We always make an effort to get back whatever we can,"said Michael Dwerniak, spokesman for the U.S. Attorney. "In these situations sometimes we get some of it back; sometimes we get all of it and sometimes we get none of it." He said more light may be shed on the whereabouts of the stolen funds at an October sentencing hearing for McGrath.
The credit unions are seeking recovery wherever they can. Forte, who is suing Fannie Mae on behalf of Picatinny FCU for the return of the mortgages McGrath sold, said he is talking with the credit union’s insurer, CUNA Mutual Group, on a bond claim to cover the losses. David Stein, a New Jersey attorney representing the unsecured creditors in the bankruptcy, said several other credit unions have also filed claims with the credit union insurer.
CUNA Mutual, which issues bonds on more than 90% of all credit unions, said it has received claims from 27 credit unions in the case so far.
"Nineteen of the 27 credit unions have submitted proofs of loss, and we are in the process of investigating these claims," said John Christenson, associate general counsel for the company. "Many credit unions are making efforts to pursue recovery of their losses from Fannie Mae, whom they (and we) believe bear responsibility for these losses. We have been in discussions with these credit unions about assisting them in these recovery efforts while putting the investigation and decision of their bond claims with (CUNA Mutual) on hold."
Fannie Mae is fighting the credit unions’ efforts for return of the disputed mortgages and has asserted in the suit filed by Picatinny FCU that it did not know McGrath was not authorized by the credit unions to sell the mortgages. In fact, Forte said McGrath had authority to sell mortgages on behalf of some of the credit unions.
Fannie Mae representatives did not return phone calls seeking comment.
CUNA Mutual’s Christenson said the talks with the credit unions are ongoing. "We have not denied any claims as our investigation is ongoing," he said. "We have communicated the fact that based on our investigation to date, we have serious doubts as to whether the claims come within the coverage under the credit unions' bond policies with (CUNA Mutual)."
Other avenues, including an insurance claim against the carrier for U.S. Mortgage, appear to have little potential because the coverage is far less than the vast claims contemplated by credit unions, according to Stein.
Several other avenues are also being discussed, including suits against third-parties, like the company’s auditors. Those decisions will wait until after the bankruptcy court appoints a trustee to oversee the liquidation of the company’s assets, currently scheduled for October.
