Dozens of credit unions and banks awaiting repayment for ill-fated investments with the defunct Bentley Financial Services will have to keep on waiting.
An initial payout of $220 million from the broker’s estate to victims, most of them credit unions, has been held up by the Internal Revenue Service, which is exploring whether to file a claim on the $370 million of Bentley funds 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 JoAn Sanders, the president of Cheney Federal Credit Union in Cheney, Wash., which has lost $10.7 million. “We’re anticipating a substantial distribution over the next 30 days.”
Frank Mayer, the Philadelphia attorney appointed receiver for the case, said he hopes to be able to make initial payments amounting to 59% of each claim over the next month or so. The Bentley receivership is the largest in Securities and Exchange Commission history, he said.
Bentley, a popular certificate-of-deposit broker for small banks and credit unions, and its sole owner, Robert Bentley, were found by a federal court last year to have operated a massive fraud in which the broker sold federally insured CDs in investors’ names but invested the funds for itself. The SEC seized control of the brokerage and its subsidiaries last year, and the U.S. District Court for the Eastern District of Pennsylvania issued a permanent injunction against Mr. Bentley and his firm in December. A criminal investigation is also pending.
The court found that Bentley was operating a classic Ponzi scheme, selling bogus CDs and paying off early investors with the proceeds of later investors. Several credit union investors said they never suspected a thing because they received regular payments.
Tony Black, the president of BCM Federal Credit Union in Houston, which has $6.7 million in claims against the firm, said: “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.”
The situation with the claims, for which a final payment could take years, has severely hindered the $25 million-asset BCM. “We have no investment income,” Mr. Black said. “We’ve been very fortunate to be able to keep our doors open.”
The scheme was 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, the revenue stream dried up.
The National Credit Union Administration has instructed the 112 credit unions with Bentley investments to write them down by 5% and set aside another 10% for allowance for loan losses. The accounting action pushed several of the credit unions, including Cheney, into a loss for last year. Most of the credit unions’ capital has fallen as well.
