NEW LONDON, Conn. — NCUA has tied last year's failure of New London Security FCU here to fraud by its investment manager-who the regulator believes siphoned as much as $12 million from the $12.7-million institution.
The investment manager, 82-year-old Edward Rachleff, leaped to his death from an 11th-story window within hours of NCUA shutting down the 73-year-old credit union on July 28, 2008. On that date, examiners were closing in on the alleged fraud, according to a report issued by NCUA's Office of Inspector General yesterday.
Phony Reports Cover Up Fraud
Rachleff, a broker for A.G. Edwards who sat on the credit union's board for 19 years, covered up his fraud by providing phony reports which he hand-delivered to the credit union, the report said.
At the time, the NCUA seizure seemed unusual because the credit union appeared to be healthy, with only $5,000 of reported losses for the first half of the year and 17% capital. But one thing stood out: the credit union had just $234,000 in loans to members, meaning more than 98% of its assets were in investments. The credit union, according to the NCUA report, was nothing more than an investment club.
The failure of New London Security FCU cost the National CU Share Insurance Fund $9.7 million, which was used to pay out depositors of the failed credit union. The report finds fault with the oversight of the outside investment manager by the credit union's single employee and its supervisory committee, and cites a failure by examiners to spot the fraud. "Specifically, management allowed the account manager to handle all investment activity without adequate oversight," said the report. In addition, beyond contracting with external auditors to perform annually required work, the credit union Supervisory Committee was inactive for more than four years.
No Adequate Evaluation of Risk
NCUA examiners said there was not an adequate evaluation of the risk in the New London's investment program. Investments accounted for more than 95% of the credit union's assets. While NCUA examiners noted the high concentration of investments and the lack of controls over investments-including the lack of a safekeeping agreement-there was a failure to elevate these repeated issues for stronger supervisory actions. Consequently, examiners did not expand examination procedures when they should have done so.
NCUA moved to shut down the credit union in July 2008 after examiners visited Rachleff's office, where they reviewed original statements and supporting documentation. Examiners found that according to the investment firm, the credit union did not have an investment account worth $12 million. Specifically, examiners determined the existence of one brokerage account, the New London Security FCU Deferred Compensation account, which as of July 2008 held approximately $55,000 in investments. The assistant manager for the investment firm told examiners the account number used for the investment account did not belong to the credit union. Examiners later determined the account number used by the credit union's account manager was actually the account number for a shoe company, which was owned by the family of Rachleff's wife.
Denials Issued at First
The investment firm's senior regulatory counsel confronted Rachleff about the credit union's brokerage statements, the report said. The account manager denied knowing anything about the statements and denied hand delivering the investment statements to the credit union. Subsequently, the account manager committed suicide on the day of liquidation.
