WEST PALM BEACH, Fla. – A federal court Friday approved an unusual settlement between IBM Southeast Employees FCU and about 150 members who lost more than $8 million when bonds they bought through the credit union’s third-party investment advisor turned out to be a Ponzi scheme.
Under the deal, approved by U.S. Judge Kenneth Ryskamp, the $830-million credit union will pay the members, most of them IBM retirees, $950,000 in cash and assign all of the credit union’s rights in an insurance claim it is making with CUNA Mutual’s CUMIS Insurance unit to recover another $8 million, according to David Rothstein, a partner in the Coconut Grove law firm Dimond Kaplan & Rothstein, who represented the members.
“The parties reached an amicable and businesslike settlement without the costs or risks of protracted litigation,” Rothstein told Credit Union Journal Friday.
The case involves bonds issued by Cornerstone Ministries, which turned out to be a Ponzi scheme, which a third party broker-dealer Wellstone Securities, sold to the credit union members.
CUMIS is challenging the insurance claim and says the directors and officers policy IBM Southeast has with it covers losses on investments accrued to the credit union, but not losses to its members. The credit union disputes that finding and has asked the courts to make a determination.
The lead plaintiff in the case, Claudia Schorrig, an IBM retiree who bought the bonds at the credit union’s offices, said based on the credit union’s recommendation she initially invested $50,000 in Cornerstone bonds. Later, she bought an additional $10,000.
The members of the plaintiff class lost about $8.1 million, an average of $50,000 to $200,000 of their investments in the bonds. The $8.9 million settlement represents interest accrued on the losses.
The members claim the credit union is responsible for their losses because it solicited member investments and even advertised in its newsletter for Wellstone Securities to sell the bonds issued by one of its affiliates.
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. As in a typical Ponzi scheme, the company continued paying principle and interest to the earliest investors to make it appear to later investors the bonds were good.
The company, which sold $142 million worth of bonds to more than 3,600 churchgoers and other investors, filed for bankruptcy in February 2008 amidst the crash of the mortgage markets, costing investors tens of millions of dollars in losses. Investors in the bonds such as the ones sold to members at IBM Southeast are expected to recover between eight cents and 30 cents on the dollar as part of the bankruptcy procedure.
