Madoff-Like Ponzi Scheme Alleged In Collapse Of Connecticut CU
NEW LONDON, Conn. – Members of defunct New London Security FCU have filed suit against former directors and officers and the brokerage for the one-time $13 million credit union, claiming they were induced to deposits their funds by a multi-million dollar Ponzi scheme perpetrated by the credit union’s investment advisor, who leaped to his death as authorities were closing in.
The alleged scheme is reminiscent of the much larger Madoff Securities scandal, in which well-known Jewish investors were roped in by what turned out to be phony promises of high returns. The suit, filed in federal court last month, claims New London Security, chartered in 1936 to serve the local Jewish community, misrepresented the value, nature and existence of its investments to members and falsified member statements by misrepresenting return on investments in order to induce members to deposit funds and retain their deposits with the credit union. The suit claims the account statements purported the investments “were generating positive dividends when in fact said investment funds were embezzled, misappropriated and/or lost causing the plaintiff member investors to suffer substantial financial losses included uninsured funs, interest, attorneys fees and costs incurred.”
The suit asserts that the 72-year-old credit union, which had some 97% of its assets tied up in investments, was more investment club than credit union.
The scheme was uncovered on July 28, 2008, hours before New London Security’s 82-year-old investment advisor and former director Edwin Rachleff jumped to his death from the 11-floor of a nearby building, as NCUA was taking over the credit union. A subsequent audit conducted by NCUA revealed that Rachleff had misappropriated more than $12 million of the credit union’s funds, rendering the credit union insolvent.
The suit was filed by credit union members Melvin Goldblatt and Douglas Antupit, Joan Lazerow, Mark Fetcher and Gloria Johnston, and seeks $4 million in damages from officers and directors of the defunct credit union and Wells Fargo Advisors, which acquired the firm that Rachleff had worked for, A.G. Edwards, which itself had been acquired by Wachovia Securities (Bank).
Defendants include: New London Security board members Herbert Linder, Hinda Kimmel, Martin Yavener, Reuben Levin and Martin Lazarus, as well as longtime credit union manager Mary Lou Richards; former New London Security auditing firm Beller, Shepatin & Co. and Maxine Shepatin, the executor of the estate for its late principal, Hyman Shepatin; Edward Lorah, whose accounting firm succeeded Shepatin's; Naomi Rachleff, Edwin's widow and executrix of his estate, and the New London law firm of Suisman, Shapiro, Wool, Brennan, Gray & Greenberg, which served as general counsel and attorneys to the credit union.
The suit singles out the Susiman, Shapiro law firm, whose founding partners were the founding directors of the credit union and were represented on the Board ever since then, “counseling and advising the Board on legal matters as well as carrying out other duties.” Representatives of the firm could not be reached for comment.
Among its allegations, the lawsuit claims Suisman, Shapiro engaged in legal malpractice, Wells Fargo and its predecessor firms were negligent in supervising Rachleff, the credit union board was negligent in fulfilling its oversight duties, and the auditors were negligent and careless in failing to discover financial discrepancies. From March 1988 through June 2008, the plaintiffs invested large sums of money with New London Security Federal Credit Union and, ultimately, A.G. Edwards, under the belief that their investments would not be embezzled, misappropriated and/or lost, according to the suit.
At the time of the NCUA takeover, New London Security had just 365 members and more than $12.3 million of a total of $12.7 million were purportedly in investments made by Rachleff.
The suit said the board provided a lax internal control environment which created an environment susceptible to fraud, misappropriation or imprudent investment. It added that the board accepted highly suspicious statements from A.G. Edwards – statements the NCUA has said were typewritten on blank brokerage-firm forms – and failed to conduct regular meetings or keep meeting minutes.
NCUA, which paid out $9.7 million to members as part of the liquidation, filed suit earlier against Wells Fargo Advisers, auditor Robert Shutsky of Preston and accounting firm Ed Lorah & Associates, seeking compensation for losses the agency said were incurred by the National CU Share Insurance Fund.
Lawyers for the plaintiffs in the suit did not return phone calls seeking comment.