NCUA Mulls Charges Against CU Execs In Corporate Failures

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ALEXANDRIA, Va. – NCUA is investigating whether to bring charges against dozens of directors of the three recent corporate credit union failures – including CEOs of some of the nation’s biggest credit unions – just as it did in the failure of WesCorp FCU.

The charges could be as serious as civil fraud or negligence, as NCUA has charged directors of WesCorp, according to one source familiar with the NCUA practice. Or, they could be less serious, such as a slap on the wrist accompanying so-called Letters of Reprimand, which was done once before, in the 1995 failure of Capital Corporate FCU.

NCUA is expected to wait to bring any charges against directors of Members United Corporate FCU, Southwest Corporate FCU or Constitution Corporate FCU until after the agency’s Office of the Inspector General has completed a formal Material Loss Review on each of the recent failures, which it conducts on all big credit union losses.

An NCUA spokesman said beside the charges brought against the WesCorp directors in a civil suit, NCUA also has served notice of an intent to file a bond claim against directors of U.S. Central FCU. NCUA is expected to file similar claims against the directors of WesCorp. But no decisions have been made about the other three corporates. “In the case of the other three conservatorships, it is premature to say what we might do,” said John McKechnie, chief spokesman for NCUA. “Nothing will be done until we review all of the facts.”

In the WesCorp case, NCUA is claiming breaches of fiduciary duty and gross negligence on the part of five top WesCorp executives and 11 directors, most of them managers of large California credit unions, caused the failure of the one-time $34 billion corporate. NCUA typically follows up civil suits such as this with some type of civil administrative actions, such as a prohibition order which bars an executive from working for a federally insured credit union. However, in the CapCorp case directors who consented to Letters of Reprimand were allowed to continue their credit union careers. Some of them continue to operate Washington-area credit unions to this day.

Whether NCUA decides to pursue action against directors of the failed corporates will depend on several factors, according to one former attorney with NCUA’s office of general counsel. One factor will be a determination of the cause of each failure. Another will be the size of the monetary loss involved. Another still will be the level of expertise expected from the volunteer directors. For example, NCUA generally views expectations from directors of small credit unions, many of them having little financial expertise, differently than expectations from corporate directors who are financial professionals, many of them managing their own billion-dollar credit union, the former NCUA staffer said. In the WesCorp case most of the directors were financial professionals, managing sophisticated large credit unions.

The corporate failures, said the one-time NCUA insider, raises questions as to what the boards knew about the dire conditions of each corporate and the accuracy of the disclosures to both members and regulators. All of the failed corporates, for instance, were issuing optimistic reports about their prospects down to the final days, in order to prevent member withdrawals.

NCUA already is moving to answer some of the questions raised by the failure of the five corporates with respect to board governance. Over the next few weeks NCUA is expected to propose amendments to its new corporate rule that will, among other things, require all new internal and board reporting as in the Sarbanes-Oxley Act for all corporates.

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