NCUA: WesCorp Board Abandoned Duties
LOS ANGELES-In a pleading that could have broad ramifications for officers and directors of failed corporate credit unions, NCUA told a federal court here that directors and officers of WesCorp FCU abandoned their roles as fiduciaries of a not-for-profit credit union by pursuing ever-increasing profits for the failed one-time $34-billion corporate.
"The considerations are different for a nonprofit credit union such as WesCorp," NCUA asserts in a new filing in its suit against top WesCorp figures. "WesCorp's members were not investors voluntarily buying shares in WesCorp in hopes that they could profit from the business risks WesCorp took. They were generally small credit unions looking for banking services, a borrowing source and a safe place to keep their funds."
"Nor was WesCorp capitalized like a for-profit financial institution," noted attorneys for NCUA. "The corporate mandate for its directors was not to earn greater return by taking shrewd investment risk, but to provide effective funds management and services to benefit its members."
The argument, which rebuts the officers and directors defense that the massive losses resulting from their oversight was the result of the normal course of business, is a clear indication of how NCUA will view the roles of managers and directors in the other big corporate failures of U.S. Central FCU, Members United Corporate FCU, Southwest Corporate FCU and Constitution Corporate FCU.
Losses on the MBS eventually mounted to a staggering $6.9 billion for 2008, immediately erasing $2 billion of capital owned by 1,025 credit union members of WesCorp, and requiring NCUA to take the failed corporate giant under conservatorship, and eventually, to liquidate it.
The WesCorp defendants in the NCUA suit, including CEOs of almost a dozen big CUs, claim their actions overseeing the massive corporate failure are covered by the California Corporations Code, which insulates directors from liability for poor business judgments made while exercising due care "in reliance on information provided by others."
But NCUA asserts the directors were blinded by greater returns being earned by WesCorp that were being passed on to their own credit unions, to the point of gross negligence. "The directors caused or allowed WesCorp to transform its investment portfolio from a relatively safe repository for its members' excess funds into a cash machine, generating ever-increasing amounts of investment income," said NCUA's attorneys.
"The thrust of the directors' motion (to dismiss the NCUA suit) is that the directors were well meaning and diligent volunteers whom the NCUA has made scapegoats because it needs someone to blame," the lawyers said. "The NCUA respectfully submits that the evidence will prove otherwise."
The NCUA pleading recounts how the directors stood by as WesCorp management abandoned a strategy focusing on safe U.S. agency securities to a point where an overwhelming 95% of its investment portfolio was invested in risky private label mortgage-backed securities, the vast majority of it so-called Option ARMs. Those Option ARM securities accounted for a whopping $4.8 billion of the losses. "Nonetheless, the Directors did not consider the imposition of concentration limits for those type of MBS, despite their inherent riskiness, and they did not inform themselves about the growing concentration of these types of these types of securities," said NCUA.