WEST PALM BEACH, Fla. – IBM Southeast Employees FCU and about 100 members have agreed on an unusual settlement of a class action suit of claims the members lost an estimated $10.5 million in an investment scheme sold by the credit union’s CUSO.
Last week the sides submitted the settlement for approval by the federal judge who is presiding over a class action suit brought by the members, who invested in bonds issued by Cornerstone Ministries, purportedly to finance churches and other faith-based products, from Wellstone Securities, a third-party broker hired by the credit union. The members eventually lost their investments when the scheme went bad because Cornerstone Ministries instead had invested in risky real estate in the Southeast.
Under the terms of the unusual settlement, the credit union has agreed to reimburse the members for $8.9 million of their losses, $950,000 of which will be paid immediately in cash. The members will get legal rights to an additional $8 million the credit union is seeking on a bond its directors and officers liability policy it holds with CUNA Mutual Group’s CUMIS Insurance Society.
The breadth of the bond coverage has already caused a flurry of new suits, with IBM Southeast seeking a declaratory judgment from the courts that it is covered under the CUMIS bond. CUMIS has filed a separate suit seeking a declaration that the bond does not cover the damages. A federal court dismissed the CUMIS request in November and the credit union insurer has appealed the ruling.
The lead plaintiff in the case, Claudia Schorrig, an IBM employee 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 class action suit filed by the members claims the credit union is responsible for millions of dollars of 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. The company, which sold $142 million of bonds to more than 3,600 church-goers 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.
