As many as 100 credit unions who bought CDs from Bentley Financial Services can expect to take a "haircut" as investigators have come up an estimated $50 million short in their accounting of the firm's assets.
A receiver appointed by the federal court last year has compiled about $320 million in assets, with an estimated $370 million in claims expected, sources close to the investigation told The Credit Union Journal
As a result, credit unions who invested with the rogue broker can expect to take a loss, but none large enough to force a credit union to fail, according to an NCUA official familiar with the proceedings.
Assets held by Bentley Financial, based in Paoli, Pa., its principal owner Robert Bentley, and a related company, Entrust Group, were frozen last November after the Securities and Exchange Commission brought a civil suit against the entities, claiming securities fraud in the sale of brokered CDs to more than 3,200 financial institutions. The SEC alleged that Bentley Financial sold the institutions the certificates by falsely claiming they were legitimate bank-issued certificates carrying federal deposit insurance. In reality, the securities were issued by Bentley and the proceeds used to buy legitimate CDs in his or the company's name at higher yields than the paper issued his customers, the SEC charged.
About half of the 200 institutions believed victimized by the scheme are credit unions, NCUA sources indicate. A court-appointed receiver has sent all of those credit unions a letter explaining the situation and urging them to file claims.
Sources close to the investigation said that Robert Bentley is cooperating with the probe.
The U.S. Attorney's office is investigating the case for possible criminal charges.
Fourth Major Case
This is at least the fourth major case brought by regulators in recent years against firms brokering CDs for credit unions, as credit unions continue their search for higher yields in a lower-rate environment. All of the prior cases involved allegations of fraud or misrepresentation.
According to the SEC, Bentley operated as a so-called Ponzi scheme under which early investors are paid from proceeds obtained from later investors. The pay-off to early investors makes it appear to subsequent investors that the operation is a successful one.
The SEC claims because the notes sold by Bentley were not actual bank-issued CDs, as represented, the company was offering private notes or investment contracts. That brought the case under the SEC's authority, as opposed to credit union and bank regulators that have jurisdiction over bank certificates. "Defendants go to great lengths to disguise the fact that they are offering private notes with all the risks that accompany the purchase of such instruments," the SEC charged.