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LOS ANGELES-In what could mark the beginning of a major bloodletting in the credit union movement, NCUA is scheduled to face off in federal court here today with seven credit unions over tens of millions of dollars of potential insurance claims against officers and directors of WesCorp FCU.

The claims, which NCUA is seeking to wrest away from the credit unions, threatens to open all kinds of fault lines within the credit union movement, because it will put powerful players in the dock for the failure of the one-time $34-billion corporate, which has already cost the movement more than $2 billion.

The seven credit unions, all WesCorp members, have sued former WesCorp CEO Bob Siravo, CFO Jim Hayes and Chief Investment Officer Bob Burrell, as well as Bill Cheney, the newly named president of CUNA who not only served on the board at WesCorp until February 2006, but U.S. Central FCU from January 2008 until it was taken into conservatorship.

It also names as defendants the CEOs of some of the biggest credit unions in the country who served also on the WesCorp board, including Bob Harvey, president of Seattle Metropolitan CU, who was WesCorp chairman; Jim Jordan, president of Schools Financial CU; John Merlo of Premier America CU; Warren Nakamura of Honolulu FCU, and Gordon Dames, the well-known, retired president of Mountain America CU in Utah, as well as top executives of another six big credit unions.

The seven CU plaintiffs are mostly mid-sized institutions who are among WesCorp's 1,000 members from around the country. They are 1st Valley CU in California, Cascade FCU in Washington state, Glendale Area Schools FCU in California, Kaiperm Northwest FCU in Oregon, Northwest Plus FCU in Washington, Stamford FCU in Connecticut, and Tulare County FCU in California.

The onset of the WesCorp suit comes as NCUA has filed demand notices of potential insurance claims in the failure of U.S. Central against officers and directors of the one-time $52-billion corporate, including some of the same figures, such as Cheney and Siravo. But NCUA said last week any claims it makes in the U.S. Central case, as well as the WesCorp case, will depend on the findings of an ongoing loss mitigation audit being conducted by the office of the Inspector General, which is not expected to be available for some time.

By challenging the directors' roles in the demise of WesCorp, the suit threatens to open a rift in the credit union movement just as the cost of the corporate bailout is growing, with NCUA having charged credit unions a $1.1-billion assessment last month to pay for the bailout of WesCorp and U.S. Central.

The suit also may lay bare the culpability in the corporate bailout of directors and other volunteer committee members. While typical natural-person credit union boards are made up of individuals with little financial experience, corporate boards, like those at WesCorp and U.S. Central, were comprised of CU leaders, many of whom ran their own billion-dollar credit unions.

NCUA, which is already in the role of defendant in the case by virtue of being the conservator of the troubled corporate, is now asking the court to let it also assume the role of plaintiff on behalf of the credit unions because federal law requires that the conservator control the claims in federal takeovers of credit unions and banks.

NCUA claims that only it, and not the members of WesCorp, can decide what is in the best interest "of the federal credit union system."

The credit unions assert that appointing NCUA as plaintiff-after it was already appointed defendant-would render control of the claims "absurd and impracticable." In other words, NCUA would be suing itself.

Moreover, the credit unions claim that it was NCUA's own oversight of WesCorp that contributed to the corporate's failure, costing them all of their capital investments. "Throughout 2008 and into early 2009 the NCUA was particularly active in its oversight of WesCorp, having placed two examiners physically on-site at WesCorp to monitor its activities," asserts the suit. "Yet, somehow, the NCUA oversaw WesCorp right into the ground, placing WesCorp into conservatorship on March 20, 2009."

The federal regulator's own role, say the credit unions, has created reluctance about pursuing claims in the case. Since it became WesCorp's conservator some 15 months ago, the NCUA has been "investigating the failure of WesCorp and whether any of its former officers or directors are legally culpable."

"With representatives on the ground long before the conservatorship, and 15 months to investigate the managers and boards who exercised such poor judgment," the NCUA still has not decided whether to initiate legal action against the former directors and former and/or current officers of WesCorp," states the suit. "Despite its ambivalence as to whether or not it will pursue claims against the defendants, the NCUA has nonetheless intervened in this action.

"Now the NCUA-an entity that shares the blame for the failure of WesCorp-seeks to substitute itself as Plaintiff, and wrest this litigation out of the hands of the seven retail credit unions that have prosecuted it to date, even though the NCUA, as compromised as it is, has not determined whether it will pursue the action in their stead."

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