The failure of a tiny and allegedly fraud-riddled Massachusetts credit union could cost the federal government millions in insurance payouts.

Berkshire Credit Union, Pittsfield, which had about $158,000 in assets, was shut down by Massachusetts regulators on March 22. So far, depositor claims against the National Credit Union Share Insurance Fund total $2.7 million.

"It's reasonable to expect some (outflows), but it's too early to tell the extent," said Bob Loftus, director of public and congressional affairs for the National Credit Union Administration.

Agency sources said that since last June, Martin Siegel, manager of the credit union and a prominent Pittsfield businessman, diverted Berkshire's deposits to an ice cream company he owned. The Federal Bureau of Investigation is also after Mr. Siegel for allegedly stealing $10 million from about 20 investors in that company.

Earlier this month Mr. Siegel suffered a heart attack; he is in a Boston hospital.

Mr. Siegel apparently lured money into the credit union by offering deposit yields as high as 12%, NCUA sources said.

Though some people questioned how the credit union could offer such high returns, others trusted him completely, agency sources said.

"The only explanation was that this is a guy who was sort of like a brother, uncle, and father all wrapped up into one," one source said.

Ironically, one friend of Mr. Siegel's who lost about $2 million as an investor in the ice cream company is the ranking cardiologist at the Pittsfield hospital where Mr. Siegel was originally taken, an agency source said.

One large depositor in the credit union, the Jewish Federation of the Berkshires, grew suspicious of Mr. Siegel's activities and blew the whistle, sources said. Massachusetts regulators, who had examined the institution in late 1994, moved in Feb. 28.

An NCUA source said that the state regulator missed some red flags.

The source pointed out that the transaction account Berkshire maintained at a Pittsfield branch of the Bank of Boston showed an unusually high level of activity for a small credit union, as well as a number of overdrafts.

"If anyone had simply looked at a bank statement, he would have seen that huge activity, particularly where it increased from June 1994 on," the source said.

Acting Massachusetts Banking Commissioner Thomas Curry denied that his office was negligent.

"If someone's intent on defrauding an institution and is taking steps to cover up his tracks, it's difficult to discover," he said.

He added that shortly before Berkshire's failure, the state agency began more training on fraud detection.

"Unfortunately, that happened after Berkshire," Mr. Curry noted.

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