The government has put its consideration of the industry's biggest merger on hold while allegations of serious misconduct by Patelco Credit Union officials are investigated.
In a Feb. 24 letter, the National Credit Union Administration informed Patelco's board of directors that the institution's supervisory committee must be allowed to investigate charges ranging from forgery to employee intimidation.
The board of the San Francisco credit union rebuffed the supervisory committee's request for such an investigation on Feb. 1. The committee asked the regulator to intervene on Feb. 23.
Agency General Counsel Robert M. Fenner responded to the request the next day.
"Because these allegations are material to the validity of the credit union's merger application, all members of the NCUA Board have agreed that there can be no further consideration of the merger application until such time as the supervisory committee is allowed to investigate and resolve these issues," Mr. Fenner wrote to the Patelco board.
The industry's biggest merger appears to be all but dead.
Patelco in August filed an application with NCUA, asking permission to combine with First Technology Federal Credit Union in Beaverton, Ore., and Seattle Telco Federal Credit Union (Seattle Telco withdrew from the merger in December because the NCUA was taking so long to approve the deal.)
From the start it was obvious that the NCUA was unhappy with the prospect of a $1.3 billion merger.
Even the Patelco board is split on the deal. At an NCUA-sponsored hearing on the merger last month, two board members - Barry Woodard and Robert L. Wenzel - spoke against it. Neither would have a spot on the board of the surviving institution. The supervisory committee is an entity separate from the board, although some of its members also would lose their seats if the merger takes place.
Edgar F. Callahan, chief executive of $1 billion-asset Patelco, said in an interview Thursday that the credit union is working with the regulator to devise a probe acceptable to both parties.
Mr. Callahan questioned whether the supervisory committee has the authority to conduct a wide-ranging review. He insisted that Patelco's board wants the charges examined.
"My sense of the board is that they want this investigation as badly as the supervisory committee wants it," Mr. Callahan said. "The sticking point is what's a reasonable amount of money to spend and who's going to be the disinterested third party conducting a probe."
Mr. Callahan said the board wants to ensure that the inquiry is conducted by "an impartial third party that doesn't have an ax to grind."
But from the administration's letter, it appears Patelco has little room to negotiate. Mr. Fenner wrote that the board shouldn't conduct its own probe. The letter added that the agency "will consider its full range of options available to resolve this matter" if Patelco didn't let the supervisory committee proceed.
Agency officials would not comment on the matter.
The three-page agency letter outlined seven allegations, some of them related to the merger with First Technology.
The charges include:
*Key merger documents and information have been withheld from the board, or destroyed or altered.
*Communication to the credit union's members regarding the merger has been misleading.
*Credit union employees have been threatened with firing if they approach any board member about the merger.
*The signature of the acting board chairman was forged on a survey that was mailed to 5,000 members, a document that misrepresented his views.
*Personal gain might be the motivation for the merger.
*Directors have committed breaches of fiduciary duty.
*Board members have behaved unethically in past merger and personnel practices.
Mr. Callahan declined to comment on the allegations, but said the board wants to vindicate itself.
"I don't think history of this whole thing will tell of any reluctance of this board to have an inquiry conducted," he said. "It wants a thorough investigation into everything that's going on."