Another fidelity bond legal dispute between the NCUA and an insurance company revealed that a former manager and assistant manager were running a check-kiting scheme that led to a loss of nearly $700,000 and contributed to the involuntary liquidation of an Indiana credit union.
According to court documents filed last week by the NCUA and Southwest Marine and General Insurance Co. of Scottsdale, Ariz., Sandra Santay, manager of the $7.5 million Lakeside Federal Credit Union in Hammond, Ind., and the credit union’s assistant manager, Paula Awe, allegedly operated a check-kiting scheme through their Lakeside checking accounts from January 2012 to April 2015.
The fraud was uncovered during an NCUA examination in April 2015. When examiners confronted Santay, she verbally admitted that she and Awe were kiting checks that amounted to $690,120. Soon after the NCUA determined Lakeside was insolvent and closed its operations in July, the $3 billion, South Bend, Ind.-based Teachers Credit Union purchased Lakeside’s loan portfolio and assumed its 2,280 members.
On April 21, the NCUA filed a lawsuit in U.S. District Court in Fort Wayne, Ind., claiming Southwest Marine and General Insurance Co. rescinded the credit union’s fidelity bond coverage for employee dishonesty and refused to pay the NCUA’s bond claim of $690,120. On the same day, Southwest Marine filed a lawsuit against the NCUA in the Fort Wayne federal court. The insurance company said it rescinded Lakeside’s fidelity bond coverage because its manager did not give truthful answers to internal control questions on the insurance application.
For example, three questions asked whether the credit union used daily computer generated reports to identify potential check-kiting suspects, whether the credit union provided training for tellers and other employees in regard to check kiting, and whether the credit union reviewed returned checks to identify check-kiting suspects.
Santay checked “yes” to all of these questions.
However, according to Southwest Marine, Lakeside’s computer system had a function known as a kiting and suspicious activity report, but this function was optional rather than being a built-in function, and it did not appear as if the function had been operative in recent years. What’s more, Lakeside board members who were queried about this issue did not recall reviewing any check-kiting reports.
The insurance company also claimed in its lawsuit that employees were not trained in regard to check kiting and the credit union also did not review returned checks to spot potential check-kiting suspects.
“Southwest Marine relied to its detriment on Lakeside’s incorrect answers to questions … in the application,” according to the lawsuit. “Southwest Marine would not have issued the bond if Lakeside had answered the questions accurately.”
The insurance company is seeking a court ruling that will uphold its decision to rescind the bond coverage and not pay the bond claim.
In its lawsuit, the NCUA argues that Southwest Marine’s bond rescission was improper because Santay’s misrepresentation on the insurance application was a dishonest act committed by the employee, which cannot be attributed to the credit union.
The NCUA is seeking a court ruling that would force Southwest Marine to pay the $690,120 bond claim, plus interest.
This new legal dispute is similar to a separate lawsuit in which the NCUA sued CUMIS over its decision not to pay a $3 million dollar fidelity bond claim after a forensic auditor determined a former CEO’s embezzlement scheme caused a loss of more than $10 million that collapsed the $51 million St. Francis Campus Credit Union in Little Falls, Minn.
This case, which was filed in U.S. District Court in St. Paul., Minn., last year, has not been settled yet.
In January, the NCUA also filed a separate lawsuit in the St. Paul federal court against the former CEO of St. Francis Campus Credit Union, Margurite M. Cofell. The lawsuit alleges that the 60-year-old Little Falls, Minn., woman embezzled $2.8 million over 15 years. However, Cofell allegedly began stealing in the mid-1990s from the credit union, which led to a total loss that likely exceeded $10 million, according to a forensic auditor’s report filed with the lawsuit.
In this lawsuit, the NCUA is suing Cofell to recover $2.8 million. The remaining $7.2 million that was embezzled cannot be accounted for. According to court documents, the NCUA was only able to obtain complete transactional documentation from 2011 to 2014 because Cofell destroyed the data processing system’s back-up information prior to 2011.
Cofell’s lawyers are scheduled to answer the allegations in the NCUA lawsuit on May 12. They declined to comment when initially contacted by CU Times.
