A federal appeals court ruled against the NCUA last week in a bond insurance claim dispute stemming from the $72.5 million fraud case of the St. Paul Croatian Federal Credit Union.
The U.S. Court of Appeals for the Sixth Circuit on May 18 affirmed a lower court decision that CUMIS Insurance Society Inc. was not obligated to pay a $5 million insurance bond claim to the NCUA. In its 2-1 decision, the Cincinnati appeals court ruled the fidelity bond had been terminated well before it took effect in 2010 because a credit union director knew of an employee’s dishonesty before 2010.
From 2000 to 2010, former St. Paul Croatian Federal Credit Union COO Anthony Raguz pocketed $1 million in bribes in exchange for issuing 1,000 fraudulent loans that amounted to more than $72 million. In April 2010, the NCUA conserved the Eastlake, Ohio credit union and liquidated it. After investigating and convicting about 20 people for crimes related to the massive fraudulent loan scheme, federal prosecutors said it was one of the largest credit union failures in U.S. history. The NCUA said it lost $171 million because of the credit union’s collapse.
When the NCUA filed a claim with CUMIS to collect on a $5 million claim for employee dishonesty, it was rejected by the Madison, Wis.-based insurance company.
In August 2011, the federal agency sued CUMIS in federal court arguing the insurance company should pay the $5 million claim, including compensatory damages and interest.
Raguz falsified financial reports he submitted to the St. Paul board every month, and quarterly to the NCUA. From 2003 to 2010, the fake reports showed zero delinquencies for real estate loans, credit card loans, unsecured loans and share-secured loans. Raguz reported zero delinquencies because he believed reporting delinquent loans would draw the attention of board members and NCUA examiners, according to court records.
However, the zero delinquent loans alarmed 22-year board member Robert Calevich.
He testified that he knew for a fact that there had to be at least some delinquencies based on his prior experience as the credit union’s board secretary and treasurer. The board also had concerns about the zero delinquency rates. Even though board members brought their concerns to Raguz during monthly meetings, they never received a straight answer. What’s more, board members did not discipline the COO when they asked him to provide a breakout of each loan he was making, according to court documents.
In February 2010 about two months before the massive fraud was uncovered, CUMIS issued a fidelity bond to St. Paul that covered employee dishonesty.
In court documents, CUMIS argued that the coverage for Raguz had terminated years before February 2010 because Calevich knew the former COO falsely reported delinquency rates to the board and the NCUA. A provision in the bond agreement stated that the coverage terminates immediately when a director — not in collusion with the dishonest employee — learns of any fraudulent act committed by such an employee.
In January 2016, U.S. Magistrate Judge Greg White in Cleveland ruled in favor of CUMIS and that it was not required to pay the $5 million claim. In February, the NCUA appealed the ruling.
“Through its termination provision, the bond anticipated (and mandated) that the credit union’s directors would be vigilant in their oversight of their employees,” U.S. Sixth Circuit Court Judge Alice M. Batchelder, wrote affirming the lower court’s decision. “That failure to exercise that vigilance would terminate the bond’s coverage; and that the directors clearly and repeatedly failed to police Raguz despite recognizing the obvious evidence that something was amiss, which pointed to Raguz’s dishonesty.”
In November 2012, Raguz was sentenced to 14 years in federal prison and he also was ordered to pay $71.5 million in restitution.
