BIRMINGHAM, Ala. (CN) – A credit union says officers of the U.S. Central Federal Credit Union sold it $9 million in “worthless securities.” Directors of U.S. Central concealed its disastrous position, and had to write off $1.2 billion in subprime mortgage securities shortly after selling millions of dollars of worthless paper to Corporate America Credit Union, according to the federal complaint.
The U.S. Central Federal Credit Union has been taken over by and is now run by the National Credit Union Administration, a federal agency.
In a reprise of the savings and loan disaster of the 1980s and the recent worldwide bank meltdown, U.S. Central ignored its mandate – to encourage thrift – and threw away its members’ money on risky, putative high-yield investments, according to the complaint.
“Until being placed into conservatorship, U.S. Central was a federally chartered corporate credit union that was intended to provide liquidity and other services for its 26 corporate credit union members, including CACU,” the complaint states.
But because U.S. Central “heavily invested” in risky subprime mortgage securities, it was placed on a negative credit watch by Standard & Poor, and just days after issuing the plaintiff’s securities, U.S. Central was forced to write off $1.2 billion worth of its mortgage-backed securities, according to the complaint.
The 12 individual defendants were all officers of U.S. Central. They are accused of persuading their members to exchange capital shares for “equity-like” shares. To this end, they overstated the value of U.S. Central’s investment portfolio, and co-defendant RubinBrown, accountants, offered a valuation report that “grossly overstated” the new securities as worth $450 million when in fact they were worthless, the complaint states.
RubinBrown prepared its report during the worldwide mortgage meltdown, which the accountants allegedly described as “short-term market imbalances.”
The plaintiff credit union says it made its disastrous investment based on the defendants’ misrepresentations. Three months later, U.S. Central was placed into federal conservatorship and the individual defendants were removed from their positions.
Corporate America Credit Union claims that U.S. Central offered the securities exchange as a “last-ditch hail Mary” to keep from being placed into conservatorship as it hoped for receive a federal bailout or money from the Troubled Assets Relief Program.
Corporate America Credit Union “is a ‘corporate credit union’ serving ‘natural person credit unions’ in Alabama,” according to the complaint. “‘Natural person’ or ‘retail’ credit unions serve individuals such as teachers, police, government employees, and many others, in much the same manner as do banks, except that credit unions are operated as nonprofit, cooperative organizations designed to encourage thrift and to provide members with financial services at a lower cost, or greater investment return.”
Named as defendants are RubinBrown LLP and the individual officers of U.S. Central, Joseph Herbst, Charles Thomas, David Brehmer, Robert Siravo, Bill Cheney, Larry Eisenhauer, John Franklin, James Hansen, Greg Moore, Francis Lee, David Dickens and Kathy Brick. U.S. Central Federal Credit Union is not named as a defendant because it has been taken over by the government.
Corporate America wants its $9 million back, and punitive damages for fraud, negligence and breach of fiduciary duty. It is represented by David R. Donaldson.