Credit Union Exam Solutions Presents With Flying Colors

Speaker: Hey, everyone.

This is Mark Trakel with another
episode of With Flying Colors.

On May 6th, NCUA conserved
Jackson Area Federal Credit Union.

On May 11th, I did a podcast saying
I think there might be a huge problem

here perhaps a huge l- deficit
that was gonna cost the insurance

fund, perhaps a embezzlement o- of
a larger variety because they had

borrowed money, yet had no loans.

It just didn't make sense, and there
were some other red flags, and when you

conserve a credit union, you do it for
safety and soundness reasons, but this

one kinda had a smoking gun effect.

I was traveling a little bit over the
last week, and I got a message from

a listener, a nice message saying,
"Hey, have you looked at the new 5300?

It shows that the credit union had
a $95 million write-off, and that

they were upside down in reserves to
the tune of about 71 to 73 million."

And I told them that I would take
a look at it and do a follow-up

podcast, and that's what this is.

So in prepping for the podcast two days
ago, I stumbled across this morning an

article by Frank Diekmann of cutoday.info,

I believe is what his website is, and
NCUA has filed a suit against the CEO.

So- That is now included here
in my update, and I'm gonna

walk through what's going on.

But as you can see here I'm calling
this podcast NCUA sues for $95 million

and names how the money vanished.

Poof, like that.

So there is a new federal complaint, which
is a- alleges that the CEO, and I'm not

gonna go into names here, and alleges…

Everything I say here is alleges, okay?

Alleges that former CEO diverted at
least ninety-five million, confirming

that my phantom cash thesis was
correct and putting a face on the

seventy-seven million dollar deficit
the insurance fund now stands to absorb.

I do happen to know that they
are shopping Jackson Area

already for a quick resolution.

And so next up on the slide…

By the way, on the bottom I say
allegations unproven because,

again, these are allegations.

Although, we'll find out that she
actually appears to have admitted to it.

All right.

So who is Jackson Area
Federal Credit Union?

Jackson Area Federal Credit
Union was chartered in 1953.

It's a MDI, self-designated, and a
limited income, serving the city of

Jackson and Hinds County employees.

The reported profile, it was
reported that they had one point…

a hundred and sixty-two
million in assets, 92 per…

9.2%

net worth, but this was the thing that
stood out to me, only 28% loan-to-asset,

which was unusual since they had forty-one
million dollars in non-member deposits.

Why did they need that cash?

The intervention happened, as I
mentioned, May 6th, a conservatorship,

and when you see somebody
conserved with a net worth of 9.2%,

you immediately conclude that 9.2%

might not be there,
which is what I concluded

So the previous episode I talked
about the possibility of phantom cash.

66% of assets were in cash deposits,
which was implausible, and the fact

that they were borrowing money, as I
mentioned when they didn't really need to.

And they must have needed that
cash for something, and it

turns out indeed it was fraud.

There was fabricated net equity that
was also in play that went on the

books and then went off the books.

And then what also triggered my
analysis was that NCUA said that this

was an estimated finding, which to me
meant there were write-offs coming.

They knew they were coming.

They had to file to get the debt- to
get the data into the system, because

they never want to say, "We didn't get
data into system for one credit union."

Because that happened once
and Congress wasn't happy when

they asked some questions.

So NCUA doesn't do that anymore.

All right, so why is my
slide not moving down?

Here we go.

Why we're back today.

So two things have happened.

First, NCUA filed a restated call
report, the regulator's own number.

And again, when you conserve a credit
union, you act as the agency, the

regulator, you act as the insurer,
and you act as the board in the best

interests of the members as well.

So NCUA went in there, did their
reviews and I think quickly found

out that the cash was not what it had
been reported to for years and years.

Second, on June 11 and tipped off, a
hat tip to Frank Diekmann NCUA files

a federal lawsuit alleging the former
CEO diverted at least $95 million, and

named the mechanism and the numbers
on how they allegedly did that.

So they restated the books.

Then in a sworn federal complaint,
they landed on exactly the mechanism

that I said they did it by.

So sometimes it's better
to be lucky than good

All right, so

What we now have is that the fraud landed
a-a-and was taken from where it would

normally be taken from, the cash account.

First quarter, they recognized a $91.7

million loss, and there was
a reduction in cash of $93.6

million.

And their net worth ratio went from
a positive 9% to a negative 107%.

That's just not a number that…

that, that's a laughable number, a number
that doesn't make any sense at all.

They are materially insolvent, which
means NCUA has to shut them down and

will have to pay probably at least
70, $80 million to make this go away.

Ironically, that will wipe out most,
some, all of the savings that Kyle

Hauptman's reorganization made.

And longer term, when NCUA is doing
less exams, which in the short term is

good for credit unions, and when NCUA
is doing re- contemplating and FFIEC

is comp- contemplating changing the
CAMELS rating system, which a net-net

I think is a good thing, but curtails
some of NCUA's and banking regulators'

flexibilities to downgrade management.

Again, short term, that's a good thing.

Long term, occasionally it's
going to lead to some losses.

And again, of course, NCUA
is not a fraud auditor.

There's a lot of, "Where was NCUA?"

And we l- tend to lose sight of
the fact that a criminal stole

a lot of money here, right?

But it's easy to look at, what happened
in a postmortem, and it was easy for

me to look when they conserved to
say, "Hey, what might be wrong here?"

But the inspector general will
have to do a postmortem on that,

and I'll walk through that.

So this is a chart I put together
looking at what was reported in December

and then what was restated in March.

We had total assets going down $91
million, cash going down $93 million,

net worth going down $92 million.

Net worth going from the best category
to the worst category, and they're

well beyond the worst category.

They're, This was, this is a f-
a fatal adjustment to net worth

because nobody can survive that.

And so loans, no changes,
member shares, no changes and

non-member deposits no changes.

So the asset side imploded.

The liabilities are there because
they stole the money, and they

still owe the money to the members
and/or to the organizations that

that put in non-member deposits.

What's new?

The loss relative to the lawsuit

I'm trying to move where my, where
this is popping up on my screen here.

Okay.

So they filed June 11th in US
District Court as conservator.

They allege that the former CEO diverted
at least $95 million for personal

use $51 million in false deposits.

Entries into the CEO's and her husband's
own share accounts alle- allegedly

showed funds arriving from outside
institutions when they actually came

from Jackson Area's general ledger.

And allegedly, this goes back to 2015.

Now, I think I saw somewhere that
the CEO hasn't even been CEO s-

that long my guess is there might
be somebody else at the credit union

who's aware of what's going on here.

But NCUA will suss all of that out.

And so the signer.

What happens if you don't have
separation of church and state, if

you don't have separation of duties?

The signer had the keys.

The former CFO, who became…

Okay, so here we go.

I did have that here.

The CFO, who became the CEO around
2021, allegedly prepared and signed

the regulatory filings and held wire
transfer authority, the same filings

our episodes our previous episode
analyzed and questioned, right?

And they overstated the corporate cash.

Accounting entries allegedly overstated
funds held at a corporate credit union.

The phantom cash mechanism now
describes in a sworn filing rather

than inferred from the 5300.

And I've heard chatter which may
or may not be true, that that the

corporate credit union tipped off NCUA.

That could be true.

That could be just chatter, or
that could be somebody trying to

control a narrative of some sort.

But NCUA, when there's a big loss
like this, always gets criticized.

And again, there is a rumor, and I
will call it nothing more than a rumor,

that the corporate did tip off NCUA.

I don't know if that's true or not.

I don't know who they tipped off whether
it was looked at what the reality is

there, but I just thought I'd mention
it because I did hear that All right.

And next slide is not wanting to come up.

All right so this is when you when you
have these losses when you're at NCUA

or when you're sitting at home looking
at the web or looking at a newspaper

if you if you're one of those folks who
still gets a hard copy of a newspaper.

When you read the story and you
see somebody stole money, it's

fun to it's it's interesting.

I don't wanna say fun.

Interesting to see where the money went.

So there was alleged personal use of $14.4

million in alleged payments to a
single card issue- issuer, American

Express, which was one line among many.

The, their credit card payments,
Amex, Apple, Chase, $15 million.

Luxury jewelry and handbags at
local area Jackson retailers, $3.3

million.

Jewel- jeweler- jewelers in New York,
Illinois, and California, $1 million.

A wire connected to
Tiffany's & Company, $378,000.

Construction and interior design, $1.16

million.

A Steinway grand piano, 'cause when
you're stealing all this jewelry and

you're building fancy houses, of course
you need a Steinway grand piano at the,

to the tune pun intended, of $129,000.

Vehicles, Mercedes,
Porsche, Tesla, $193,000.

And of course, they need
more than one house, right?

Properties in Mississippi
and Orange Beach, Alabama.

So there is a co-defendant.

The husband is named.

His account was allegedly received $13.8

million from the general ledger
between May 2019 and May 2026,

far exceeding his payroll income.

So the money in doesn't make sense
when you look at what he did.

That's basically what
NCUA put in the complaint.

And the complaint alleges
the CEO controlled the

account to conceal activity.

And there is, was an alleged admission.

So somebody figured something out,
and they confronted, allegedly

confronted the CEO on April 17th,
meeting with the board and NCUA.

The CEO admitted misappropriating
funds and using false entries to

conceal it, was placed on leave, and
then NCUA conserved the credit union

about two and a half weeks later.

What NCUA is seeking.

Claims include fraud, conversion,
breach of fiduciary duty,

and D&O liability violations.

Seeking money, judgment- judgments,
assets, recovery, disgorgement, a

constructive trust, and injunctive relief.

A constructive trust, I'm
curious what that might mean.

I think I might mean,
but I'm not gonna guess.

But that, that's kinda interesting.

And you know what happens when
there's these fraud cases and

you … the people confess and
they say, "How much did you take?"

They think the number is this
much, and it's actually this much

because they had to pay dividends
on the stolen money, right?

And that kind of money can't
be recovered from a bond claim.

And so of course, the bond claims,
whatever it is, whatever their bond

cover- coverage is not gonna cover the
$70, $80 million, maybe $5 million.

But NCUA will net that against the loss of
whoever the successful bidder is to take

over the remnants of the credit union.

So again, I confirm the phantom
assets, it was validated.

It's no longer a hypothesis.

It's now corroborated twice.

The restated books book the loss on
the cash account, and the complaint

alleges the matching mechanism, false
deposits, and overstated corporate cash.

The asset side of my story my
thoughts on the theory hold true.

And then the liabilities
were the liabilities.

I had mentioned the possibility of
fake deposits on the other side, but

that does not appe- be based on the
filing of the lawsuit, and based on

the filing of the 5300, that, that
does not appear to be the case.

So let resolution, there's a
clean clean books left, right?

Theoretically, NCUA has only, is only
offering for sale what they know exists.

And they'll be selling that.

NCUA NCUSIF taking a hit is unavoidable,
probably $77 million or more.

O- of course, if you had less
than $250,000, you were covered.

If you had more than $250,000,
you may be covered depending on

how NCUA writes up this deal.

There is a way that you can allow
those deposi- depositors to be made

whole if the net effect of everything
is the least cost in the insurance

fund, but I won't go down that rabbit
hole other than what I just said.

And then of course, the IG materal-
materialal- materiality, they're

gonna have to do a material
loss review 'cause it's 3.7

times the limit.

They have to do one over $25
million or 10% of assets.

This hits both those It's
probably gonna take them a while.

They're gonna look at when
NCUA first became aware.

They're probably gonna look into
these rumors of whether or not

the corporates indeed did tip off
NCUA, and if so, who they did and

what NCUA did in response to that.

There may end up being some changes
to how NCUA does some exam steps.

There may not.

But it's gonna be a black eye or a red
eye on the insurance fund and if you

have one, two, three, four, five of
these things happen eventually and then

the credit union industry grows, the way
the math works on the insurance fund,

you could end up having to pay a premium
into the insurance fund, but this in

and of itself won't cause that, so I
wouldn't worry about that too much yet.

So what we know and what we
look for still ahead again the

theory that I had was right.

These are still allegations, not verdicts,
although U- NCUA wouldn't say that she

confessed if they didn't, so clearly
this is going to play out, in my opinion.

There will be subsidization
of the insurance fund.

I'll report more on the material
loss review when that comes out,

but that's gonna probably be a year.

I do have some other podcasts
coming up on IG reports.

I had a previous one on IG reports.

But, NCUA's not a fraud auditor.

CPA opinions are not a fraud auditor.

I've fraud audit the, this credit union's
asset size, did not require a CPA opinion.

They probably had a
agreed-upon procedures.

And it's a sad state of affairs that
these folks decided to use their

local credit union as a piggy bank.

But I'm guessing they will be
be doing substantial time for

their crime and/or crimes.

And I'm gonna leave it at that, all right?

I got a couple other podcasts I'm
gonna be rolling out here that

I've got the PowerPoints ready for.

And this week was, I think, only the
second week in two years that I missed

a current version of the podcast.

Again, I had some travel going on.

And I'm back in my rhythm,
and you'll see a new episode

every Mon- Monday or Tuesday.

You will see on the podcast version
only, the old g- evergreen topics

that that I reissue on Thursdays.

And on Wednesdays, don't forget, we've
got our other podcast Credit Union

Regulatory Guidance with an AI voice,
Samantha Shares, and that talks about

audiobook style of NCUA releases,
FDIC releases, et cetera, et cetera.

All right.

That's it.

I wanna thank you for listening.

Thank you for watching.

I hope you'll do the same again soon.

This is Mark Trakel signing
off with flying colors.