A federal agency is accusing two former executives of a giant failed credit union in Los Angeles County of fraud for their roles in adding millions of dollars to retirement payouts for themselves and other top brass at the financial institution.
A lawsuit by the regulators also alleges breach of fiduciary duty and negligence by the two executives and 14 other officers and directors of Western Corporate Federal Credit Union in San Dimas.
WesCorp, as it was known, was seized by the government in March 2009 after incurring nearly $7 billion in losses, largely because of bad investments in mortgage-backed bonds.
The suit, filed this week in federal court in Los Angeles by the National Credit Union Administration, a government agency, seeks at least $1 billion from the defendants or their insurers. Among the defendants is the current head of the national trade group of credit unions.
WesCorp had $23 billion in assets when it failed. It had grown rapidly starting in 2002, ultimately borrowing heavily to invest in securities backed by subprime and pay-option mortgages. Such loans, popular during the housing boom, had exceptionally high rates of default after the market turned.
Although the Federal Deposit Insurance Corp. has frequently pursued damages from officials at failed banks, such actions in the traditionally conservative, not-for-profit credit union sector are unusual to say the least.
But the suit over WesCorp is not surprising because it and U.S. Central Federal Credit Union of Lenexa, Kan., which had $34 billion in assets when it was seized along with WesCorp, were so enormous, said Bert Ely, a financial industry consultant in Alexandria, Va.
"These failures have been very, very expensive," he said.
One of the defendants is former WesCorp director William Cheney, who was president of an association of California and Nevada credit unions before he moved to Washington this year to head the Credit Union National Assn.
Cheney, a former Rancho Palos Verdes resident, issued a statement saying he left WesCorp's board before the credit union bought the securities that caused most of its losses, Credit Union Times reported.
The defendants accused of fraud are Robert A. Siravo, who was WesCorp's chief executive, and Thomas E. Swedberg, who was vice president of human relations. Reached by phone Wednesday, they declined to comment on the case.
The lawsuit says improper changes were made to WesCorp's retirement plan for executives, causing the credit union to pay Siravo $6.8 million in May 2008 instead of the $4.5 million he would have received under the original terms of the plan.
Swedberg received more than $1.2 million in January 2009 rather than the $535,000 he would have received if the plan had not been changed, the lawsuit alleged.
The suit seeks to recover the additional compensation from Siravo and Swedberg. The complaint also seeks damages from other former WesCorp officials who benefited from the changes in the retirement plan.
WesCorp was what's known as a wholesale or corporate credit union, providing back-office services such as check and credit card processing for retail credit unions. Retail institutions with extra funds on hand often entrust them to corporate credit unions for investment.
Corporate credit unions are owned by the retail credit unions they serve, which in turn are owned by their own depositors.
The WesCorp case initially was brought in Los Angeles County Superior Court by seven retail credit unions complaining that they suffered losses when WesCorp failed.
The National Credit Union Administration, which is running WesCorp under a conservatorship, intervened in the litigation last December, contending it was the appropriate plaintiff and transferring the suit to U.S. District Court in Los Angeles. It filed its own complaint Tuesday, dropping some of the original defendants and adding others, along with the fraud allegations involving Siravo and Swedberg.
WesCorp was the largest of 27 corporate credit unions at the time of the seizure, with 1,100 member retail credit unions, the NCUA said.
Charles W. "Chip" Filson, a credit union consultant, said that in filing suit the NCUA was trying to cover the fact that it had failed to detect WesCorp's problems.
"There were examiners in there every day," Filson said. "This is just a public relations gesture. They're trying to rewrite history."
He also said the defendants were unlikely to have anywhere near the personal resources or insurance that would allow for a recovery of $1 billion.