Credit Union Journal
August 31, 2009
SECTION: GENERAL NEWS; Pg. 4 Vol. 13 No. 35
LENGTH: 811 words
HEADLINE: CUs Unlikely To Recover Funds Missing From U.S. Mortgage
BYLINE: Ed Roberts, Washington Bureau Chief
BODY:
NEWARK, N.J.-Attorneys representing unsecured creditors of U.S. Mortgage
Corp. are seeking information the government may have on some $125 million of CU
funds stolen by the owner of the company, but have little hope any of the money
is available.
"It's all gone," said Howard Brownstein, a partner in Philadelphia
turn-around specialists NachmanHaysBrownstein, which is winding down operations
of U.S. Mortgage and its CU National Mortgage unit.
A federal bankruptcy court has appointed an examiner in the case to try and
locate the money, which Michael McGrath, president of U.S. Mortgage, confessed
to stealing. McGrath pleaded guilty in June to selling off as much as $138
million in mortgages the company held on behalf of about three dozen credit
unions to Fannie Mae. He has agreed to forfeit about $13 million of his own
assets, leaving the $125 million hole.
McGrath told the judge at his plea hearing he lost the money in day trading,
with large bets on several stocks, including Fannie Mae. According to a hearing
transcript, McGrath said he first started selling off CU loans in 2004 to cover
losses his company was accruing on mortgage-backed securities. Then he started
selling more credit union mortgages to feed a day-trading habit in one of the
worst bear markets in history.
"There isn't any left," said James Forte, a New Jersey lawyer representing
Picatinny FCU, one of the credit unions burned in the scheme.
The credit union for the Picatinny military arsenal in Dover, N.J., Picatinny
FCU has one of the largest exposures to the fraud. U.S. Mortgage held $52
million of its mortgages, $14 million of which were sold to Fannie Mae and are
the subject of the lawsuit.
Some CUs Had Significant Exposure
But several other credit unions also had significant exposure, including
Suffolk FCU, Proponent FCU, Sperry Associates FCU, Treasury Department FCU,
Novartis FCU, Educational Systems FCU, County Educators FCU, Energy FCU, Rutgers
FCU, Piedmont Aviation FCU, Pinnacle FCU, Velocity County FCU, TCT FCU, Lassen
County FCU, JM Associates FCU, Miami Firefighters FCU, First Florida CU and
Newark Board of Education Employees CU.
Representatives at the U.S. Attorneys office declined to comment on a
potential recovery. "We always make an effort to get back whatever we can," said
Michael Dwerniak, spokesman for the U.S. Attorney. "In these situations
sometimes we get some of it back; sometimes we get all of it and sometimes we
get none of it." He said more light may be shed on the whereabouts of the stolen
funds at an October sentencing hearing for McGrath.
Seeking Recovery Wherever They Can
The CUs are seeking recovery wherever they can. Forte, who is suing Fannie
Mae on behalf of Picatinny FCU for the return of the mortgages McGrath sold,
said he is talking with CUNA Mutual Group on a bond claim to cover the losses.
David Stein, a New Jersey attorney representing the unsecured creditors in the
bankruptcy, said several other CUs have also filed claims with the credit union
insurer.
CUNA Mutual, which issues bonds on more than 90% of all credit unions, said
it has received claims from 27 CUs so far. "Nineteen of the 27 credit unions
have submitted proofs of loss, and we are in the process of investigating these
claims," said John Christenson, associate general counsel for the company. "Many
credit unions are making efforts to pursue recovery of their losses from Fannie
Mae, whom they (and we) believe bear responsibility for these losses. We have
been in discussions with these credit unions about assisting them in these
recovery efforts while putting the investigation and decision of their bond
claims with (CUNA Mutual) on hold."
Fannie Mae is fighting the credit unions' efforts for return of the disputed
mortgages and has asserted in the suit filed by Picatinny FCU that it did not
know McGrath was not authorized to sell the mortgages. In fact, Forte said
McGrath had authority to sell mortgages on behalf of some of CUs. Fannie Mae
officials did not return phone calls seeking comment.
CUNA Mutual's Christenson said the talks with the credit unions are ongoing.
"We have not denied any claims as our investigation is ongoing," he said. "We
have communicated the fact that based on our investigation to date, we have
serious doubts as to whether the claims come within the coverage under the
credit unions' bond policies with (CUNA Mutual)."
Other avenues, including an insurance claim against the carrier for U.S.
Mortgage, appear to have little potential because the coverage is far less than
the vats claims contemplated by credit unions, according to Stein. Several other
avenues are also being discussed, including suits against third-parties, like
the company's auditors. Those decisions will wait until after the bankruptcy
court appoints a trustee to oversee the liquidation of the company's assets,
scheduled for October. |
