By Frank J. Diekmann
At first, it just seems like some incredible, edge-of-the-seat crime thriller you might find on Netflix—the CEO of a relatively tiny, obscure financial institution is living on the edge with a secret, invisible life that includes private jets, a gambling habit, luxury cars and more.
We watch and listen as the soundtrack rises in volume like a rapid heartbeat as he dodges one close call after another over two decades before being undone after an employee finds a mysterious check and his own wife turns him in.
Too bad it’s not fiction. And for credit unions, it’s not entertaining.
The alleged embezzlement by Edward Rostohar, former CEO of the now-defunct C B S Employees FCU, is a black eye for credit unions as a whole, and I’d say the same for NCUA as an examiner, but it’s long since run out of eyes to blacken. The face of the agency at this point is closer to that of Rocky Balboa after his first 15 rounds with Apollo Creed.
As CUToday.info has reported, prosecutors arrested Rostohar, 62, at his home in connection with embezzlement of more than $40 million. Forty million! Allegedly, the embezzlement had gone on for nearly 20 years, ever since Rostohar was named CEO.
What Can’t Be Liquidated
The credit union has been liquidated and whatever its remaining assets are plus its members have been acquired by University Credit Union in Los Angeles.
But here’s what can’t be liquidated—all of the damage to the reputation of credit unions. The allegedly spectacular details and size of the embezzlement received national media coverage, with the story distributed coast-to-coast across multiple media outlets. Given its highly recognizable field of membership, primarily broadcast network CBS as well as Mary Tyler Moore Productions and CBS/MTM, numerous entertainment-industry publications also broadcast the story.
The impression? Credit unions are some sort of amateur investment clubs with crooked management and little professional oversight. Given what’s alleged to have transpired (you can read more here and here), it may not be Netflix rushing a movie into production as much as CBS looking to its employees’ credit union for a new episode of NCIS.
How Could This Happen Again?
For the credit union community itself, meanwhile, the news of the huge embezzlement once again begs so many questions over where was the regulator and how could an embezzlement of such size go on for so long? Keep in mind, the credit union from which $40 million was allegedly ripped-off had just $21 million in total assets at the time it was shut down. That’s right—according to prosecutors, Rostohar stole double the credit union’s asset size. And no one noticed? No auditor, no supervisory committee member (seriously, what were they supervising exactly?), no NCUA examiner over two decades found anything just a tad suspect?
According to credit union compensation surveys, CEOs at credit unions in this asset size range earn less than $80,000 annually, and yet not an eyebrow was raised with suspicions over the luxury cars, an expensive home and the hobnobbing with the NetJets set?
C B S Employees (and we now know what the BS stood for) FCU’s last 5300 showed it reporting $120,000 in net income for last year and net worth of 12.57%, meaning it was “well capitalized” and likely qualified for an extended exam cycle. We now know it’s all complete fiction. Really, what would be the difference if NCUA had never sent an examiner in at all? Rostohar, incidentally, allegedly told authorities his prior experience as an NCUA examiner had helped him learn how to hide his activities (you can read more in the court documents here, and we'll have additional details to come).
A Real Howdunnit
For credit unions, this isn’t a whodunnit, it’s a howdunnit (again!?) The alleged embezzlement is just the latest in a number of similar crimes at credit unions reported by CUToday.info, such as the $20 million theft by Michael LaJoice, CFO at Clarkston Brandon Community CU in 2016 (who turned himself in, saying he had been stealing funds for 13 years); a $5 million embezzlement at Parsons Pittsburg CU in Kansas in 2017; a $13 million embezzlement at Lynrocten FCU in the years leading up to its 2013 liquidation; a more than $1 million embezzlement at Ochsner Clinic FCU that went on for more than six years and involved 149 fictitious loans; $2 million embezzled from Veterans Health Administration Credit Union to pay for personal vacations and a $100k motor home; $2 million stolen over 13 years at Shoreline FCU in Michigan, and $3 million stolen by the CEO of Municipal CU in New York to pay in large part for lottery tickets.
There are too many other examples of missed bad actors acting badly and long-term thefts at credit unions to list here, but if you want to fill your afternoon with sad crime tales, just search “embezzlement” at CUToday.info.
Who’s Paying? You
All of these losses are being eaten by the National Credit Union Share Insurance Fund, which means that’s you being forced to pump a lot of extra nickels into the meter if you’re federally insured. It doesn’t do much good to get an NCUSIF refund if you have to turn right around and give it back thanks to the bad guys who should have been caught by the people paid to catch them. Maybe that’s what the new CBS series NCIS will stand for: Never Catch Illicit Swindlers.
A few years ago after a number of embezzlements at some smaller credit unions NCUA Chairman Mark McWatters questioned during a public NCUA Board meeting what in the heck was going on. It’s time for the question to be raised again by both NCUA and the credit unions that fund it. Sure, credit unions would rather be known for their George Bailey-like role in the world rather than some Barnum & Bailey-like Circus of Larceny, but talking about it shouldn’t be the concern.
Stopping it should be.
Frank J. Diekmann is Cooperator in Chief at CUToday.info and can be reached at Frank@CUToday.infoor @Frank@CUToday.