By Ray Birch
CEDAR CITY, Utah—Sue Longson was always accustomed to examiners and auditors taking an indepth look into the books when she ran credit unions and “poking around in her business.”
But what amazes her is how examiners apparently didn’t do the same when they visited CUs in which spectacular cases of fraud have surfaced in the last few years.
Longson, a veteran of the CU community, pointed to a wave of recent frauds occurring at large and small CUs—the case of Kam Wong at the $2.8-billion Municipal CU in New York, who embezzled nearly $10 million from the now-conserved CU; Edward Rostohar, who stole $40 million from the small (and now defunct) $21-million C B S Employees FCU in Studio City, Calif.; and Michael LaJoice, the former CFO of $68.5-million Clarkston Brandon Community CU, who embezzled $20 million from the credit union before it was conserved in 2016 and merged into $3.5-billion Michigan State University FCU that same year.
And those are just the headline grabbing embezzlements in credit unions. CUToday.info has reported on numerous other thefts by CU managers and others that were for lesser amounts but just as serious.
Longson, who spent 33 years overall running three credit unions, recalled that it was part of examiners’ routine to always ask her questions about her personal life, as well as to quiz her staff about her, to look into the kinds of property the CEO might own, and to learn the things she liked to do.
“At all the credit unions I ran, the examiners were always poking around the office when they came in, looking around, talking to staff, asking them what I had been doing, where I might be going, just interested in things I did and owned,” recalled Longson, who ran California Center CU in Pomona, Calif., from 1977-1983; Pacific FCU in Pomona from 1985-1995; and SONEPCO FCU in Las Vegas from 1995-2011. “They looked out the window to see what kind of car I was driving, and would chat with me about my vacation plans—‘Where are you going this year?’ It was friendly conversation, but you knew what they were doing. And I have to say, I expected these talks, as any CEO should. And if they didn’t ask about me I would have wondered why not.”
Longson said her experiences with examiners makes the recent cases of fraud much more “mind-boggling”—especially given how long many embezzlements went on before being discovered.
“It almost makes you wonder that in some cases was there collusion along the way?” she said. “I would think there was not, but the cases are just that unbelievable.”
Ideally, examiners and employees should spot changes in behavior by those who are committing internal fraud. But that didn’t happen in most cases, including that of Wong at Municipal CU, said Longson, who used to consult with NCUA and CUMIS Insurance Society on cases of fraud at CUs. Wong was recently sentenced to 66 months in prison.
Longson, who has had to deal with cases of internal fraud related to employees at credit unions she has run, said what often triggers the crimes is a life event.
“You have a person at the credit union who has been there for years and has always been a trusted employee,” she said. “But then, something happens to them in their life; they face a crisis, like huge medical bills. Or they start gambling and develop a big gambling problem. You just have to have safeguards in place to detect fraud and be vigilant. Because even the best employees can face a problem and turn to crime.”
Change in Behavior
Longson said detecting a change in behavior in one of her staff at SONEPCO led to the CU stopping a case of internal fraud.
“One young lady, who we prosecuted successfully, took care of withdrawals,” recalled Longson. “We found she was stealing from seniors who were in poor health. She knew they weren't able read their statements and had no family that would be involved. She would just take the money out of their accounts. We found that fraud and we prosecuted her.”
She said that boards and supervisory committees, along with auditors and examiners, should always be on the lookout for marked changes in behavior from staff, particularly the CEO.
Using Common Sense
“It’s often just common sense; look for changes in behavior and always be looking for signs of things that just don’t add up,” she said. “Like if the CEO of a $55-million credit union comes driving in in a Lamborghini.”
C B S Employee FCU’s Rostohar, according to court records, owned a Tesla, a Porsche, a Lexus, a Chevy truck and expensive jewelry, as well as a number of properties, in addition to his own 4,300-square-foot home in Studio City, Calif. As CUToday.info reported, Rostohar stole the $40 million over a 20-year period.
LaJoice, who was paid approximately $60,000, before he was arrested, was the developer of a downtown project called Riverview for which he had paid $2.1 million to gain control of seven properties, and was also the owner of the Chasse Ballroom & Latin Dance Studio and owned a home valued at $4 million.
“There are so many guidelines that NCUA examiners and auditors have to follow regarding fraud and yet still crimes slip through the cracks—obviously not often to the extent of the case in Hollywood,” Longson said, noting there have been many changes in the exam process over the years. The agency moved to risk-focused exams in 2002, and in 2012 rolled out new procedures for examinations of small credit unions. “That was particularly egregious. I was flabbergasted when I read about that—how auditors in the examiners could miss that for so long.”
Small CUs, Bigger Risk
Based on her experience in working on cases of fraud at CUs, Longson noted, as have analysts in previous CUToday.info reports, the crimes often occur at smaller CUs when one person has too much individual control over the operations, and young examiners often change each year.
“When you have one person, like the CEO, doing everything, that’s where the problems happen. And what makes people miss things even more, is that the person has been in the job for so long and has been trusted highly,” she said.
Longson also said thieves are getting more sophisticated.
“And, I know, in some instances, auditors were new and were not as skilled at detecting fraud within a financial institution,” she said.
And then, there is simply cases of misplaced trust due to an employee’s background, which she noted was the case at C B S Employees FCU, according to reports.
“I have seen where if a CEO has worked for NCUA at one time, such as an examiner, when examiners come into this person’s credit union they just think the employee knows what they are doing and do not dig as deeply as they would with someone else in charge. They overlook things,” Longson said.