During the January 6 WOWT’s First Alert news program, the station presented a report titled Watchdogs Say $13.6 million is missing from recently-absorbed Omaha-based credit union. The TV Reporter, Michael McKnight, had contacted me for comments on the case.
The TV story told of the $13.6 million dollar loss at Creighton FCU leading to its subsequent merger with Cobalt FCU in August 2024. Cobalt said this was the result of the “CEO’s retirement.” Both Peter Strozniak’s Credit Union Times article and I had written about this forced merger and the loss in its final June 2024 quarter of operations.
The merger was caused by an enormous deficit equal to 20% of assets uncovered following the CFO’s death in April. NCUA gave no explanation of what happened, where the money went or who was responsible for the follow-up. NCUA and Cobalt refused to answer any questions about the event. Problem resolved, no questions please.
But the TV news triggered immediate additional facts that NCUA has refused to provide the press and public about its actions. The TV reporter received a letter NCUA’s Inspector General (IG) sent to Omaha Congressman Mike Flood responding to his inquiry about the circumstances of the loss in November.
The IG response is linked here. The letter opens with an unusual disclaimer of direct responsibility as the IG and NCUA are not required to investigate this situation any further:
Because there was no loss to the Share Insurance Fund, my office was not required to perform a material loss review. Additionally, NCUA informed us that the agency was not required to conduct a post-mortem review for the same reason.
But the IG then proceeds to state facts from the public 5300 call report and details of all the external resources and NCUA officials who became involved when the CFO died in April. Those listed include a local CPA firm, the NCUA’s supervisory examiner, the regional director, associate regional director, the director of special actions and a problem case officer. NCUA requested the credit union hire a bond attorney, fraud auditor and an interim CFO to work with its problem case officer. On May 3 the case was transferred to the Western Region’s Special Case office on May 3.
The only NCUA offices not listed are those ultimately responsible for the oversight of NCUA’s federal credit unions: the Executive Director, the Director of Examination and Insurance and the NCUA board. By omitting any mention of their role, they are apparently excused from any accountability.
In October 2024 Cobalt reported to NCUA that the “former CFO understated expenses related to the ATM network to artificially boost Creighton’s income statement to appear to achieve a steady net income.” The IG’s explanation also includes this assertion of agency’s due diligence:
When reviewing the deceased CPO’s famiy’s financial records and computers that:The regional director also said the fraud auditors looked for all ways cash could have left the credit union and found no instances of cash removal.
The IG’s concluding paragraph provide NCUA’s theory of the case:
In summary, NCUA officials believe the credit union failed due to bad accounting and financial statement fraud. The large deficit was hidden by the former CFO who exploited Creighton’s weak accounting system that allowed back posting, forward posting, deleting transactions, and hiding general ledger accounts when generating reports. Because no money was found to have left the credit union through this, NCUA officials believe the former CFO committed the fraud not for personal financial gain, but to make the credit union appear to be thriving in the eyes of its Board and membership.
The IG’s Theory of the Case
Several observations from the IG’s summary. First all the information is second and third hand. The IG did not complete any direct review, but solely reported what others have said and done.
If this preliminary description is accurate, one has to believe this accounting coverup occurred over at least 26 years with an average operating shortfall of $500,000 per year between reported and actual net income.
To accomplish this alleged coverup, the CFO would have to keep two complete sets of books. As the deficits were recorded from share balances this would require hundreds of individual entries each quarter to balance out the shortfall but keep member statements accurate. Then these two sets of books would need to be updated quickly whenever external NCUA examiners and auditors arrived on site. Or whenever there was any external loan and share verifications.
A person capable of this legerdemain bookkeeping effort for over 26 years was however not capable of managing the credit union’s financial performance with positive net income?
There is no explanation of how such a consequential scheme could have gone undetected from annual CPA audits, NCUA examinations. supervisory committee share and loan verifications and traditional separation of duties in the accounting shop. It was not discovered until the CFO’s death in April. New people quickly found the out of balance situation and the $13 million shortfall. The fact that the share shortfalls were recovered so rapidly and then transferred in full to Cobalt, suggests these two sets were readily available. An internal defalcation involving member share balances over three decades would normally be an auditing and forensic nightmare to reconstruct. But in this case resolved quickly.
Just Country Bumkins Fooling Experts
Finally, it strains credulity to believe there was no shortfall of funds. The cash had been received from the incoming share deposits. But the IG’s letter presents the assumption that the CFO just used “suspense accounts” to cover unrecorded continuing operating losses—that would average at least $500,000 per year. Why would a person go to this much trouble to just cover operating losses for which he was not directly responsible? If in fact it was failure to balance out ATM deposits and withdrawals—one suggestion—how could such a continuing imbalance go unnoticed for over three decades?
The IG report describes the accounting coverup: Specifically, the CFO had understated expenses related to the credit union’s ATM network to artificially boost Creighton’s income statement. And, The regional director stated that the ATM accounting was extremely complicated due to Creighton having over 150 ATMs and the multiple ways in which income and expenses could be divided.
A credit union of this asset and member size managing a 150 ATM network seems highly unusual. What happened to this system after the merger? Why were examiners and auditors unable to balance out this system for decades?
Assuming the CFO’s only rationale was to hide a continuing operating loss and that he received no benefit from his actions, one must ask who also might benefit from such a coverup? Who supervised the CFO? Is this just a situation of two country bumkins fooling all exam and auditing experts for decades?
NCUA’s Silence on This Failure
Until the IG’s December response to Congressman Hood’s inquiry, all responsible parties have said nothing about the situation. Press queries are referred to call reports and to Cobalt’s press release saying the merger was due to the CEO’s retirement, a completely false account. Why would the NCUA and Cobalt put out such a blatantly and easily contradicted explanation? Was it to avoid addressing the $7 million or greater shortfall that Cobalt members will now cover?
One fact is clear, everyone, including the IG is distancing themselves from any responsibility for getting to the bottom of this $13 million loss. The IG presents second hand information and lists multiple NCUA involvements with everyone handing off the ball to someone else-either internally or externally. Cobalt does the cleanup. The IG quotes Cobalt’s theory of the loss from October, not NCUA findings, for the missing funds. The IG washes his hand because no “material loss” review is required, but he will consider adding a review to his 2025 “to-do” list.
When people in positions of responsibility have nothing to hide, they will speak up with their understanding of events and what more needs to be done. In this case there is silence for all parties, but most especially the highest levels of NCUA. The initial explanation of multiple decades of accounting coverups creating a $13 million shortfall seems unlikely and inconsistent with some of the data reported. It feels like there must be more to the story.
The True Shortcomings
NCUA’s lack of public candor is the real problem. No one at NCUA wants to take responsibility for the agency’s most fundamental role of overseeing a credit union’s safe and sound operation. Noticeably absent from IG’s account is the role of the three-member board, the information they received and the actions they did, or did not, take.
Did the Board approve the forced merger without member vote? If so, what was in the Board Action Memorandum about the situation and alternatives? Why was Cobalt FCU willing to absorb this accounting and operational mess with a $7.0 million loss which their members must now cover? Where is their upside, if any?
Why weren’t the previous NCUA annual (?) exam papers reviewed for how so-called unrecorded expenses could be disguised in other accounts (suspense and office expenses)? The three quarterly call reports clearly show the credit union reporting positive net income, but no increase in net worth until the yearend. Don’t examiners first review the accuracy of call reports as one of their first verifications? Etc. etc.
The Largest Credit Union Failure in 2024
The Creighton case is an example of institutional failures. The most serious is not the $13 million unexplained loss shutting down a federal credit union. But the total lack of responsiveness to the members and the public by NCUA’s leadership. In a crisis, leadership should come from the NCUA board members, not the professional staff. They are merely foot soldiers. The leaders are missing in action.
Is the best explanation NCUA can provide Congress and the public an IG summary of second-hand agency actons, a listing of all the professional resources sent and offering a third party’s partial explanations of what may have happened?
The buck should stop at the Board’s three desks. The board members are nowhere to be found or heard on the most significant failure in 2024. A long standing, apparently successful federal credit union collapses overnight and costs its members their institution and $13 million in combined resources.
More Precious than Dollars: Trust and Confidence
The NCUA board member’s inaction and silence when facing real problems in an open, prompt and responsible manner is a failure of leadership. Hiding from issues and accountability leads to internal coverups. It creates a lack of public confidence in the agency’s oversight. The perception that board members are not up to the agency’s most basic responsibility raises questions about their competency supervising other areas of credit union activity in which members good faith and trust (e.g.merger payouts) are routinely compromised.
After the TV investigation was reported on Monday, I received the following from a former Creighton member. It read :
Hi Chip – I ran across your coverage (in November) of Creighton Federal’s large shortfall. I am a customer there and had followed their directives to switch to Cobalt. Now I’m wondering if my money is safe at Cobalt! I liked some of Cobalt’s products (a money market savings account with high interest, for instance) and have been happy with their service so far. Still, your coverage of the slap-dash management at Creighton Federal, and its rescue by Cobalt has me wondering if I should move my money to another credit union in town that doesn’t have any problems (that I know of). Thanks!
Hopefully this case is at its beginning and the four members of Congress on the IG’s response will continue to press for actual facts, updated numbers and direct explanations for what happened. NCUA seems incapable of self-assessments. Credit unions should not expect perfection from their regulator, but they should have honest accountability.
Editorial update at 5:00 PM January 8.
Yesterday the WOWT station published this follow up report incorporating some of the IG’s December letters comments to Representative Hood.
NEVER SHOCKED. JUST DISAPPOINTED. Where are the 3 Kings of Duke Street? Can the NCUA explain how they receive quarterly Call Reports, conduct annual examinations and yet have no clue as to the fraud, or embezzlement? Can we have a conversation with the examination team and understand how such a fraud, or embezzlement occurs?
Can we learn any lessons from this Ponzi-scheme? It is time that NCUA contract credit union on-site examinations to real auditors. Say KPMG? Musk & DOGE should consider the merger of FDIC with the NCUSIF.
Credit Union technology and operating systems have appeared to exceed the bandwidth of Duke Street. The entire credit union system is at systemic risk while the 3 village savants on Duke Street remain blind, deaf and dumb to its shortcomings. With nothing learned from this – it is a silly kind of stupid to think this won’t repeat.