WASHINGTON — The battle over whether and how credit unionsshould convert to mutual bank charters appeared to get a little bithotter on May 16 when the Securities and Exchange Commissionrevealed its investigation of a scheme to defraud mutual bankdepositors, including the former members of eight converted creditunions.

The Securities and Exchange Commission and the U.S. Attorney forNew Jersey charged that Bert Fingerhut, his nephew Bruce Fingerhut,a childhood friend Robert Danetz and his brother Stephen embarkedon a scheme through which they would fraudulently purchase stockmade available to mutual bank depositors. Sixty-five banks overall,including former credit unions, were victims of the fraud.

Former credit union members were hurt by their actions by losingaccess to stock they would have otherwise been able to buy, theagency said. Of the four, Bert Fingerhut has pled guilty and theagency has settled with the other three.
The eight former credit unions where the fraud took place include:Viewpoint Bank (formerly Community Credit Union), HeritageFinancial Group (AGE FCU) Atlantic Coast Federal Corp (AtlanticCoast FCU), K-Fed Bancorp (formerly Kaiser Permanente EmployeesFCU), Rainier Pacific Financial Group (Rainier Pacific CU), SynergyFinancial Group (Synergy FCU), First Pactrust Bancorp (PacificTrust FCU), Jade Financial (IGA FCU).

Bert Fingerhut is a former director of research and executivevice president for Oppenheimer and Co., Inc. and came upon thescheme in 1995 after reading about how much money could be made inthrift conversions, according to the SEC indictment.

The scheme worked like this. Over the next 12 years, BertFingerhut systematically targeted mutual banks throughout thecountry that had not yet converted to stock ownership, by openingas many accounts as possible in his own name and the names of hisco-conspirators.

When any of the banks where he and his conspirators controlledaccounts announced a stock conversion, Fingerhut would have hisconspirators submit stock order forms for the maximum amounts ofstock available to each depositor. Each time, the conspiratorscertified that they were buying shares only for their own accountsand not through any arrangement to transfer the shares or theirproceeds after selling them.

“Each of these statements was false,” the SEC said. “BertFingerhut funded both the opening of the nominees' accounts and thenominees' stock purchases, and the nominees had agreed in writingto transfer either the shares or the subsequent sale proceeds toBert Fingerhut. In short, Bert Fingerhut secretly owned all theaccounts, all the subscription rights and all the stock issued tothose account holders.”

The scheme was also fairly complicated. In order to get aroundthe requirements, particularly on the part of the credit unions andformer credit unions, Fingerhut recruited Robert Danetz to travelaround the country and open as many accounts as possible.

Essentially, Robert Danetz opened single accounts in his ownname and joint accounts with members of the Danetz and Fingerhutfamilies, the SEC said. He even traveled around the country withmultiple copies of the social security cards and passports for BertFingerhut and his wife, their two daughters, Danetz's own wife, andtheir two children.

Once he established accounts at a given bank, he then openedadditional accounts by mail in the joint account holders' names andadded new joint accounts with other names. To open accounts atthose banks outside New York and New Jersey that prohibiteddepositors from outside the local area, Robert Danetz paid friendsand acquaintances to add his name to their utility bills or leasesso that he could show “proof” of local residency. He also used theacquaintances' addresses to fraudulently obtain stateidentification cards.

In resolving the case, Bert Fingerhut agreed to forfeit $11million he obtained by the scheme and may face a maximum sentencein prison of five years, at the discretion of a federal judge.Bruce Fingerhut has forfeited $181,269, plus prejudgment interest,and will pay a civil penalty in the amount of $150,000. StephenDanetz has agreed to disgorge his ill-gotten gains of $137,975,plus prejudgment interest, and pay a civil penalty in the amount of$120,000.

Impact On Conversion Debate?

Reaction to the news depended a bit on where you fell on thespectrum of debate about credit unions converting to mutual banks,which is to be expected, but may have a stronger impact because ofthe banks involved, several of whom have been noted in theCU-to-bank conversion discussion.

For example, Viewpoint Bank is the institution that resultedfrom the hard fought conversion of the $1.4 billion CommunityCredit Union, still the largest conversion. AGE FCU, which becameHeritage Financial Group, is the bank that Lee Bettis, currentexecutive director of the Coalition for Credit Union CharterOptions, took from being a credit union to being a bank and FirstPactrust Bancorp is the organization that resulted from thecontroversial conversion of Pacific Trust FCU.
Another, Jade Financial, formerly IGA FCU, has already revealed inlegal papers how insider trading effectively prevented many of theformer CU members from taking part in a stock offering.

Calls to Viewpoint Bank and Lee Bettis were not returned as ofpress time.

Jim Blaine, CEO of the $14 billion State Em-ployees' CreditUnion and one of the founders of the National Center For MemberTrust said credit union members should not be surprised.

“For a long time there has been a lot of suspicion and worrythat there were insider trader opportunities and chances for folksto get money they shouldn't be able to have in these conversions,”Blaine said. “Now that has just become much more tangible.”

Blaine applauded the agencies for the arrests and theprosecutions, but added that they had only brought to the light ofday a practice which had been known about but not discussed forsometime, which is the opening of investor accounts in creditunions which might convert or in former credit union banks.

He also noted that these sorts of things have happened in a highpercentage of the CUs that convert to banks and then tostock-issuing banks. According to CU Financial Services, 19 creditunions have converted to banks and then gone on to issue stockeither as a straight stock issuing company or as part of a mutualholding company structure. The revelation from the SEC meant that42% of the CUs that have converted to banks and then to gone on toissue stock have had some sort of fraud involved in the stockoffering.

But Hans Ganz, CEO of Pacific Trust Bank, formerly Pacific TrustFCU, said that none of the banks involved could have known aboutthe fraud when it was taking place.

“If a depositor sends me a slip saying that he or she wants topurchase stock,” Ganz said, “how am I going to know whether theyare using money from their deposit account or money they got fromsomewhere else? There is no way I could ever know this.”

And Alan Theriault, president of CU Financial Services and aconsultant on CU to bank charter conversions, argued that thecapture of Fingerhut and his co-conspirators indicated that the SECand Office of Thrift Supervision are doing their jobscorrectly.

“From my perspective, it looks like they are doing things rightand capturing the bad guys,” said Theriault. “After all, 99% ofpeople are going to follow the rules but you need to have the rulesfor the 1% who won't.”
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