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June 6, 2016

Credit union CFO claims whistleblower retaliation

nutmeg state credit union branch in rocky hill PHOTO | Contributed A Nutmeg State Financial Credit Union branch in Rocky Hill.
John Holt, CEO, Nutmeg State Financial Credit Union

A former chief financial officer and his top lieutenant, both fired in January by one of the state's largest credit unions, aren't going away quietly.

The former employees of Rocky Hill-based Nutmeg State Financial Credit Union (NSFCU) have filed a civil lawsuit against their former employer, claiming they were fired in retaliation for communicating with regulators what they believed were improper accounting practices at the credit union.

The plaintiffs, former Nutmeg CFO Timothy Ross and former Vice President of Lending Shannon Hall, allege the credit union artificially inflated profits to boost its top executive's pay.

Nutmeg has denied wrongdoing and has not been hit with state or federal regulatory sanctions stemming from the allegations by Ross and Hall, who are asking for back pay, lost benefits, punitive and other damages, and legal costs and fees.

The lawsuit names both Nutmeg and its CEO John Holt as defendants, alleging that Holt instructed Hall “on multiple occasions” to push expected loan losses out to a future date, instead of recording them the same month they were likely to occur on the balance sheet as an “allowance for loan and lease losses.” The allowance, which is calculated regularly by banks and credit unions, is a reserve designed to protect lenders from probable credit risks in their loan and lease portfolios.

The complaint also alleges that Holt instructed Ross to stretch out expenses incurred after the closing of an East Windsor branch last year, and that Holt refused to let Ross alter the valuation of a Glastonbury facility that the former CFO believed was overvalued by $1 million.

Intent to inflate net income

The intent of those alleged accounting gimmicks, the suit claims, was to artificially inflate NSFCU's net income, to which the plaintiffs say Holt's bonus and supplemental executive retirement plan (SERP) were tied.

“By pushing out the losses, … Holt was able to keep … NSFCU's profits artificially inflated, which allowed his bonus and SERP to be funded, even in months when … NSFCU's profit targets would have fallen short, and also at the expense of proper reporting practices and against the interests of … NSFCU's members and the public in general,” the suit reads.

The plaintiffs claim that those alleged practices, which are sometimes referred to as “earnings management,” violated state and federal law and were inconsistent with Generally Accepted Accounting Principles (GAAP), which all but the smallest federally insured credit unions are required to follow.

The suit alleges four counts of wrongful discharge and one count of defamation (related to a negative performance review placed in Hall's personnel file).

Asked to confirm whether Ross and Hall were fired, Miguel Escalera Jr. — an attorney for both Nutmeg and Holt — said he couldn't comment, citing personnel confidentiality rules.

Nutmeg points to clean audit

Nutmeg provided the Hartford Business Journal with a May 31 letter from its external audit firm, remarking on the lawsuit.

The letter from Nearman, Maynard, Vallez — which has offices in Miami and Atlanta — addressed to Holt, notes that the firm didn't find anything amiss with Nutmeg's financials during its most recent audit, for the year ended June 30, 2015.

Certified public accountant Chris Vallez disputed Hall and Ross' allegation that Nutmeg wasn't following GAAP rules. Vallez also said Nutmeg compares favorably to its Northeast peers, with lower than average delinquent loans and higher return on average assets.

During the first quarter of 2016, Nutmeg's loan loss allowance was $3.2 million, up from $2.9 million at the end of 2015 and $2.6 million from the year-ago period, according to data from the National Credit Union Administration.

The credit cooperative posted net income of $1.5 million in 2015, down from $2.8 million a year earlier.

No adjustments

“Our report from the most recent audit period … supports that the credit union is following GAAP,” Vallez wrote. “There were no adjustments to the financial statements as presented by management. Additionally, there were no material weaknesses related to control deficiencies noted during our testing of controls. Our opinion on the overall consolidated financial statements was an unmodified or a 'clean' opinion. This is the highest level of assurance an institution can obtain from their audit firm on accuracy of its financial statements.”

Lisa Asadourian, a Nutmeg senior vice president, said the outside auditors “directly refute the sensationalized claims made in this lawsuit and reinforce the fact that the lawsuit has no merit.”

Noted in and attached to the CPA's recent letter to Holt was a management representation letter attesting to the accuracy of the fiscal 2016 audit. The letter, dated Sept. 18, 2015, is signed by Holt and Ross.

Additionally, neither the state Department of Banking — which is the main regulator of the state-chartered Nutmeg — nor the NCUA, which insures it, has publicly announced any enforcement actions against the credit union, which has eight area branches and approximately $397 million in assets.

“There have been no penalties of any kind and no factual basis to impose any penalty,” Escalera, Nutmeg's attorney, said.

Ross was hired as CFO on July 12, 2015, while Hall was hired three months later.

Asked for comment on the suit and Nutmeg's defense, Ross and Hall's Hartford attorney, Richard Hayber, wrote in an email: “We won't comment on pending litigation for obvious reasons other than to say that we stand by the allegations in the complaint and we are eager to have our day in court.”

Compensation claims

While the allegations are mainly related to the firing of the two men, the complaint also delves into Holt's compensation, describing his retirement package as “excessive.” The suit claims the so-called SERP was costing the credit union approximately $45,000 per month. The financial value of the bonus incentive isn't disclosed in the suit.

Nutmeg disputed the SERP figure cited in the complaint. The credit union said the actual number is closer to $38,000, and that it's not technically a monthly benefit, but an accrual for a benefit that's offset by investments. Holt would have to stay employed at Nutmeg until age 67 to collect in full, it said.

The suit claims examiners from the state's Department of Banking and NCUA expressed concerns in a December meeting about Holt's compensation and its effect on Nutmeg's finances. That meeting capped a required annual examination conducted by the department and NCUA, during which Ross and Hall told examiners about their concerns, the suit said.

HBJ asked the banking department last week to confirm the claim that its examiners expressed concern about Holt's compensation. Department spokesman Matthew Smith declined comment.

“This is a civil lawsuit between a financial institution and two former employees,” Smith said. “It is the policy of the [department] to not comment on pending litigation.

An NCUA spokesman also declined comment.

Escalera confirmed that Holt has a SERP, which he said is an executive retention tool OK'd by outside auditors. He also confirmed that Holt has a “pay-for-performance” plan, approved by Nutmeg's compensation committee, and tied to financial performance, member satisfaction and other metrics.

Several U.S. banks have been fined in recent years by the U.S. Securities & Exchange Commission for understating their allowances for loan and lease losses, which the SEC says can be misleading to investors.

Editor's note: The print version of this story did not state that Nutmeg disputes that its CEO's retirement benefit costs the credit union $45,000 per month. The online version has been altered to reflect that.

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