INTERNAL MECHANISMS
We'd like to thank everyone who has taken a moment to post their thoughts and share their experiences as employees and members of Priority One Credit Union.
Some comments have provided leads and insights which have enabled our investigation to delve out information about actions committed by President Charles R. Wiggington, Sr. that constitute an abuse of his appropriated authority and which represent violations of credit union policies and possibly, state and federal laws.
On March 3, 2009, a reader asked the following question:
"Here is a question for John since he seems to know a great deal about Priority One. Does Priority One use an outside independent certified public accounting firm to conduct the annual audit and issue assurance letters?"
Priority One does contract the services of an external auditing firm. Under President Wiggington's predecessor, William E. Harris, the credit union contracted the services of O'Rourke, Clark and Sacher. Last year, President Wiggington contracted the services of Turner, Warren, Hwang and Conrad* ("TWHC"), an accounting ("CPA") firm based in Burbank, California.
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In the years while Mr. Harris served as President, a representative of O'Rourke, Clark and Sacher would attend Priority One's annual meetings during which he/she would speak and assure attendees that the credit union's finances were secure and in proper order. We've not heard anything about plans to invite the external auditor to future annual meetings to speak to attendees.
We will be keeping an eye on the relationship between the new external auditing firm and the credit union. The relationship should be above reproach but we know Charles R. Wiggington, Sr. and acting ethically is not something he is prone to do. Last year, while Terry Nabors of TWHC conducted an audit in the South Pasadena's Board Room, the President stood by during a portion of Mr. Nabors' review, weaving a story of how he purchased a white BMW from a dealership just a few years earlier and that recently, rumors have circulated at the South Pasadena branch that the vehicle was actually repossessed from a former member. During his story telling session, the President exerted tremendous effort to ensure Mr. Nabors understood the car was never repossessed from a member and that he purchased the vehicle from some unnamed dealership. His story was of course a lie from beginning to end.
The President also invited Mr. Nabors to lunch, for the purpose of discussing business. Though meeting with business associates is common in any industry, we don't trust Charles R. Wiggington, Sr. or his reason why he chose to conduct an off-site meeting to allegedly discuss business.
We'll be keeping an eye on this relationship.
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The Credit Union's Loan
In mid-2008, the President obtained permission from the Board of Directors to borrow $20 million from the credit union's line-of-credit. Its important to note, that no President, prior to the appointment of Charles R. Wiggington, Sr., had ever borrowed money from the credit union's line-of-credit. This was clearly a first and begs the questions, "Why was obtaining a loan of $20 million necessary?"
We reviewed the credit union's quarterly Financial Performance Report for the quarter ending December 31, 2008 and under the section, "Statement of Financial Condition", located the following reference:
Draws Against Lines of Credit
A.
1 Year
$10,000,000
B.
3 Years
$10,000.000
C.
Total Amount
$20,000,000
The report can be reviewed at www.ncua.org using Priority One's charter number, 60024.
Until the loan is paid-off in its entirety, the loan will continually offset any profit earned by the credit union. So why did the President deem it prudent to borrow $20 million at a time when the credit union is experiencing difficulties to acquire new business? The loan is also costing the credit union $30,000 to $32,000 each month in interest payments alone. At present, the credit union is paying only the interest on the loan and not the principle.
PERKS, PERKS, PERKS AND MORE PERKS
We recently discovered disturbing information about the junkets members of the Board of Directors and Supervisory Committee periodically attend. Its not actually the junkets that are problematic it is the activities of some Directors and Supervisors who apparently don't understand the purpose for attending junkets.
Over the years, the credit union has paid travel, lodging and eating expenses when the Board traveled to Europe, Hawaii and earlier this year, to Las Vegas. What has come to light is that many of the Directors and Supervisors are not attending scheduled junkets but behaving like tourists and visiting popular tourist destinations. During January's trip to Las Vegas, Director, Diedra Harris-Brooks, exceeded her daily allotted allowance and spent much of her money in the casino bar. The President ordered that the accounting department report excesses in spending on a daily basis on other days to create the appearance Mrs. Harris-Brooks had not exceeded her per diem. The President's clever accounting reporting isn't new. His proclivity to adjust financial reporting has too often created a strain in his relationship with CFO, Manny Gaitmaitan who has more than once, refused to adjust reporting to fit the President's agenda.
Also, why did the President grant $3000.00 to each Director and one Supervisor to travel to Hawaii? The total spent for the Directors and one Supervisor to travel to Hawaii was between $15,000 and $24,000. And why isn't the expense referenced in the credit union January 2009 monthly Income Statement? And why haven't the monies provided to the Board appeared in any of the credit union's quarterly Financial Performance Reports since Charles R. Wiggington, Sr. became President on January 1, 2007?
Its also apparent that the Board Chair is devoid of all decorum or understanding that her position on the Board she conduct herself in a manner that is above reproach.
In the years while William E. Harris served as President, the only compensation alloted to Directors was mileage reimbursement for driving to and from the credit union to attend monthly meetings.
Since Mr. Harris' retirement on December 31, 2006, President Wiggington has approved a small stipend, paying Directors to attend monthly Board meetings. Irrelevant of the amount of payment, the monies given to Directors is contradictory to the premise that Directors in any credit union serve voluntarily and without compensation which includes not being the recipients of perks. Have the Directors no concept that their role on the Board is to ensure the credit union functions efficiently and ethically and that it realizes that its role is "People helping people" not People Helping Themselves
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10 comments:
The O'Rourke Clark & Sacher CPA firm was merged into a larger national CPA firm several years ago. The firm is now known as RSM McGladdery CPA.
Correction - spelling error on message above. The correct spelling is RSM McGladrey CPA
Thank you. O'Rourke, Clark and Sacher are then the firm who were hired to perform audits while Mr. Harris was president.
I have just finished reviewing the financial statement for the quarter ending 12/08 and was unable to locate the expenses for the Christmas Party which total more than $25,000. It is interesting because these should have been reported under non-operating expenses.
Borrowing money to relend the money to someone else is hwo all banks and credit unions operatte. They gather money from the depositors and then they lend it out to borrowers.
Perfectly safe and normal under most circumstances.
The Priority One loans you are refrring to are a form of arbitrage. they were taken out with the intent to borrow cheaply from some lender and then relend the money to someone else. The credit union makes a modest profit on the spread between the interest rates it pays and what it earns.
Now, I'll give you what I think is the real reason Priority One entered into this transaction.
Borrowing the money increased the balance sheet assets and liabilities of the credit union. Something that the CEO can point to and say, "I did that." I would not be surprised if part of the CEO's compensation and probably bonus plan included a payment based on credit union growth.
All of this is proper so long as the borrowing is apporoved by the Board of Directors and properly included in the financial statements. This practice is at least thiryy years old and probably it is much older.
Most CEOs that I know who have practiced this arbitrage did so only for short periods of time and largely for vanity purposes. CEOs like to manage larger credit unions; it is human nature to do so. I knew one CEO who would borrow a couple of million dollars in December to make the year end financial numbers larger and then pay off the loan in January. This went on for at least twenty years or longer.
Here is my $64 question or observation of the day.
If these advances or loans were funded from a true line of credit; then the lender can call the advances due and payable at the maturity of the line of credit, something that usually happens every twelve months. In a former life, I was a corporate banker and did not renew a line of credit more than once.
If Priority One's lender decides not to renew the line of credit, perhaps because of questionable operations for example, then Priority One and the CEO will have to come up wiht the money and a truly fascinating explanation that would make most, if not all, fishing stories seem like gospel truth.
HOW IS TEDDY??
I agree. Borrowing money to make your financial numbers appear larger at the end of the year, certainly is not unusual but is it a wise decision when delinquencies are at an all-time high and losses have consistently occurred each and every month? It would seem that this would only add to the financial burden of the credit union.
John, To address your comment on the Christmas Party expenses - It would be an operating expense - perhaps buried in the "Other Expenses" or Education and Promotion" category.
It would not be classified as a non-operating expense.
This addresses the Borrowed Money situation at Priority One as commented by Anonymous: I once again reviewed the Call Report on the NCUA website. It is my opinion the CU borrowed money because it was used to keep funds in the "cash" account as deposits were drawn down in the last 12 months. For example, in December 2007 Shares totaled $144 million. As of December 2008 Shares have been drawn down to $135 million. To offset the withdrawals it appears the CU borrowed money. I do not agree it was done for arbitrage purposes.
On the other hand, I would say Priority One's membership does not have much confidence in the CU because of the on-going contraction in member share deposits.
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