SAN DIMAS, Calif. — A group of seven natural-person credit unions filed suit against the former management and directors of WesCorp FCU in state court last week over the failure of the one-time $32-billion corporate.
The suit claims the corporate and RiskSpan, WesCorp's third-party risk management firm, were negligent in their day-to-day operations and violated fiduciary responsibilities to the membership by heavily investing in mortgage-backed securities, which eventually crippled its portfolio and led to conservatorship by NCUA in March.
In the lawsuit, compiled by New York City-based attorney Scott Kamber, the plaintiffs allege WesCorp's management "embarked on a wildly irresponsible Wall Street gambling spree in mortgage-backed securities, losing billions of member dollars it was charged with conservatively maintaining as liquid assets."
The complaint also calls RiskSpan "a supposedly qualified and independent expert" that "WesCorp's members mistakenly trusted as a detached and capable gatekeeper."
WesCorp spokesman Walter Laskos referred all press inquiries to NCUA spokesperson John McKechnie, who said the regulator would not commenting on legal actions to which it is not a party. A call to RiskSpan was not immediately returned.
Glendale Area Schools FCU President/CEO Stuart Perlitsh told Credit Union Journal that the CU "owe[s] it to our membership" to try and recover the losses it incurred when WesCorp failed through the courts.
"The defendants embarked on a reckless and unreasonably leveraged investment strategy borrowing over $10 billion from non-member sources to plunge deeper into exotic non-agency mortgage-backed securities representing 80% of WesCorp's entire investment portfolio," he said. "Over the same time period other corporates held a mere 37%. WesCorp did not borrow $10 billion for natural-person credit union liquidity-they borrowed $10 billion to play investment banker on Wall Street. Now GASFCU is paying for it."
Perltish's statements closely mirror language in the lawsuit that allege the corporate "strayed far from its primary mission" as a credit union when it changed investment strategies in 2003, shifting its focus from government obligations to asset-backed securities. "The individual defendants set WesCorp on a course that far more focused on obtaining higher rates of return on principal than on preservation and return of that principal itself," the compliant states, noting that that the corporate's own mission statement says "profits are not the driving force at credit unions; rather, they exist solely for the benefit of their member/owners."
The plaintiffs asked the court to force WesCorp's former management team and other defendants to pay them $3.9 million, the combined losses at all seven natural person CUs caused by the conservatorship, as well as any other damages it sees fit to award.
Last week's legal action marks the fourth such lawsuit filed related to troubles in the corporate network, in this case against WesCorp, which has wiped out more than $2 billion of capital for more than 2,000 member credit unions of the corporate. Cheney, along with other directors and managers of the failed U.S. Central, has also been sued by Corporate America CU over their alleged roles in bringing about the corporate's demise. There have also been suits filed recently against Members United Corporate FCU (Corporate vs. Corporate: Lawsuit Takes Aim at U.S. Central BOD, CU Journal Oct. 26).