Conference 7.286::dcu

889.0. "PRESS RELEASE: NCUA, DCU, KPMG PEAT MARWICK SETTLE CLAIMS" by IAMOK::DAWKINS (Tanya Dawkins) Mon Oct 10 1994 12:18

        FOR IMMEDIATE RELEASE
        For Additional Information
        Contact:  Tim Garner, 800/328-8797 x 204
        
        
           NCUA, DCU, and KPMG Peat Marwick settle auditing claims
        
        
        ALEXANDRIA, VA - The National Credit Union Administration 
        (NCUA), Digital Employees' Federal Credit Union (DCU), and 
        KPMG Peat Marwick (KPMG) recently announced a $3.5 million 
        settlement of auditing claims against the account firm.
        
        KPMG and a predecessor firm, Main Hurdman & Co., were auditors 
        for two Massachusetts credit unions which were the victims of 
        a massive fraudulent loan scheme.
        
        In July, 1993, four men were convicted of siphoning $47 
        million from the Barnstable Community Federal Credit Union of 
        Hyannis and DCU.  Three of the four have been sentenced to 
        anywhere from three to 15 years in prison and ordered to pay 
        restitution totaling $50 million.  The fourth, former DCU CEO 
        Richard Mangone, disappeared before sentencing and is still at 
        large.
        
        NCUA uncovered the fraud and closed Barnstable in 1991.  DCU 
        is prosperous today in spite of its losses.
        
        NCUA contented that, as the auditor for both credit unions, 
        KPMG and Main Hurdman failed to detect that each credit union, 
        in the course of the fraud, understated its loan loss reserves 
        at various times so that each of the credit unions had 
        overstated its net worth and net earnings during the periods 
        at issue.  NCUA also contended that KPMG and Main Hurdman 
        failed to deliver their auditors' reports to each credit 
        union's Supervisory Committee.
        
        NCUA and DCU stated that, to their knowledge, KPMG and Main 
        Hurdman, and their present and former partners and employees, 
        had no involvement in any of the matters which were the 
        subject of the fraud or with any of the participants in the 
        fraud.
        
        "Peat Marwick and Main Hurdman audited the Barnstable and 
        Digital credit unions for the whole five-year period of the 
        fraud, 1985 through 1990, without ever challenging the 
        adequacy of their loan loss reserves," NCUA General Counsel 
        Robert Fenner said in a statement.
        
        KPMG has informed NCUA and DCU that certain personnel whom 
        NCUA and DCU contend were responsible for the audits of the 
        two credit unions are no longer employed by KPMG.
        
        KPMG denied any negligence of it or Main Hurdman in connection 
        with performing the audits or delivering auditors' reports to 
        the Supervisory Committees of the credit unions.
        
        The firm agreed to pay $3.5 million to DCU and NCUA, the 
        liquidating agent for Barnstable, to avoid the expense and 
        risk of litigation.  When auditing financial statements of 
        federal credit unions in the future, KPMG said it would adhere 
        to GAAP (Generally Accepted Accounting Practices) and GAAS 
        (Generally Accepted Auditing Standards) in reference to 
        auditing loan loss reserves and would ensure that auditors' 
        reports are delivered directly to the credit union's 
        Supervisory committee.
        
        NCUA is the federal agency which supervises and insures 7,700 
        federal credit unions and insures 4,600 state-chartered credit 
        unions.  It is entirely funded by credit unions and receives 
        no tax dollars.
        
        KPMG, one of the world's largest professional services firms, 
        is the second largest auditor of credit unions in the country.
        
        DCU is a member-owned not-for-profit consumer cooperative.  It 
        provides savings, loan, and financial services for its 
        member/owners.  DCU is the second largest credit union in 
        Massachusetts with $350 million in assets and over 71,000 
        members.
        
        (NOTE:  The text of this release was agreed to as one of the 
        terms of the settlement.)
        
                                     ###
        
        
    

    I wonder how much of the $3.5M the DCU gets.  Not much, I would expect.
    
    	Larry
    
    PS -- THANKS, Tanya, for posting these press releases!

    Larry,
    
    We are not allowed to disclose the NCUA/DCU split as agreed to as part
    of the settlement.  However, when our annual report is published, you
    will notice a large amount of non-operating income which will be mainly
    litigation-related.
    
    Regards,
    
    Tanya
    
    
    

Tanya,
    
>    We are not allowed to disclose the NCUA/DCU split as agreed to as part
>    of the settlement.  


This seems to be an incredibly odd thing to add to a settlement.  What party
to the settlement pushed for this addition?

al    
    
    

    
    It's not odd at all. This is the way settlements are handled these
    days. If no wrong-doing is admitted, in order for the parties to get
    their money, they usually agree to a gag order on the actual details of
    the settlement.

>    It's not odd at all. This is the way settlements are handled these
>    days. If no wrong-doing is admitted, in order for the parties to get

  In fact, in some cases the total figure is not disclosed either. We are 
lucky that it was disclosed in this case.