Insurance Company Countersues Credit Union Over $5.4 Million Embezzlement Claim | Business Insurance

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Southwest Marine and General Insurance Company countersued Southern Pine Credit Union alleging that some prior statements it made were fraudulent regarding loan protection.

The Valdosta, Georgia-based credit union has denied these allegations, according to its court documents.

In June, $42.4 million Southern Pine filed a federal civil lawsuit against the Morristown, New Jersey-based insurance company for refusing to pay a $5,471,518 verified proof-of-loss claim stemming from an alleged loan scheme. internal fraud of former President/CEO Leah Lehman. and former Comptroller Teresa Paulo.

Claimed losses on the Paulo loans totaled $1,233,201 and claimed losses related to the Lehman loans totaled $4,238,317.

In 2020, Southern Pine posted a loss of $5,844,935, but returned to profitability in 2021 and so far in 2022, according to NCUA financial performance reports.

The credit union is suing Southwest Marine for $3,746,000. The insurance company’s countersuit is asking US District Court Judge W. Louis Sands in Valdosta, Ga., to exclude coverage of the credit union’s bond claim.

Lehman and Paulo allegedly began embezzling funds from the credit union in 2003 and 2006, respectively.

In 2014, Southwest Marine issued Southern Pine a three-year fidelity bond for employee and director dishonesty coverage of up to $2.5 million. The insurance policy had been renewed twice.

The credit union said in its original insurance application and renewal applications that it had separation of duties among its employees. But Southwest Marine claimed that, based on information and documents provided by the credit union, almost all of those separations of duties were performed by Lehman and Paulo. However, according to court documents, the credit union has denied that most of the separation of functions was carried out by Lehman and Paulo.

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The credit union also said in documents provided to the insurance company that it audited loan files and that its oversight committee reviewed loans to officers, employees and their immediate family members and also reviewed activity on employee accounts. .

In its response to Southwest Marine’s countersuit claims, Southern Pine said the oversight reports did not specifically identify concerns regarding unknown and undiscovered embezzlement of funds at the time. Court documents also showed that the credit union had been vetted by state regulators and the NCUA.

However, many red flags appear to have been missed despite oversight committee audits, state and federal examinations and other financial oversight reviews that the credit union and its board of directors said they conducted.

Based on a forensic audit by Lillie & Company, a Sunbury, Ohio-based CPA firm that specializes in insider fraud investigations, Southern Pine alleged that the embezzlement began in June 2003 when Lehman created a loan account in her husband’s name, took an advance of $7,850 and allegedly transferred those funds to the joint stock draft account she owned with her husband.

According to Lillie’s audit, for the next 17 years, Lehman continued to use this joint account, her husband’s account and accounts belonging to other family members to obtain fraudulent loans and used those funds for personal reasons and to hide his theft. .

Paulo allegedly began transferring funds from relatives’ accounts “for temporary cash flow needs” in 2006. A year later, he created a loan account that was supposedly insured and took advances to pay credit card bills and other expenses, according to Lillie’s audit. .

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Paulo’s alleged fraud spread rapidly.

For example, by July 1, 2014, he had allegedly created approximately $42,000 in fraudulent loans, and by January 1, 2015, that amount had increased to approximately $103,000. However, in successive one-year periods, the balance grew to approximately $270,000, $529,000, $750,000, $945,000 and $1,170,000, according to Lillie’s audit.

Sometime in the first or second quarter of 2020, through sources outside of Southern Pine, the NCUA became aware of questionable transactions involving Lehman and Paulo. At the time, the credit union had five employees who were insured under the Southwest Marine policy.

By June 11, 2020, Lehman and Paulo were fired and the credit union was placed in conservatorship. Southern Pine, which serves more than 1,400 members, was released from conservatorship in March 2022.