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Saturday, July 10, 2010

Feds say auditor may have let fraud continue at Connecticut credit union: Lawsuit alleges he lacked training for review of NL institution that collapsed

A federal agency is alleging that an unqualified auditor may have allowed a multimillion-dollar fraud at the New London Security Federal Credit Union to fester for years before the financial institution suddenly collapsed two years ago.The board of the National Credit Union Administration, the agency that regulates federal credit unions, said in an amended lawsuit filed in U.S. District Court that Robert Shutsky of Preston, an employee of Ed Lorah & Associates, performed audits for the New London credit union. For most of those years, according to the suit, Shutsky was employed by Beller, Shepatin & Co., a New London accounting firm purchased by Lorah in September 2007."Shutsky was unqualified and lacked the proper and necessary training and knowledge to perform auditing and review services," according to the suit. Shutsky did not respond to two telephone messages seeking comment. In an answer to the complaint filed last week, attorneys Marisa Lanza and Andrew F. Pisanelli denied the allegations. But the attorneys acknowledged Shutsky joined Lorah when the New London accounting firm bought Beller Shepatin, and that he was the auditor for the credit union. Lorah had previously said his company never performed an audit on behalf of the credit union. "I stand by my previous comment," he said in an e-mail Wednesday.But the NCUA said in its amended suit that the credit union's final audit, in October 2007, came about a month after Lorah acquired Beller Shepatin.bIt contends that Lorah's firm, as successor to Beller Shepatin, is responsible for $9.7 million in deposit insurance losses that the agency incurred when the New London Security Federal Credit Union was declared insolvent in July 2008 after a routine NCUA examination. The agency also said it is trying to recover $570,000 on behalf of uninsured shareholders in the credit union.In an October 2009 report by the Office of Inspector General, the NCUA blamed the credit union's failure on a massive embezzlement scheme by longtime New London stockbroker Edwin F. Rachleff, who served as the financial institution's investment adviser. Rachleff, who was accused in the report of creating a dummy account and fictional investment statements, committed suicide the day the credit union was shut down. The NCUA said in its suit that Rachleff's scheme went on far longer than it might have if auditor Shutsky or his employees, Beller Shepatin and Ed Lorah, had done their jobs properly. Among the NCUA's allegations were that Shutsky failed to request independent confirmations of accounts being audited and neglected to question inconsistencies in account statements. "Had Beller Shepatin and Mr. Shutsky performed proper audits and reviews, the credit union would have uncovered the fraudulent investment account years sooner," according to the suit. In addition to the suit against Beller Shepatin, Shutsky and Lorah, the NCUA earlier this year filed suit against Wells Fargo Advisers LLC, successor to the brokerage houses A.G. Edwards and Wachovia Securities, companies for which Rachleff worked. It also has sued Rachleff's estate, which had less than $40,000 in assets. Shutsky is being sued for professional malpractice, while Lorah and Beller Shepatin are accused in the NCUA's complaint of professional malpractice and breach of contract.

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