By Michael Fryzel
The period between August 2008 and August 2009 has been described by some credit union individuals as one of the most difficult times for the industry.
The financial markets were in turmoil. Investment firms were on the brink of failure. The real estate bubble was bursting. Corporate credit unions were on the verge of collapse. Close to 2,000 natural person credit unions, unbeknownst to them, faced the possibility of closing their doors.
During that difficult time I had the honor to serve as Chairman of the National Credit Union Administration (NCUA). It was the most challenging, exciting and fulfilling year of my professional career. When I became aware of the seriousness of the situation, the fact that all the signs of looming problems were ignored and that the loss to the credit union system was going to be staggering, I knew that every effort had to be made to recover as much of the losses as possible from those who were involved in creating them.
After putting into place the measures needed to stabilize the system, the NCUA General Counsel was instructed to pursue all means necessary and file any action to rectify the wrongs. That effort included securing outside legal counsel to evaluate the success of potential lawsuits filed against investment firms and banks that were derelict in their duty to provide sound and accurate investment advice to the corporate credit unions.
NCUA did not and could not hire expert counsel on an hourly basis to research and file what were to be groundbreaking lawsuits. This was untested water and the efforts to pursue an equitable result were going to be expensive. Not knowing whether it would be successful, the NCUA Board was reluctant to commit millions of dollars of credit union funds to pursue legal action.
In the corporate world, law firms often operate on a contingency basis--they agree to take on a client’s case, do all required research, prepare the necessary documents, file and argue the merits of a lawsuit, participate in settlement discussions and if successful receive a certain percentage, plus expenses, of any monetary settlement.
A contingency agreement costs no upfront money and results in no loss to the client if the action is unsuccessful. Such an agreement is also a risk to the law firm. If they lose, they get nothing. However, if they win, they get paid. And the bigger they win, the more they get. Such an agreement has proven to be a winning one for NCUA and the law firms involved.
The gross recovery to date of the lawsuits filed is $3.1 billion, with more to come. Part of the recovery will go to offset the losses credit unions experienced and part will go to the attorneys who took the case on a contingency basis.
Tarnishing The Effort
What has tarnished this successful effort has been the refusal by NCUA to provide information naming the law firms involved and how much each has earned. There appears to be no compelling reason why the industry and everyone else should not be given that information.
NCUA has denied Freedom of Information requests asking for the net recoveries associated with the litigation. They claim the information contains trade secrets, privileged information and protected memorandums and letters, all reasons I believe a court would quickly reject.
If the NCUA is truly honest about their boast of transparency and keeping stakeholders involved, they need to immediately release all information relating to recoveries from the lawsuits. And if they do not, it is the responsibility of the trade associations and publications to pursue legal action requiring them to do so.
It’s unfortunate that such a lawsuit would not involve a monetary award. If it did, lawyers across the country would line up and take it on a contingency basis.
Michael E. Fryzel is an attorney and advisor to the financial services industry with offices in Chicago, Illinois. He is a past Chairman and Board Member of the National Credit Union Administration. He can be reached at meflaw@aol.com.