WHITE PLAINS, N.Y, (1/31/12)--A New York credit union has sued CUMIS Insurance Society for reimbursement of its claim of more than $565,000 in losses the credit union incurred when an ATM money management and armored car business defrauded credit unions, banks, retailers, hospitals and universities of $50 million by "playing the float."
In its lawsuit, filed Jan. 20 in the U.S. District Court for the Southern District of New York, White Plain, Northeast Alliance FCU said it lost $565,462.93 in the Ponzi-like scheme at Mount Vernon (N.Y.) Money Center (MVMC) in New York. The Bardonia, N.Y.-based credit union alleges that CUMIS breached its contract when it denied the credit union's insurance claim for losses under the credit union's bond. Northeast Alliance FCU seeks monetary damages and a declaratory judgment that would require CUMIS to pay the full amount, plus interest.
The money center supplied cash to more than 5,300 ATMs, including those of several credit unions, which lost a total $5.8 million in the fraud (News Now Sept. 27, 2010). ATM provider Cardtronics Inc. also lost $2.1 million and reportedly shut down about 4% of its ATMs as the result of the fraud (News Now May 24, 2010). MVMC had handled Northeast Alliance FCU's cash replenishment and armored transportation needs for more than 15 years, said the complaint.
From 2005 to February 2010, the document said, MVM's president, Robert Egan, and chief operating officer, Bernard McGarry, allegedly conspired with other employees to misappropriate money belonging to the money center's customers, including Northeast Alliance; converted the funds for the company's or personnel's own use; and co-mingled funds of clients, the complaint alleged.
Both men pleaded guilty to charges of bank fraud and conspiracy to commit bank fraud, according to the court document. They engaged in a practice known as "playing the float," relying on the continual influx of funds to misappropriate clients' funds to cover its operating expenses, repay prior obligations to other clients or keep for their own enrichment, said the court document. "Similar to a Ponzi scheme, 'playing the float' schemes have an ultimate breaking point where the influx of funds will be insufficient to cover the monies misappropriated," it alleged.
In January 2010, federal agencies launched an investigation of the money center and uncovered the fraud. Unaware of the investigation, the credit union requested cash replenishment services on several dates in between Feb. 2 and Feb. 9 for the $565,000 total but did not receive the funds, said the complaint. Egan and McGarry were arrested on Feb. 8, and the Federal Bureau of Investigation was authorized to seize the property. On May 27 that year, the MVMC petitioned for Chapter 11 bankruptcy.
In the lawsuit filed, the credit union claims that CUMIS was aware that the credit union used couriers and armored motor vehicle carriers and other third party servicers and vendors; that the credit union expected its property to be covered from the moment it left the credit union's possession until it was returned to the credit union or its authorized facilities; and that the credit union wired funds each week for replenishing its ATMs and cash teller dispense machines.
The complaint said it was not advised that its "in transit" coverage did not protect the credit union from theft or embezzlement by MVMC representatives when the property was located in MVMC's possession but not within an armored motor vehicle, or when the property was located in the MVMC vault or MVMC bank account. The credit union also alleged it was not advised of the deficiencies in its bond coverage and was not offered a product to cover embezzlement or theft by a third-party vendors.
The case is before U.S. District Judge Edgardo Ramos. It is one of several lawsuits related to the MVMC theft. CUNA Mutual Group does not comment on pending litigation.