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Two Sentenced in Credit Union Ponzi Scheme.

Byline: Peter Strozniak

A former CEO and her assistant received federal prison sentences last month for running an $18 million Ponzi scheme out of a Texas credit union by selling non-member share certificates to at least 10 credit unions across the nation.

Maria Guadalupe Hernandez, 59, former president/CEO of the shuttered $5 million El Paso Federal Credit Union was sentenced to 15 and a half years on Sept. 21 by U.S. District Court Judge Philip R. Martinez in El Paso. On September 29, Hilda Simental Mendoza, 53, the former assistant manager for EPFCU, was sentenced to 10 years.

Judge Martinez also ordered the women to pay restitution of $18,376,542 to the NCUA.

Hernandez and Mendoza pleaded guilty in May to an 11-count indictment that included charges of bank fraud, wire fraud and conspiracy to commit bank and wire fraud.

Starting from August 2007 to September 2012, Hernandez and Mendoza sold 111 non-members share certificates, generally in the amounts ranging from $99,000 to $249,000, to at least 10 credit unions that were only identified in court documents by their initials.

To cover the dividends and principal balance payments of $20,000 to $50,000 a month, they sold new non-member share certificates, a Ponzi scheme that led to the insolvency of the credit union in 2012.

Hernandez told federal investigators that the money from the sale of the non-member share certificates was wired into the credit union's accout at the Federal Reserve and then into the credit union's account at Capital Bank. From there, Hernandez diverted the money into dormant accounts and the accounts of deceased members from which dividend payments were made on the non-member share certificates. Dividend payments also were made from accounts Hernandez set up in the name of family members. She also charged phony fees to these accounts to conceal the fraud.

Hernandez and Mendoza kept a secret list of the non-member share certificates they issued, which they did not record on EPFCU's books. They concealed this list from other employees, the board and the NCUA.

In case auditors visited the credit union, Hernandez said she created fraudulent Federal Reserve statements on a daily basis to reconcile the general ledger. Hernandez also admitted that she submitted 20 Call Reports to the NCUA that misrepresented the credit union's true financial condition, according to court documents.

Mendoza admitted to being aware of the sale of the unrecorded non-members share certificates, calculated the interest due on them and maintained a list of the non-member share certificates on her computer. She later deleted the list after she was instructed to do so by Hernandez. Mendoza also admitted to signing hundreds of dividend checks.

However, Mendoza told investigators that she never questioned Hernandez's instructions and never considered reporting the sale of the non-members share certificates to regulators.

An audit conducted by Lillie & Company LLC, an auditing firm in Sunbury, Ohio, found that Hernandez spent at least $1.1 million on real estate purchases, mortgage payments and vehicle purchases. The stolen funds also paid for family trips to Disneyland and Las Vegas where some of the money was gambled away.

Lillie & Company's audit identified fraudulent activity from 2006 to 2012 that resulted in losses totaling $3,687,042. Due to lack of documentation, the remaining loss of $15.3 million was not included, according to the auditing firm's report.

Court documents and testimony, however, do not indicate whether Mendoza took or used any stolen funds for her benefit.

Hernandez said that to keep the credit union open and to keep its staff employed, she began selling the non-members share certificates after the American Smelting and Refining Co. shut down its copper smelter operations in El Paso.

What's more, Hernandez told federal investigators that "part of her motivation was to keep EPFCU open and keep Simental Mendoza employed because she believed that Simental Mendoza was very unattractive and would not be employable anywhere else."

Mendoza's lawyer, Louis E. Lopez Jr., argued that while its true that Hernandez could not have pulled off the fraud scheme without Mendoza's assistance, there was no evidence that Mendoza received any funds or anything of value.

Lopez said that Hernandez took advantage of Mendoza's insecurities and that Hernandez was the only person who benefited from the scheme.

The fraud was uncovered in September 2011 when an NCUA examiner found irregularities. The examiner realized that Hernandez provided fake Federal Reserve statements that purported to reconcile the credit union's general ledger but it did not list the unrecorded debt of the non-member share certificates.

Nonetheless, a 2013 material loss review criticized the NCUA for failing to detect red flags.

The NCUA could have reduced losses to the share insurance fund had the regulator done a better job of identifying and following up on fraud risk factors at the failed cooperative, according to the Material Loss Review by the NCUA Inspector General Office.

The report also blamed Hernandez and financially unsophisticated volunteers for the failure. The report revealed that the credit union's examiner-in-charge later joined the credit union's board.

Examiners failed to note or question excessive fee income and other unusual transactions, including non-member shares, on two Call Reports in 2009 and 2011 that did not appear on other Call Reports.

The report contained several redacted sections that concealed details. However, one passage left untouched said share certificates were omitted from the credit union's books.

The report also highlighted challenges within the NCUA to detect and address fraud, including a lack of specific fraud detection training for examiners, no minimum procedures to identify or respond to suspicions of fraud, and challenges due to scheduling issues to follow up on risk factors.

Achieving appropriate internal controls is also a challenge for small credit unions, the report said.

Additionally, the report said volunteers were too close to management to effectively oversee the credit union, spending considerable time together and interacting socially.

A recently retired NCUA examiner, who had been the credit union's examiner-in-charge, joined the credit union's board during the EPFCU's last year before liquidation.

The investigation found no link between the examiner and the credit union's failure, and his appointment complied with NCUA rules and regulations. However, because the credit union failed due to suspicious activity that may have occurred while the examiner was supervising the credit union, his later participation could appear to be a conflict of interest, the report said.

In 2014, the NCUA sued Hernandez and successfully secured an injunction to freeze her assets, including four homes in Florida, Nevada and Texas. According to Multiple Listing Service, the estimated market value of the homes is more than $976,000.

It wasn't until August 2015, however, when Hernandez and Mendoza were indicted by federal prosecutors.
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Publication:Credit Union Times
Geographic Code:3ARGE
Date:Oct 3, 2016
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