Hartford Business Journal

www.HartfordBusiness.com June 6, 2016 • Hartford Business Journal 19 Four Delicious Courses Tableside Chef Dinners Thursday nights at 7 pm With Chef Rob Maffucci As featured on Food Network $75 Per Person + tax and gratuity Vito's by the Park 26 Trumbull St., Hartford, CT 06103 860-244-2200 from page 1 Shannon Hall, allege the credit union artificially inflated profits to boost its top executive's pay. Nutmeg has denied wrongdoing and has not been hit with state or federal regulatory sanctions stemming from the allegations by Ross and Hall, who are asking for back pay, lost benefits, punitive and other damages, and legal costs and fees. The lawsuit names both Nutmeg and its CEO John Holt as defendants, alleg- ing that Holt instruct- ed Hall "on multiple occasions" to push expected loan losses out to a future date, instead of recording them the same month they were likely to occur on the balance sheet as an "allowance for loan and lease losses." The allowance, which is calculated regularly by banks and credit unions, is a reserve designed to protect lend- ers from probable credit risks in their loan and lease portfolios. The complaint also alleges that Holt instructed Ross to stretch out expenses incurred after the closing of an East Wind- sor branch last year, and that Holt refused to let Ross alter the valuation of a Glastonbury facility that the former CFO believed was overvalued by $1 million. The intent of those alleged accounting gimmicks, the suit claims, was to artificially inflate NSFCU's net income, to which the plaintiffs say Holt's bonus and supplemental executive retirement plan (SERP) were tied. "By pushing out the losses, … Holt was able to keep … NSFCU's profits artificially inflat- ed, which allowed his bonus and SERP to be funded, even in months when … NSFCU's profit targets would have fallen short, and also at the expense of proper reporting practices and against the interests of … NSFCU's members and the public in general," the suit reads. The plaintiffs claim that those alleged practices, which are sometimes referred to as "earnings management," violated state and federal law and were inconsistent with Generally Accepted Accounting Principles (GAAP), which all but the smallest federally insured credit unions are required to follow. The suit alleges four counts of wrongful discharge and one count of defamation (relat- ed to a negative performance review placed in Hall's personnel file). Asked to confirm whether Ross and Hall were fired, Miguel Escalera Jr. — an attorney for both Nutmeg and Holt — said he couldn't com- ment, citing personnel confidentiality rules. Nutmeg points to clean audit Nutmeg provided the Hartford Business Journal with a May 31 letter from its external audit firm, remarking on the lawsuit. The letter from Nearman, Maynard, Vallez — which has offices in Miami and Atlanta — addressed to Holt, notes that the firm didn't find anything amiss with Nutmeg's financials during its most recent audit, for the year ended June 30, 2015. Certified public accountant Chris Vallez disputed Hall and Ross' allegation that Nut- meg wasn't following GAAP rules. Vallez also said Nutmeg compares favorably to its North- east peers, with lower than average delinquent loans and higher return on average assets. During the first quarter of 2016, Nutmeg's loan loss allowance was $3.2 million, up from $2.9 million at the end of 2015 and $2.6 million from the year-ago period, according to data from the National Credit Union Administration. The credit cooperative posted net income of $1.5 million in 2015, down from $2.8 million a year earlier. "Our report from the most recent audit peri- od … supports that the credit union is following GAAP," Vallez wrote. "There were no adjust- ments to the financial statements as presented by management. Additionally, there were no material weaknesses related to control defi- ciencies noted during our testing of controls. Our opinion on the overall consolidated finan- cial statements was an unmodified or a 'clean' opinion. This is the highest level of assurance an institution can obtain from their audit firm on accuracy of its financial statements." Lisa Asadourian, a Nutmeg senior vice president, said the outside auditors "directly refute the sensationalized claims made in this lawsuit and reinforce the fact that the lawsuit has no merit." Noted in and attached to the CPA's recent letter to Holt was a management representa- tion letter attesting to the accuracy of the fis- cal 2016 audit. The letter, dated Sept. 18, 2015, is signed by Holt and Ross. Additionally, neither the state Department of Banking — which is the main regulator of the state-chartered Nutmeg — nor the NCUA, which insures it, has publicly announced any enforcement actions against the credit union, which has eight area branches and approxi- mately $397 million in assets. "There have been no penalties of any kind and no factual basis to impose any penalty," Escalera, Nutmeg's attorney, said. Ross was hired as CFO on July 12, 2015, while Hall was hired three months later. Asked for comment on the suit and Nut- meg's defense, Ross and Hall's Hartford attor- ney, Richard Hayber, wrote in an email: "We won't comment on pending litigation for obvi- ous reasons other than to say that we stand by the allegations in the complaint and we are eager to have our day in court." Compensation claims While the allegations are mainly related to the firing of the two men, the complaint also delves into Holt's compensation, describing his retirement package as "excessive." The suit claims the so-called SERP was cost- ing the credit union approximately $45,000 per month. The financial value of the bonus incentive isn't disclosed in the suit. The suit claims examiners from the state's Department of Banking and NCUA expressed concerns in a December meeting about Holt's compensation and its effect on Nutmeg's finances. That meeting capped a required annual examination conducted by the department and NCUA, during which Ross and Hall told examiners about their concerns, the suit said. HBJ asked the banking department last week to confirm the claim that its examiners expressed concern about Holt's compensa- tion. Department spokesman Matthew Smith declined comment. "This is a civil lawsuit between a financial institution and two former employees," Smith said. "It is the policy of the [department] to not comment on pending litigation. An NCUA spokesman also declined comment. Escalera confirmed that Holt has a SERP, which he said is an executive retention tool OK'd by outside auditors. He also confirmed that Holt has a "pay-for-performance" plan, approved by Nutmeg's compensation com- mittee, and tied to financial performance, member satisfaction and other metrics. Several U.S. banks have been fined in recent years by the U.S. Securities & Exchange Commission for understating their allowanc- es for loan and lease losses, which the SEC says can be misleading to investors. n Credit union fires back John Holt, CEO, Nutmeg State Financial Credit Union Is this $14,000 device the world's most secure smartphone? By Ivana Kottasova CNN Money A new $14,000 device from Sirin Labs that went on sale last week claims to be the world's most secure phone, incorporating military-grade security and technology used by intelligence agencies. Special features on the company's "Solarin" smartphone include a switch that activates a "security shield" and enables extra encryption. It also comes with a remote application that allows the owner to locate, lock or even wipe the phone. Sirin Labs was co-founded by Google alum Tal Cohen, Kazakh businessman Kenes Rakishev and Israeli venture capi- talist Moshe Hogeg. The trio hope to cash in on rising priva- cy concerns among high-profile corporate executives. "Cyber-attacks are endemic across the globe," said Cohen. Sirin said it has raised $72 million in venture funding, including an investment from Chinese tech firm RenRen. There are other smartphone manufactur- ers who claim their phones are super secure, such as Silent Circle's Blackphone, which is sold for $799. But Sirin said that high-end design and features set Solarin apart. The Android phone was developed in Sweden and Israel over a two-year period. The device is made up of over 2,500 compo- nents and can be used anywhere in the world. It has all the classic smartphone fea- tures, including a 23.8-megapixel cam- era, 2k resolution screen, 128 GB internal memory and a fingerprint sensor. Solarin is heavy, though. At 250 grams, the smartphone weighs almost twice as much as an iPhone 6. n The "Solarin" smartphone, produced by Sirin Labs. P H O T O | C O N T R I B U T E D

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