WEST PALM BEACH, Fla. – More than 100 members of IBM Southeast Employees FCU, most of them IBM retirees, have reached a settlement of a class action suit claiming the credit union is responsible for more than $10 million they lost when a third-party investment broker hired by the credit union sold them what turned out to be bonds backed by a fraud.
But under an unusual settlement, the credit union will immediately pay the members $950,000 and assign to them the rights to $8.9 million in reimbursements it is seeking from its insurer, CUMIS Insurance Society, a unit of CUNA Mutual Group.
The members bought the bonds issued by Cornerstone Ministries, purportedly to finance churches and other faith-based products, from Wellstone Securities, a third-party broker hired by the credit union. But the bonds, which turned out to be financing low-income housing and other speculative real estate projects, eventually went bust, costing credit union and other investors an estimated $140 million of losses.
Claudia Schorrig, an IBM employee and lead plaintiff in the class action who bought the bonds at the credit union’s offices, said based on the credit union’s recommendation, she initially invested $50,000 in Cornerstone bonds. Later, she bought an additional $10,000.
The class action suit filed by the members claims the CU is responsible for millions of dollars of their losses because it solicited member investments and even advertised in its newsletter for Wellstone Securities to sell the bonds issued by one of its affiliates.
The case has seen a flurry of cross-action suits, with members suing IBM Southeast Employees, which, in turn has sued CUMIS over its refusal to cover the losses. CUMIS, in turn, sued the credit union seeking a declaratory motion that it is not responsible for the losses. That suit was dismissed last month but CUMIS has appealed the ruling.
The proposed class action settlement, which must be approved by the federal court here, would cover all credit union members who bought the Cornerstone Ministries bonds from Wellstone between June 2004 and September 2008. More than 100 credit union members bought a total of $10.5 million of the bonds.
The federal court has scheduled a hearing on the settlement for Jan. 13, 2012.
Cornerstone, which financed thousands of faith-based projects, ended up investing funds gathered from the credit union and other investors in low-income housing, retirement homes and other risky real estate projects. The company, which sold $142 million of bonds to more than 3,600 church-goers and other investors, filed for bankruptcy in February 2008 amidst the crash of the mortgage markets, costing investors tens of millions in losses. Investors in the bonds such as the ones sold to members at IBM Southeast are expected to recover between eight cents and 30 cents on the dollar.
