Lafayette Lost First Conversion Ballot; Recount Was Never In Play

Credit Union Times   October 17, 2007
By David Morrison

KENSINGTON, Md. — Documents have come to light that suggest the $296 million Lafayette Federal Credit Union initially lost the ballot on whether or not to convert to a mutual bank charter and may have prevented a vote recount and certification that could have shown that loss.

The first report on election results had shown supporters of the charter change winning the contest by 18 votes, the narrowest margin ever in a CU-to-bank charter change election. But that winning ballot was later decertified and the credit union withdrew its application to convert its charter.

The documents also suggest that some in the CU's camp were unhappy the credit union's independent inspector of the election, the accounting firm RSM McGladrey, had contacted NCUA when it decertified the CU's initial vote count. They also outline, ironically, that it was an e-mail that the CU sent during the balloting that triggered the investigation into the vote count in the first place.

McGladrey produced the documents in response to a subpoena from NCUA which is part of an ongoing investigation into Lafayette's charter change balloting. The agency released the documents as part of a request under the Freedom of Information Act from Bill Brooks as part of his ongoing legal fight with the CU.

The documents provide the clearest picture so far of at least one part of what was going on behind the scenes as Lafayette first appeared to narrowly win the balloting, only to see the vote decertified and then to announce it was abandoning the charter change attempt.

According to a Feb. 9 letter from McGladrey to NCUA about the balloting controversy, the firm had initially certified the vote on Dec. 19, 2006 as 2,555 votes for the conversion and 2,537 against, giving proponents the 18 vote majority. But a subsequent recounting of the ballots seeking to investigate some balloting discrepancies resulted in a count of 2,556 in favor of the conversion and 2,562 against, giving opponents a victory by six votes, the firm said.

At the time, Lafayette would only blame McGladrey for the discrepancy in the vote count and asserted that errors by the firm and the closeness of the vote would prevent the CU from ever really knowing the actual vote count.

"We are deeply disappointed that the integrity of the balloting process has been irredeemably compromised due to errors by RSM McGladrey in the tabulation process," the credit union said in the press release at the time. "In the opinion of the Board, these errors make it impossible to confidently ascertain the will of the membership."

Due to the closeness of the vote and the errors that were made by the inspector of election, the Board is doubtful that a new third party inspector of election can provide unqualified certitude to the Board in order for the credit union and its membership to be confident of the final outcome. As a result, the Board has determined to terminate the Plan of Mutual Charter Conversion," the CU added at the time.
But the documents suggest that McGladrey believed that a recount of the entire vote was not only possible but also necessary and that the firm urged the recount on the credit union several times in the wake of the decertification.

According to McGladrey, the first suggestion for a recount came from Dale Hotz, a managing director for McGladrey, in a Jan. 5 phone call after the firm had decertified the previous election results and notified the CU and NCUA about the decertification.

In McGladrey's account, Hotz spoke on the phone with three of Lafayette's lawyers–Richard Garabedian, Lafayette's lawyer during the conversion process with the Washington, D.C. law firm of Luse, Gorman, Pomerenk, & Schick and Kent Krudys, with the same firm who had also been working on the conversion. McGladrey also states that Eric Luse, a principal partner in the firm, may have also been on the call, but did not say this absolutely.

In McGladrey's account of the call, Hotz said that due to the "closeness of the counts, the appropriate course of action would be a complete recount of all days." McGladrey told the agency that it made similar pleas to be allowed to do a recount on Jan. 8 and Jan. 9.

The firm said that on the Jan. 8 call from Hotz and its in-house council to Lafayette's counsel and then Lafayette CEO Michael Hearne the firm stressed that "absent a recount, the extent and impact of the error on the conversion vote cannot be definitely known."

McGladrey did not speculate on why Lafayette ultimately refused to allow a recount, but the firm's statement on the events said its in-house council remembered Krudys from the Jan. 8 phone call as saying, in regard to a recount, that "Lafayette may not want to know the results." But the firm added that the counsel "believes but is not sure" that Krudy's said this.

Garabedian has not responded to a request for comment on McGladrey's account of the press calls as of press time.

The firm's account of the ballot counting problem also did not offer any explanation on how the original miscount had occurred, but it did contain a detailed account of how it had been discovered.

On Nov. 3, 2006 Lafayette sent an e-mail to some of its members who worked at the U.S. Small Business Administration which, the agency contended, had violated some of its disclosure regulations and "improperly implied that NCUA has endorsed Lafayette's conversion materials." The CU has specified that it had not necessarily agreed with NCUA's position on the e-mail but agreed to send a "curative" or clarifying e-mail on Nov. 16.

Now this was during part of the time when the CU was collecting votes from its members on the conversion question and the agency asked both about the possibility that some of the members who voted yes during the Nov. 3 – Nov. 16 time period did so because of the CU's e-mail and the fact that the CU's account of the number of votes during that period did not tally with the number of votes during the same period it had reported earlier. The investigation into the discrepancy is what uncovered the missing 32 "no" votes that led the firm to decertify the vote.

McGladrey has remained quiet on the question of the Lafayette balloting since it decertified the vote and made a request of NCUA not to make these documents eligible for release under the Freedom of Information Act, but these documents coming to light have left some questions on the table.

Loose Ends Still Dangling

For example, during the Jan. 9 phone call McGladrey recalled Lafayette's counsel being upset that the firm had notified NCUA that it decertified the vote. In the firm's account of the phone call, McGladrey said Lafayette's counsel "expresses unhappiness that RSM contacted the NCUA directly." The law firm has not yet responded to inquiries about why it had been unhappy that the agency had been notified of the certification.

Likewise, the brokerage firm of Sandler O'Neil has not yet commented on McGladrey's report that one of its principals, Louis Parr, contacted Hotz on Aug. 14 regarding the Lafayette voting. In the firm's statement Hotz said Parr contacted him by phone about "encoding ballots and the mailing process" and Hotz told him that McGladrey had no role in the mailing other than collecting and tabulating the returned ballots.

The firm also reported that it had not tracked the ballots which the CU delivered directly for tabulation but recalled at least one occasion when Lafayette executive Juan Marulanda hand delivered ballots prior to the Special Meeting on the conversion and another occasion where the CU forwarded ballots by mail.


© 2007, Used with permission from The Credit Union Times. All rights reserved.

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