Key Suspect in Stockbroker Fraud Dies, Investigation Stops

New London, CTIt's one of the few occasions where stockbroker arbitration proves useless in allegations of stock fraud, stock losses and the need for negotiated compensation: when the alleged wrongdoer suddenly dies, putting an end to an investigation.

Such may have been the case when Edwin F. Rachleff, an 82-year-old stockbroker, took his own life on the same day that regulators closed the New London Security Federal Credit Union and declared it insolvent. Rachleff had served the institution for decades, but at the time of his death was under criminal investigation for suspicion of embezzlement.

A report by the National Credit Union Administration's Office of Inspector General (NCUA) asserted the former investment account manager embezzled about $12 million from the New London Security Federal Credit Union.

A criminal investigation by the US Attorney's Office ended with the death of Rachleff, who jumped to his death from the Mohican Senior Apartments on July 28, 2008. According to The Day, a newspaper from New London, CT, the report does not disclose where the missing millions wound up.

However, the NCUA report does point to a number of red flags that somehow went unseen in the years leading up to the alleged stockbroker fraud. The financial institution's board of directors was lax in its oversight, allegedly allowing four years to go by without any activity on the part of the credit union's Supervisory Committee.

Peter Marcus, owner of Lee's Toy & Hobby in Groton and a former member of the credit union who recovered funds after the institution failed, said, "It became like a fraternity, and everyone trusted everyone. ... Nobody ever thought this would happen."

The NCUA's insurance fund paid out about $9.6 million in losses against a reported $12.7 million in assets. NCUA losses of less than $10 million are normally not investigated, but since losses accounted for 76 percent of the credit union's assets, the loss review was warranted.

The NCUA, which itself shoulders blame for a lack of oversight, revealed that warning signs first appeared in 2003, when the external auditor stopped getting adequate responses from the stock brokerage A.G. Edwards confirming the credit union investments.

An NCUA examiner discovered during a routine annual audit beginning in June 2008 that Rachleff "could not answer any questions about the investments" in the institution's $12 million portfolio.

Earlier this year, the NCUA filed an $11.8 million claim against Rachleff's estate, saying the financial adviser had created fraudulent account statements. Rachleff's probate file listed only $37,275 in assets.