Two former credit union executives are suing Nutmeg State Financial Credit Union (NSFCU), alleging they were fired in retaliation for bringing to light fraudulent accounting practices designed to inflate the CEO’s executive bonuses and retirement plan.

Former CFO Timothy Ross and Shannon Hall, formerly vice president of lending, brought the complaint against the Rocky Hill-based credit union in Hartford Superior Court late in May. The story was first reported by the Credit Union Times.

The two alleged in the lawsuit that the credit union engaged in questionable accounting practices, overvaluing certain assets and underreporting loan losses, and not in accordance with generally accepted accounting principles (GAAP).

Moreover, President and CEO John Holt had negotiated a compensation package that included bonuses and a supplemental executive retirement plan, in addition to his annual salary, and which the plaintiffs estimated cost the credit union more than $45,000 per month, the lawsuit said.

According to the lawsuit, Holt’s compensation package included bonus payments if certain profit targets were met, so he encouraged accounting practices that overstated short-term earnings so he could meet his bonus targets.

He did this in part by encouraging his subordinates to push out loan losses to a later date, rather than report them when GAAP would dictate, and by overvaluing one of the credit union’s facilities by about $1 million, the lawsuit stated.

The lawsuit states: “By pushing out the losses, Defendant Holt was able to keep Defendant NSFCU’s profits artificially inflated, which allowed his bonus and [supplemental executive retirement plan] to be funded, even in months when Defendant NSFCU’s profit targets would have fallen short, and also at the expense of proper reporting practices and against the interests of Defendant NSFCU’s members and the public in general. Indeed, based upon Defendant Holt’s manipulations, the true condition of Defendant NSFCU was concealed, in violation of state and federal law, to the detriment of the credit union and its members but to the benefit of Defendant Holt.”

Further, the plaintiffs alleged that Holt discouraged employees from talking frankly with regulators, writing that “during a planning meeting for the review with the management team, Defendant Holt told senior staff, including Mr. Hall and Mr. Ross, that ‘communications and interactions’ with the examiners ‘should be held to a minimum’ and ‘do not offer any information beyond what is absolutely required.’”