For example, the bank awarded most of the contracts that we reviewed without competition and without any written justification for going sole source. Also, we found that at times the bank officials did not timely prepare required procurement requests and did not always comply with requirements for modifying and/or evaluating contracts.

The bank has recently adopted a new procurement manual which, if followed, should correct many of the contracting deficiencies we identified.

I would emphasize the words "if followed."

It is important to implement the new policies and procedures in this particular case.

In the area of communication methods, we found that the bank board and management have taken or were in the process of taking several actions to increase the flow of information to and feedback from member cooperatives in specific and the public in general.

Communication methods now used by the bank include public hearings, annual meetings, newsletters, and other special mailings. A number of allegations have been made by former bank employees that the bank did not consistently apply personnel policies. We did not find any evidence of this for the policies we tested.

We did find that the bank changed certain policies one or more times and put other policies into practice before they were written and published.

We believe that changing policies and applying policies before they were written contributed to how former employees perceived the way they were treated.

A significant area covered in our review was questions concerning the elections. In January 1982, the bank's shareholders elected nine new board members. The board, on May 26, 1982, reported to the bank's shareholders that its review of the election process showed that the election was handled with integrity and completely in accordance with the election rules.

However, our review of the election process identified a number of concerns about the election.

Examples of our concerns follow.

The bank established more stringent eligibility requirements for the purchase of voting stock after it announced the election.

On the one hand, these requirements prevented many cooperatives which had applied to purchase stock from becoming shareholders in time to vote.

On the other hand, these same requirements were not consistently applied to all 62 cooperatives that were issued stock after the establishment of these new eligibility requirements.

The election rules state:

In order to be counted. . . each vote by a stockholder must be cast on the official ballot form issued by the bank, and must be certified by the corporate secretary or other official of the stockholder who is authorized to certify its corporate documents. The bank disqualified five ballots because an officer of the cooperative other than the secretary signed the certification.

Our review of relevant documents and interviews with present and former bank officials suggested several differing explanations

why the bank rejected the ballots. Had these five ballots been qualified, the election of one director would have changed.

Five election envelopes were opened before the official election date.

Chairman ST GERMAIN. Excuse me. Let's make sure everybody hears that one. Had these five ballots been qualified, the election of one director would have been changed.

In other instances where you feel there probably were violations or some practices that weren't really and truly what they should have been, you stated it wouldn't have substantially changed the ultimate outcome, but in this instance it indeed did mean the difference of one director being elected?

Mr. PEACH. That is correct. There also is a door opened to some uncertainty in terms of the next point in my statement.

Basically that is the point that five election envelopes were opened before the official election date.

Chairman ST GERMAIN. So who knows what was in those envelopes?

Mr. PEACH. Who knows what was in the envelopes when they were sent in?

Chairman ST GERMAIN. Had the contents of those envelopes been different, is there any way for us to know whether or not the ultimate result would have been changed?

Mr. PEACH. Not with any certainty.

Chairman ST GERMAIN. But it does raise one question and that is that the letter that was sent to me and the shareholders assuring us that Touche Ross had done this, that and those, had certified the results, et cetera, was terribly inaccurate, was it not?

Mr. PEACH. That is right. There were inaccuracies or incomplete and misleading statements in the letter.

Chairman ST GERMAIN. Bordering on lies? I will say that. You don't have to comment.

Mr. PEACH. Thank you, Mr. Chairman.

In the case of those that were opened, the envelopes opened before the election date, there was no record of who opened the envelopes or the circumstances leading to the premature opening.

A sealed envelope was a shareholder's only safeguard that its completed ballot was the one used in the tally. Once the seal was broken, a ballot could have been replaced undetected because the official ballot contained no identifying marks.

With respect to other statements we would characterize as inaccurate, incomplete, or misleading, the report said that the CPA firm that assisted in the vote count certified the election results. An official of the CPA firm told us that the firm did not certify the election results because they did not control all aspects of the election.

Chairman ST GERMAIN. Is there any way to know how many ballots were actually sent in as opposed to how many were counted? Mr. PEACH. There is no way that we have from the standpoint of the review we made, or our involvement with the ballots to know that.

Chairman ST GERMAIN. It could be that a number of ballots disappeared?

Mr. PEACH. Certainly. We dealt with it from the standpoint of having made available to us the ballot forms at the office of the accounting firm involved in counting them.

We looked at it from the standpoint of what was made available to us there. We had to operate from the assumption that all were available.

Chairman ST GERMAIN. Yes.

Mr. PEACH. Were provided to us.

The report said that every effort was made to qualify eligible cooperatives. As I noted earlier, the bank tightened its eligibility criteria after it announced the election and that action prevented a large number of applicants from becoming shareholders in time to vote.

The report said that 62 of 66 cooperatives that submitted applications to purchase stock by the record date were able to vote. Our review of bank records showed that about 175 cooperatives, not 66, had applied for bank stock. In other words, approximately 113 instead of 4, were not approved to vote in the election.

The report said that no official envelope had been opened prematurely. As I mentioend previously, five such envelopes had been opened before the official election date.

To summarize, Mr. Chairman, we believe that the bank is at a crossroads in its history.

As we have pointed out, the bank cannot now demonstrate that it will be capable of developing the size and quality portfolio needed to allow it to mature into a viable organization.

However, this situation should be tempered by the fact that the bank has only been operational for a little over 3 years and may not have had the time needed to demonstrate an ability to develop the cooperative community as envisioned by its enabling legislation.

Also, the bank has had to adjust to the loss of financial support from the Federal Government earlier than originally envisioned and has had to contend with much turmoil resulting from changes made within its organization.

In addition, the bank is in the process of establishing the separate corporation provided for by the 1981 amendments to carry out title II activities and only time will tell how effective this organization will be in carrying out its responsibilities and in obtaining the necessary funds to do so.

Mr. Chairman, this concludes my statement. We will be pleased to respond to your questions.

[Mr. Peach's prepared statement, on behalf of the U.S. General Accounting Office, follows:]

UNITED STATES GENERAL ACCOUNTING OFFICE

WASHINGTON, D.C. 20548

STATEMENT OF

J. DEXTER PEACH, DIRECTOR

RESOURCES, COMMUNITY, AND ECONOMIC DEVELOPMENT DIVISION

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

SUPERVISION, REGULATION AND INSURANCE OF THE

HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS

ON

THE NATIONAL CONSUMER COOPERATIVE BANK

Mr. Chairman and Members of the Subcommittee:

We appreciate the opportunity to be here today to discuss our review of selected matters concerning the National Consumer Cooperative Bank.

The Bank, established by the National Consumer Cooperative Bank Act (12 U.S.C. 3001 et. seq.) in August 1978 to provide financial and technical assistance to consumer, housing, and producer cooperatives has had a turbulent history. Within a year from the date the Bank made its first loan and before its regional offices were fully operational, the Administration moved to abolish it. The Congress in amendments to the act dated August 13, 1981, chose to convert the Bank from a mixed ownership government corporation to a congressionally chartered financial institution and transferred control of the Bank from

23-148 0-83--2

the Federal Government to the Bank's shareholders. In addition, the amendments converted class A stock held by the U.S. Treasury and the remainder of the Federal Government's capital commitment totaling $184 million into capital notes. Also the amendments did not provide for future Federal appropriations for the Bank's program administration.

Title II of the original act established a Self-Help Office to loan to less creditworthy cooperatives and administer developmental and outreach activities. The amendments, however, required the Bank's Board of Directors to establish a nonprofit corporation to perform these functions in the future. These changes coupled with controversial organizational changes in June 1981 and a large turnover of Bank employees through dismissals, resignations, and job abolishments have had a negative impact on the Bank. This is reflected in a low quality loan portfolio as reported by the Farm Credit Administration, negative publicity and charges of wrongdoing, low employee morale, and a disillusioned cooperative community.

At your request Mr. Chairman, we reviewed the Bank's operations from inception concentrating on Title II non-loan activities, regional operations, the 1982 process for electing nine board members, the contracting process, the organizational structure, communication methods, personnel matters, conflictof-interest policies, and the legality of one loan. We reported separately on the legality of a $5.2 million loan to the Dunbar No. 1 Cooperative Housing Corporation and the adequacy of the Bank's conflict-of-interest policies by letter dated December 16, 1982.

We have now completed our field work on the remaining items and are in the process of preparing our draft report which we expect to furnish to the Bank for formal comment in the near future. At this time I will briefly summarize our preliminary findings and conclusions.