FDIC Still Mopping Up Kevin Lewis' Fraud Mess

by Mark Friedman  on Monday, Aug. 4, 2014 12:00 am  

The FDIC’s loss might be reduced, though, if the receiver is successful in the lawsuit against BKD.

‘Excellent Investments’

The FDIC asserts in its lawsuit that, had BKD had done its job, Lewis could have been exposed as a criminal in mid-2009, almost a year-and-a-half before he was. But it wasn’t until the fall of 2010 that FDIC examiners, during a routine examination, discovered that all 23 improvement district bonds that the bank had bought from Lewis since 2008 — $23.3 million worth — were fake. The bonds exceeded the bank’s equity capital of $19.3 million.

First Southern began operating in 2005, and on the last day of 2008 it bought its first bond peddled by Lewis: $750,000 from Hay Meadow Property Owner Improvement District No. 1. Bank officials wouldn’t learn until late in 2010 that the improvement district didn’t exist.

Before the scheme was uncovered, though, the bank recorded those bond investments as loans in its financial statements.

In April 2009, First Southern CEO Woody Castleberry asked BKD how it should handle bonds on its books.

“We would prefer to book them as bonds in our portfolio, but we thought we should get your input,” Castleberry said in an email to BKD that was attached as an exhibit in BKD’s filings.

Castleberry also touted how solid the bonds were.

“These are small, Arkansas improvement districts that have been formed with the assistance of the law firm of the fellow who is the driving force behind” buying the majority ownership interest in the bank, he wrote about Lewis. At that time, Lewis was buying a majority interest of the bank through a trust he created with his children as the beneficiaries.

“I’ve looked into them … and they are excellent investments, especially given the tax free yields they offer,” Castleberry said in the April 2009 email. “They pay annual equal payments of principal and interest.”

BKD’s managing partner, Ryan Underwood, then asked Castleberry if the bonds were private placement or if they had been available for sale to the general public. He also wanted to know what percentage of the bonds the bank bought.

Castleberry turned the questions over to Lewis, who began covering his tracks.

 

 

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