FDIC Still Mopping Up Kevin Lewis' Fraud Mess

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

Lewis, in an email response, said the bonds were private placements. But the answer he gave Castleberry to Underwood’s other question was convoluted:

“Oftentimes, there are multiple bonds issued by the same issuer in the same series that are divided amongst buyers,” Lewis wrote in the April 7, 2009, email to Castleberry. “Other times, there can be multiple series from the same issuer but there might just be one bond in the same series, e.g., ABC issuer has 2002A, 2002B and each series might have been different - Series 2002A might have 4 - $500,000 bonds = $2 MM issue and Series 2002B might have 1 - $300,000 bond.

“I realize that can be very confusing,” Lewis wrote. “See if that answers his questions.”

Based on Lewis’ answer, BKD’s Underwood suggested the bonds should continue to be classified as loans “since they would probably not qualify as investment grade,” he said in the April 2009 email exchange.

In June 2009, BKD conducted a loan review for the bank. The bonds, classified as loans, hadn’t been subject to BKD’s loan review procedures, and BKD noted that the bond files it had seen “had nominal documentation,” according to the FDIC’s lawsuit.

And that should have raised red flags, the FDIC said.

“Considering that even a cursory review of the Bond files would have raised concerns about the sufficiency of the documentation, it appears the BKD auditors did not review the files at all, or lacked the proficiency and technical training to understand the implications of the documentation deficiencies,” the lawsuit said. “Had a proper review of the Bond files been conducted, BKD would have determined that the Bonds were fraudulent, which it would have been required to report to [First Southern Bank] management.”

Between December 2008 and Oct. 5, 2009, First Southern bought 13 bonds through Lewis for a total of $10.8 million. The bank bought 10 more bonds from Lewis for a total of $12.5 million between Dec. 16, 2009, and Sept. 29, 2010.

The FDIC is suing for professional negligence, gross negligence and breach of contract.

BKD Cites Limits of Control

BKD said in its motion to dismiss the FDIC’s complaint that First Southern Bank knew that the 2009 audit wasn’t designed to detect fraud.

“The FDIC has failed to plead what, where, when and how BKD would have discovered Lewis’ fraud against FSB that FSB itself never detected,” according to the motion filed by its attorneys, Philip Kaplan of Little Rock and Timothy McNamara of Kansas City, Missouri.

 

 

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