FDIC Still Mopping Up Kevin Lewis' Fraud Mess

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

BKD said in the lawsuit that when it was hired in June 2009 to conduct the 2009 audit, it warned First Southern that the audit isn’t “designed to provide assurance on internal control. … Because of the limits of internal control, errors, fraud, illegal acts or instances of noncompliance may occur and not be detected.”

BKD also blames First Southern’s management for not doing a better job at detecting the fraud.

“The FDIC’s Complaint pleads a world where FSB bankers apparently had little or no responsibility for investigating the particulars of each proposed transaction, meeting the principals, inspecting construction plans or existing infrastructure, or otherwise exercising appropriate due diligence,” BKD said in its motion.

The FDIC’s Barr declined to comment on the lawsuit. BKD’s attorney Kaplan referred questions to McNamara, who didn’t immediately return a call last week.

What’s Necessary to Win

In order to win the lawsuit, the FDIC will have to show that BKD deviated from the general accepted auditing standards, said George Washington University law and accounting professor Lawrence Cunningham, who wrote the textbook “Introductory Accounting & Auditing for Lawyers.” It also will have to show that “if these steps had been taken properly, they’d have found out that these bonds were phony far earlier on, minimizing all those losses,” he said.

For BKD to prevail, it will have to show that it followed the accepted auditing standards and argue that “sometimes these crooks are so good that not even a great auditor can” detect the fraud,” Cunningham said.

BKD might be helped in making that argument by the fact that eight other banks either bought phony bonds from Lewis or loaned him money secured by the worthless bonds. Two other banks were stung by Lewis because they loaned him money to buy the controlling interest in First Southern and the shares of First Southern stock that he used as collateral were worthless when the bank failed.

U.S. District Court Judge James Moody Jr. hasn’t ruled on BKD’s motion to dismiss as of Thursday, but the case has a proposed trial date of July 13, 2015.

 

 

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