Trustees: Leaders of Affiliated Kited $475M in Checks

by Mark Friedman  on Monday, May. 16, 2011 12:00 am  

In the audited financial statements of Affiliated's subsidiaries, the current notes receivable line item was $11.1 million in 2007, up from $6.2 million in 2006, Rice said.

That increased value on the financial statements made the subsidiaries appear more creditworthy than they were, Rice said.

Affiliated's managers then used those audits to get loans, Rice said in the lawsuit. "The Board, asleep at the switch, let them."

In September 2007, the subsidiaries borrowed $19 million from GE Commercial Finance Corp., but the subsidiaries couldn't service the debt. And that's when the check-kiting began, Rice alleged. And as the subsidiaries were becoming insolvent, Mills and Martinez allegedly "conspired to and did in fact commit bank fraud to cover the shortfalls," he said.

Bonuses Tied to Revenue

Cox said in his lawsuit that Mills and Martinez cooked up the check-kiting scheme to disguise the financial health of Affiliated and to keep the company limping along as long as possible. Cox blamed the board's policy of awarding bonuses based on revenue rather than profit.

The lawsuits don't indicate how much Mills and Martinez were paid or the size of their bonuses.

"This pay structure motivated Mills and Martinez to operate AFS in a fashion to increase revenue, or at least create the appearance of increased revenue," Cox said.

Affiliated's stores were kept open "even if the stores were bleeding money, because closing the stores would have reduced management bonuses," Rice said in the lawsuit.

The board never changed the policy of bonuses being tied to revenue.

What Audit?

As the financial crisis was mounting inside Affiliated, the board of directors never received an audited financial statement for the fiscal year that ended June 30, 2008.



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