Trustees: Leaders of Affiliated Kited $475M in Checks

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

Cox said the financial strain could have been detected if directors had demanded an audit, as had been provided in the past. Instead, board members relied on management's pro forma draft, "which inaccurately presented the company's bleak financial condition, or relied on no financial data regarding AFS," Cox said.

The board "failed to ask questions or demand an explanation for the missing information," Cox said.

Meanwhile, Affiliated's financial problems were getting worse. For the three-month period that ended Sept. 20, 2008, Affiliated had a loss of $6.2 million, Rice said.

The loss itself violated the terms of Affiliated's $70 million line of credit with U.S. Bank, to which the company reported weekly. In order to avoid a technical default on its debt, Mills and Martinez told U.S. Bank that Affiliated had a net income for that first quarter of $401,000, Rice said.

On Sept. 29, 2008, Mills - and allegedly Martinez - began kiting checks.

Relying on the ‘Float'

Mills and Martinez allegedly developed a check-kiting scheme using checking accounts of Affiliated's related companies Supermarket Investors Inc. and Convenience Store Supply Inc., Cox said.

The alleged check-kiting scheme worked like this:

Martinez would hand-deliver to Mills the daily cash needs report, which had been prepared by an Affiliated accountant showing the cash shortfall based on the anticipated deposits versus the anticipated clearing items.

Mills and Martinez would then discuss the numbers. Martinez allegedly would then instruct Affiliated accountants to cut checks from Supermarket Investors and Convenience Store Supply for the amounts needed to cover the anticipated cash shortfall.

Those internal accountants - the lawsuit didn't say exactly how many - are identified only as "John Does" in the lawsuits.

The kited checks had to be prepared quickly and deposited before 2 p.m. so Affiliated could obtain same-day credit.



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