Trustees: Leaders of Affiliated Kited $475M in Checks

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

Then the Affiliated deposits were withdrawn by U.S. Bank in a process known as sweeping the account and used to lower the outstanding balance on Affiliated's line of credit, Cox said.

"By including the kited checks to artificially reduce their outstanding credit line balance, AFS was then allowed to withdraw more money from its line of credit than it would have been allowed to had the kited checks not been deposited," Cox said.

The additional money kept other checks to creditors from bouncing, Cox said.

"This resulted in a one-day float of additional cash," Cox said. "The following day AFS drew funds from the line of credit and deposited those funds in CSSI and SII's account to cover those checks kited the previous day. Then, new kited checks were issued by CSSI and SII based on that day's cash needs."

It is unclear how Mills and Martinez hoped to stop the check-kiting scheme once it was set in motion. The size of the kiting steadily increased as the scheme continued.

From Sept. 29 through Nov. 21 of 2008, the amount of checks kited usually was between $1 million and less than $3 million per business day. But after Dec. 3, 2008, the daily amount kited never fell below $4 million per business day.

The daily amount reached $10.3 million on Feb. 25, 2009, and then $11.6 million on Feb. 26, 2009 - huge numbers for a company that had net income of $7.3 million for 2006 and 2007 combined.

On Feb. 27, 2009, U.S. Bank discovered that Affiliated was overdrawn by more than $11 million and declined to honor more credit requests.

The board should have known that the subsidiaries didn't have the money in their bank accounts to cover the checks to Affiliated, "but nevertheless close to half a billion dollars in insufficient checks were being written on these accounts to perpetrate this massive check kiting scheme," Cox said.

"We did trust them a lot," Doucet, the board member, told Arkansas Business last week.

By that time it was too late for Affiliated.

"Unable to secure credit, AFS's inventories declined drastically and it lost a number of key customer relationships," Cox said.



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