Posted 8/3/2011 11:14 am
Updated 12 months ago
Kevin Lewis, the former Little Rock attorney connected to fake special improvement district bonds that cost Arkansas banks millions of dollars, pleaded guilty to one count of bank fraud in federal court on Wednesday.
Lewis, 43, admitted selling the bonds to First Southern Bank in Batesville and several other Arkansas banks. He agreed to pay restitution of nearly $40 million. He also surrendered his passport in anticipation of a later sentencing hearing, but U.S. District Judge James S. Moody allowed him to remain free without electronic monitoring.
The statutory maximum sentence for bank fraud is 30 years and a $1 million fine, but U.S District Attorney Christopher Thyer, in a news conference after the hearing, said the sentencing guidelines for Lewis' particular crimes call for between 121 and 151 months in prison.
Thyer called the case "the largest fraud in the history of Arkansas." He said the first fraudulent bonds date back to 1997.
The bank fraud count covers fraud of more than $20 million and less than $50 million.
Lewis, wearing sunglasses, entered the court with his attorney, Tim Dudley of Little Rock. The prosecutors were Assistant U.S. Attorneys Karen Whatley and Stephanie Mazzanti.
The exposure of Lewis' scheme, first reported by Arkansas Business in December, triggered lender lawsuits tied to more than $23 million in outstanding debt amassed by Lewis and his various entities.
The financial damage tops $50 million when including bogus bond sales, which caused the demise of First Southern Bank of Batesville. Thyer called Lewis' scheme a Ponzi in which fraudulently borrowed money was used to pay interest on earlier fraudulent loans, and those payments reduced the amount lost to a figure just under $40 million.
Other Arkansas banks were stung by Lewis' fraudulent bonds, including Centennial Bank, owned by publicly traded Home BancShares of Conway; Capital Bank of Little Rock; First Community Bank of Batesville; and Liberty Bank of Jonesboro. He also defrauded First State Bank of Lonoke by borrowing $4.6 million using stock in First Southern Bank of Batesville as collateral.
In court on Wednesday, Whatley confirmed that Allied Bank of Mulberry was also a victim of his scheme. Allied reported a fourth-quarter loss in January tied to a Lewis bond. But at that time the bank would not confirm its rumored exposure to the scam.
Whatley also listed Citizens State Bank of Bald Knob among the list of bank victims.
Lewis has kept a low profile since banks caught on to the fake bonds late last year. He has been pursued by banks and other creditors seeking financial recovery. And although his victims had trouble serving Lewis with civil suits after his crimes were uncovered, Dudley pointed out to Judge Moody that Lewis had not fled from Arkansas.
"He's known that this day was coming for months and months, and he's still here," Dudley said in successfully arguing against the need for electronic monitoring.
First Southern Collapse
Lewis, through his PA Alliance Trust, had bought 53.3 percent of First Southern Bank's stock by 2009. As an investor in the bank, Lewis then began selling improvement district bonds to First Southern, and in 2010 he bought more First Southern stock that increased his ownership to 65 percent.
During a routine examination of First Southern in October, the Federal Deposit Insurance Corp. questioned the concentration of $22.7 million worth of improvement district bonds in the bank's investment portfolio.
The bank's attorneys and accountants discovered that the Lewis bonds were fake when the bank tried to sell them.
On Dec. 1, First State Bank of Lonoke sued Lewis for fraudulently misrepresenting the financial condition of First Southern Bank and defaulting on two loans totaling $7.6 million. Lewis had used his shares in First Southern as collateral for the loans.
Soon other banks were filing lawsuits against Lewis for defaulting on loans.
Woody Castleberry, the founder and former CEO and president of First Southern Bank, told Arkansas Business in May that he believed Lewis was using bogus bonds to fuel a Ponzi scheme.
"He would have legitimate bonds that he helped put together and those bonds paid out," Castleberry said. "At some point he discovered he could put money in his pocket by issuing fraudulent bonds, and when he did that, he had to start issuing more bonds to make sure he kept everything current."
(With reporting by Gwen Moritz.)