Trustees: Mills, Martinez Ran Half Billion-dollar Check-kiting Scheme at Affiliated Foods

In the months before the bankruptcy of Affiliated Foods Southwest Inc. of Little Rock, its CEO and CFO were protecting their bonuses by operating a check-kiting scheme that totaled nearly half a billion dollars, according to recent lawsuits filed by Affiliated's trustees in U.S. Bankruptcy Court.

Just ahead of the May 23 trial of former CFO Alexander "Lex" Martinez, the trustees have sued the 14 members of Affiliated's board of directors for allegedly ignoring several red flags that should have alerted them to crimes that occurred from late 2008 until early 2009.

"The Board ... abdicated their responsibilities and failed to use any semblance of due diligence to discover, impede, prevent or stop the scheme," M. Randy Rice, who is the trustee for Affiliated's subsidiaries, said in a complaint filed May 4. "The total amount of this check kiting scheme was $474,800,000."

From the lawsuits emerges a more detailed account of the downfall of Affiliated and its subsidiaries, which was once one of Arkansas' largest private companies with reported annual revenue of $730 million in the fiscal year that ended June 30, 2008, its last full year of operation before filing for bankruptcy protection in May 2009.

At the heart of the accusations: that CEO John 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 so they could collect bonuses, which were based on revenue rather than profit.

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

Click to read the full Arkansas Business cover story on the half-billion check-kiting scheme.