Posted 10/26/2010 04:41 pm
Updated 1 year ago
A U.S. District Court judge on Tuesday sentenced John Mills, the former CEO of Affiliated Foods Southwest, to 41 months in a federal prison after the executive pleaded guilty in February to a single count of aiding and abetting bank fraud by participating in a check kiting scheme.
"I'm very sorry to have gotten caught up in this and I regret that what I did was illegal and I don't have any excuses," the 60-year-old Mills said before U.S. District Judge Leon Holmes sentenced him. "Of course I'll abide by any sentence you think is appropriate."
Mills also was ordered to pay $3.2 million in restitution and serve 3 years' probation.
Mills' sentence could be reduced for continuing to cooperate with federal prosecutors in their case against the former CFO of Affiliated, Alexander "Lex" Martinez, who is scheduled to go to trial May 16. Mills has agreed to testify against Martinez, who has pleaded not guilty.
Prosecutors said Mills and Martinez orchestrated a scheme from September 2008 to February 2009 to kite checks from two of the grocery wholesaler's subsidiaries and deposit them in Affiliated's account at U.S. Bank. The total value of the kited checks was about $11.5 million, although the actual loss to U.S. Bank was about $4 million.
Mills' restitution could be lowered if U.S. Bank receives money from the sale of Affiliated's assets or from judgments from lawsuits.
At sentencing Tuesday, Holmes called Mills' crime "very serious."
"I know that Mr. Mills had a position of trust with respect to Affiliated Foods Southwest," Holmes said. "He had a fiduciary duty to that company, to the board of directors and to the shareholders. I'm aware he abused that trust."
But Holmes said that abuse of trust didn't rise to the level that would require more time in prison, as Whatley had pushed for.
The relationship between U.S. Bank and Mills was "simply that of a bank customers and it's an arm's length commercial transaction."
But he said that because Mills didn't have a criminal history, was unlikely to commit the crime again and took responsibility for his action, Mills was sentenced at the low end of the guidelines, which could have been between 41 and 51 months.
Mills is scheduled to report to prison on Jan. 3.
Check Kiting to Cover Cash Flow Problems
In February, Mills pleaded guilty and confirmed to Holmes that the scheme entailed an effort to address major cash flow problems the company began experiencing in mid- to late 2008. According to Assistant U.S. Attorney Karen Whatley, beginning in September 2008, an internal accountant with Affiliated was asked to prepare a daily cash-needs report including each day's cash shortfall. Mills and Martinez would then determine the dollar amount of checks to be drawn on each subsidiary's accounts in order to cover each day's shortage.
The Affiliated accountant was instructed to contact counterparts for the subsidiaries and request they prepare checks made out to Affiliated for the determined amounts needed to cover Affiliated's shortfalls. The requested checks were processed and deposited, in full knowledge that the funds to cover them were not there, into Affiliated's account prior to 2 p.m. each day.
By doing so, Affiliated could obtain same-day credit for the funds. Each day, U.S. Bank withdrew the funds deposited into the Affiliated account and used them to reduce the outstanding balance on Affiliated's $70 million line of credit.
The scheme was discovered by U.S. Bank officials in a routine audit performed in early 2009, at which time Affiliated's line of credit was frozen. Mills, who had succeeded Jerry Davis as Affiliated's CEO in 2004, was suddenly fired in March 2009, and Affiliated was in bankruptcy by early May.
Arkansas Business reported in December 2009 that Mills had asserted his Fifth Amendment right against self-incrimination in a civil suit related to Affiliated's bankruptcy.