Posted 4/21/2014 12:00 am
Updated 6 months ago
Of all the Arkansas banks ensnared in the alleged serial loan fraud by Dennis Smiley Jr., First Western Bank of Booneville could be in the best position to recover money from him.
The $302 million-asset lender appears to be at the front of a line of lenders with a claim to almost $552,000 from Smiley’s executive compensation account at Arvest Bank.
First Western may have perfected its security interest in the account by filing a Uniform Commercial Code Financing Statement with the Arkansas Secretary of State on Feb. 3, 2011.
That UCC filing should’ve served as a public notice to other lenders that Smiley had pledged the assets of his Arvest account as collateral on loans from First Western. However, few, if any, lenders checked the open records.
Such a fundamental step would have revealed that Smiley was pledging the same collateral over and over to what became a string of lenders.
This alleged ploy allowed Smiley to use an asset worth several hundred thousand dollars during the past few years to help borrow more than $4.5 million.
“That is just bizarre,” said a Little Rock banking lawyer. “You’re crazy if you don’t do a UCC search. You’re reckless if you don’t do a search.”
Several banking lawyers contacted agreed to talk about the Smiley controversy but only on condition of anonymity because their firms do legal work for some of the banks involved.
Some believe Smiley’s standing as a fellow bank executive helped lull lenders into a false sense of security. His knowledge of the loan system also helped him to defeat its safeguards.
“We’re taught to run all the bases, but when someone manufactures the bases, it gets really hard,” said Joe Edwards, CEO of Benefit Bank of Fort Smith. “You’re touching all the bases, but you’re dealing with someone who knows what bases you’re going to touch.
“I think we all have a similar story. We all feel like we’ve all been held up and robbed by a friend. We also feel ashamed that we couldn’t figure it out. We were so emotionally stunned by all of this it took us 24 hours to come to grips with it.”
Benefit Bank hasn’t filed a claim yet, but Edwards estimated its loss on five Smiley loans at about $300,000.
Benton County Circuit Judge John R. Scott is tasked with the job of sorting out the various civil claims against Smiley. A hearing date for the end of May or early June is expected to attract a cattle call of lawyers to haggle through the issues.
Smiley had not, at least by last Wednesday, been charged with any crime, although Arkansas Business sources confirm a federal criminal investigation of his borrowing habits.
Some lenders filed UCC claims, and others obtained documentation securing what they thought was legal control of Smiley’s Arvest account as a safeguard measure. Some lenders took both actions to protect their loans. Some banks want a nonjury trial, and others want a jury trial.
After Smiley resigned on March 13 as CEO of Arvest Bank’s operations in Benton County, the company issued two cashier’s checks in his name that liquidated the scandal-tainted account. Arvest officials asked the court to take the checks and determine who was entitled to the money. Arvest also noted that Smiley was not permitted to pledge the assets of the account under the terms of the Arvest Bank Group Inc. stock and option plans.
Yet documents submitted so far by three lenders indicate Arvest Bank officials signed control agreements giving them security interest in Smiley’s account.
Did Arvest officials do that as well as acknowledge both Bank of Fayetteville and Delta Trust & Bank as having a first priority claim on Smiley’s account?
Delta Trust, chartered in Parkdale (Ashley County) but based in Little Rock, was the first to file a lawsuit against Smiley interests on March 25, claiming $245,126 owed. Bank of Fayetteville filed a $479,177 claim on April 7.
Questions of alleged forgery have surfaced in the case through claims against Smiley’s namesake father.
H. Dennis Smiley Sr. denied signing any loan documents associated with Bank of Fayetteville or Delta Trust & Bank. That legal response countered their allegations that he was financially liable for some of the loans based on documents filed with the court that bear his purported signature.
If his signature was forged, did his son submit other fraudulent documents to fool lenders?
First State Bank of Lonoke claims Smiley submitted fraudulent financial statements for 2011, 2012 and 2013.
First Western hasn’t filed claims yet detailing how much Smiley owes, nor have 15 other lenders who did business with him. John Hampton, CEO of First Western Bank of Booneville, couldn’t be reached for comment.
Chris Wewers, CEO of First Federal Bank of Harrison, declined to talk about the specifics of his bank’s involvement with Smiley. But he agreed to talk about some of the legal-banking issues surrounding the controversy.
“A UCC is supposed to put the world on notice,” Wewers said. “But if you’re looking at uncertificated shares, does a UCC protect you at all? That why it’s in a court of equity for everyone to argue their position before the judge and let him determine who gets some money.”
These phantom shares of Arvest Bank Group awarded to Smiley and other top executives were atypical securities. First Federal is among the lenders who obtained what they thought were legitimate control agreements to perfect a security claim on the shares.
The secured party must make sure it has the issuer’s consent, which will require a thorough review of the issuer’s governing documents to determine what constitutes approval to the issuer.
Some lenders thought they had obtained Arvest’s consent. It’s unclear how many, if any, were provided or reviewed the governing documents.
“We all need to go back to the processes and see what other efforts there are to prevent this from happening again,” said Joe Edwards of Benefit Bank.