The accounting firm BKD LLC is blaming the collapse of First Southern Bank in Batesville on the failure of bank officers and officials to detect former Little Rock attorney Kevin Lewis’ fraud.
The bank was closed in December 2010 after it was discovered that all of the $23.3 million in improvement district bonds it bought from Lewis since 2008 were fraudulent.
Lewis, who was a majority shareholder in First Southern, was sentenced in December 2011 to 10 years in federal prison after pleading guilty to one count of bank fraud. He also was ordered to pay $39.5 million in restitution to nine banks in what is considered the largest fraud ever prosecuted in Arkansas.
In 2013, the Federal Deposit Insurance Corp., as receiver for the failed bank, sued the accounting firm, which has its national office in Springfield, Missouri. The civil case, filed in federal court, accuses BKD of failing to do its job when it handled the bank’s books. If BKD had, the FDIC said, Lewis’ fraudulent scheme of selling phony improvement district bonds to the bank would have been exposed earlier than 2010, and the bank’s losses would not have been as great.
The FDIC is seeking $17.5 million in damages. In its answer filed last month, BKD denied the allegations of wrongdoing.
BKD also argued that “50 percent or more of the fault lies with the bank, and not BKD.”
BKD listed several points where the bank’s own officers and employees missed a flurry of red flags in dealing with Lewis.
First Southern began operating in 2005. On the last day of 2008, the bank bought its first of 23 property owner improvement district bonds from Lewis.
BKD said it was the bank’s decision to buy Lewis’ bonds. The bank’s officers and directors reviewed and approved the bonds but failed to detect that they were phony, even “after BKD informed the bank, in writing, that certain bond files appeared to have ‘nominal documentation.’”
The bank also allegedly didn’t bother to conduct a background check on Lewis.
If bank officials had, it would “have revealed tax liens, significant bank debt, and other information that could have prevented any association with Lewis from the outset,” BKD said.
BKD also said that the bank officials failed to notice that the address on several of the bonds was the same and that it was the same address as Lewis’ PA Alliance Trust.
In addition, BKD told the bank that “the audit was not designed to provide assurance on internal control and that fraud or a material misstatement may not be detected,” the filing said.
An attorney for the FDIC, C. Philip Curley of Chicago, declined to comment on BKD’s answer. But the FDIC had said in its lawsuit that BKD should have detected the warning signs.
“Considering that even a cursory review of the Bond files would have raised concerns about the sufficiency of the documentation, it appears the BKD auditors did not review the files at all, or lacked the proficiency and technical training to understand the implications of the documentation deficiencies,” the FDIC lawsuit said. “Had a proper review of the Bond files been conducted, BKD would have determined that the Bonds were fraudulent, which it would have been required to report to [First Southern Bank] management.”
One of BKD’s attorneys, Timothy McNamara of Kansas City, Missouri, didn’t immediately return a call for comment.
Before BKD filed its answer, it asked U.S. District Judge James M. Moody Jr. to dismiss the FDIC’s claims of professional negligence, gross negligence and breach of contract. Moody agreed to dismiss the claim of gross negligence because “the FDIC has failed to establish a legal basis for the claim,” Moody said in his order filed on Nov. 14.
But he said the other two claims could continue.
Meanwhile, Lewis, 46, is serving his sentence in federal prison in Memphis and is scheduled to be released in January 2021.