Bogus Bonds Trigger Alarm at Arkansas Banks

The last six months produced dramatic events at First Southern Bank of Batesville. In the third quarter, the young lender boosted its capital with a $5.5 million stock offering and recorded a jump in local bond investments.

Then the bank discovered that its $22 million portfolio of special improvement district bonds was splattered with alleged fraud. That revelation imperiled the bank's expanded $19.2 million capital base.

A common link between the allegedly bogus bonds and new stock offering at First Southern is Kevin Lewis. Lewis, an attorney who lived in Little Rock's Chenal Valley neighborhood and practiced in Searcy, is described as the de facto largest shareholder in the $190 million-asset bank through a trust he established to acquire a 53.3 percent stake in 2009.

Lewis, 42, allegedly created and sold worthless bonds to the bank and borrowed $3 million this year to maintain his family trust's majority position by purchasing more First Southern shares in the new stock offering.

Lewis has retained the services of Little Rock criminal defense attorney Tim Dudley as bankers, regulators and law enforcement officials scramble to sort through the chaos.

Dudley is a seasoned defender who also represented a Lewis neighbor, Aaron Jones, who was convicted this year of torching his Chenal Valley home in 2008 as part of an insurance fraud scheme.

"Apparently, none of our bonds are any good," State Sen. David Wyatt, D-Batesville, a director at First Southern said. "Apparently, he never executed the improvement districts and just printed off the bond certificates."

As word of the bond fraud spread, bankers across the state scurried to check on their potential exposure.

A bank source who spoke on condition of anonymity said other banks "either bought bonds or held bonds or other stocks that were secured by those bonds as collateral. ... I think there's going to be some other banks out there in trouble too."

Regions Bank is among the roster of lenders with financial exposure on bonds sold or used as collateral by Lewis. Though the exact dollar value of Lewis bonds held by the bank remains under wraps, the potential loss is not deemed a material matter.

Read the Full Story

Click here to read George Waldon's full cover story.

Plus: Read Arkansas Business Publisher Jeff Hankins' column on bank due diligence in light of this unfolding story.

And: More on the legal history Kevin Lewis, the man at the center of the allegedly bogus bonds.

New: Bank forecloses on Lewis loan for west Little Rock manor.