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Blocking And Tackling (Gwen Moritz Editor’s Note)

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Sometime we have errors in Arkansas Business that were completely unavoidable. A business surveyed for a list gives us a wrong number — but not so wrong that it looks questionable. Or a name is misspelled in a news release, but not so egregiously that we fire off an email asking, “Are you sure …?”

But most of the corrections we publish are the result of failure to follow established reporting techniques. Errors happen because we didn’t ask enough questions to understand a nuance, or we didn’t double-check a fact. This is basic blocking and tackling, to coin a cliché. (At this point in my career, I’m tripped up most often by the things I’m just sure I know.)

In hindsight, it is so easy to see the red flags that the reporter missed and that two rounds of editing and then proofreading of the typeset page failed to spot.

I tried to keep all that in mind as I read Senior Editor Mark Friedman’s recent article exploring the Federal Deposit Insurance Corp.’s lawsuit against BKD LLP, the regional accounting firm that had the job of auditing First Southern Bank of Batesville.

You know the story: Kevin Lewis, a Little Rock lawyer originally from Searcy, conjured up a small fortune by printing up bogus special improvement district bonds and then either selling them to banks or using them as collateral for bank loans.

In 2009, after several years of successfully passing off worthless paper as valuable securities, Lewis borrowed the money to buy controlling interest in First Southern and proceeded to sell his own bank more than $23 million worth of his fake bonds.

Twenty-three million dollars is a lot of money in any context. In this context, it was more than the bank’s total equity capital. So when the fraud was discovered in the fall of 2010, it cost the FDIC just about $23 million to clean up the mess. Lewis pleaded guilty to bank fraud and is serving a 10-year sentence in federal prison; former CEO Woody Castleberry and a member of the board of directors, Jennifer Styron, were banned from the banking industry for life.

Then the FDIC, looking for anyone else who might share the blame and the cost, sued BKD. The auditors, the FDIC said, should have spotted Lewis’ fraud. After all, examiners from the Arkansas State Bank Department and the FDIC “identified possible fraud in connection with the [improvement district] bonds after just a few phone calls,” according to the lawsuit.

I don’t know enough about auditing to know whether BKD’s auditors were incompetent. I do know from hard experience that errors often seem obvious in hindsight, and while they may be the result of lazy technique, some errors are virtually unavoidable.

BKD, in turn, used a defense of the kind that drives me crazy: “The other guy did it first.” Had Castleberry and his employees at First Southern not let Lewis get by with forging a loan in someone else’s name back in 2008, BKD argued, he never would have been in a position to buy shares in First Southern and then to pressure the bank to take all those bogus bonds off his hands, and there would have been no fraud for the auditors to miss.

While that is undoubtedly true, it hardly explains why the auditors didn’t find what the bank examiners found.

Ultimately, as we reported last week, BKD agreed to pay $4 million but continued to deny any liability.

I’m not sure why it took so long to reach that settlement, but the fact that the civil suit almost made it to trial provided us with enough documents to produce fascinating new insight into just how sloppy the operation of First Southern was.

Even before Lewis was a shareholder or director, First Southern let him take out two loans totaling $800,000 in the name of a business associate who said his signature was repeatedly forged. The proceeds of the first loan to Michael Hulsey were sent directly to one of Lewis’ companies.

With blocking and tackling like that, is it any wonder Lewis decided to move in and take over?

Publishing a correction is miserable, humiliating work. I hate every one we have to write, especially when the error is one of my own. But we want to know when we have errors in our stories, and we want to correct them, both online and in print, because our goal, always, is to provide the highest quality information to an audience that deserves nothing less.

If you spot a factual error in Arkansas Business or on ArkansasBusiness.com, I want to know about it at soon as possible.

Gwen Moritz is editor of Arkansas Business. Email her at GMoritz@ABPG.com.
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