Pig Butchering (Gwen Moritz Editor’s Note)

(Shutterstock)

The failure of a small Kansas bank last summer seemed insignificant after the collapse of Silicon Valley Bank and Signature Bank of New York in March. Then the Federal Reserve’s Office of Inspector General issued its postmortem report earlier this month, and it’s a doozy.

Heartland Tri-State Bank had only $122 million in assets — about the size of Piggott State Bank in a town with about half Piggott’s population. “Tri-State” refers to Elkhart’s location in extreme southwest Kansas, spitting distance from both Colorado and the Oklahoma Panhandle. It’s not a suburb of anything; Dodge City and Amarillo are each two hours away.

Although not named in the report, Heartland Tri-State’s CEO was Shan Hanes, now 52. Federal prosecutors have charged him with bank fraud for allegedly embezzling $47.1 million from a bank with $13.7 million in capital.

Here’s what prosecutors and the Fed’s OIG say happened:

Hanes joined Heartland’s predecessor bank in 1993 and led an investment group that bought it in 2011. In December 2022, he began investing in unspecified cryptocurrency with his own money. Soon he was investing in crypto with money embezzled from a church and an investment club. By May he was feeding this investment strategy with millions from the bank where he was one of the larger shareholders.

Between May 30 and July 7, he initiated 10 wire transfers ranging from $1.5 million to $10.3 million. About $45 million of the $47.1 million Hanes allegedly transferred was borrowed from a correspondent bank and from a federal home loan bank — credit sources that previously had zero balances, a big red flag. Heartland Tri-State was dunzo before July ended, costing the Federal Deposit Insurance Corp. about $54 million.

Alas, Hanes wasn’t really investing in cryptocurrency. The OIG says he was likely the victim of a scam known as “pig butchering.” We don’t know Hanes’ side of this story — investigators said his explanations “did not make sense and were difficult to follow” — but the pattern of starting small and making larger and larger transactions fits a pattern that the Treasury Department’s Financial Crimes Enforcement Network has warned about.

The sad story of Shan Hanes reminds me of the sad but blessedly smaller story of Joyce Judy, the long-ago president of Arkansas Employees Federal Credit Union (later acquired by Orion FCU of Memphis). In 2009, Judy “invested” $1 million, half of it defrauded from a customer, in what turned out to be an international scam. Judy went to federal prison.

Even before 2023, bank examiners had labeled Hanes as a “dominant” official. An executive who has “material influence over virtually all decisions involving the bank’s policies and operations” is a red flag that the Fed started looking for after it was identified as a factor in four bank failures between 2009 and 2014. It was also a factor in the 2016 failure of Allied Bank of Mulberry, where owners Lex and Alex Golden were both identified as dominant officials.

Email Gwen Moritz, interim editor of Arkansas Business, at gmoritz@abpg.com