A bond scheme considered to be the largest fraud case ever prosecuted in the state of Arkansas now poses a financial threat to a Springfield-based accounting firm.
The $23.3 million fraudulent scheme perpetrated by former Little Rock, Ark., lawyer Kevin Lewis involving upstart First Southern Bank in Batesville, Ark., is credited with the bank’s demise in December 2010.
As receiver of the failed bank, the Federal Deposit Insurance Corp. says the bank’s accounting firm, Springfield-based BKD LLP, was negligent in its 2009 audit of First Southern’s financials.
In 2011, Lewis was sentenced to 10 years in federal prison and ordered to pay $39.5 million in restitution. According to a 30-page civil lawsuit filed in December 2013, the FDIC seeks to recover $17 million in losses it claims should have been prevented with proper accounting.
A year later, BKD and its attorney denied the bulk of the FDIC’s allegations in a 25-page answer as the suit continues at the federal courthouse in Little Rock.
Missed connections First Southern opened in 2005 in Batesville, about 80 miles northeast of Little Rock. In 2008, Lewis considered buying the bank, according to online court records, and moved in spring 2009 to take majority ownership via PA Alliance Trust. He spent a little over $9.25 million buying a nearly 54 percent interest in the bank, the FDIC said in its filing.
Prior to the purchase, Lewis began selling 23 infrastructure-development bonds to the bank – a practice that continued through September 2010. According to the FDIC, all of the bonds were fraudulent and held no value.
“In some instances, he selected a legitimately formed improvement district that had previously issued valid bonds and prepared ‘bonds’ dated years later in amounts larger than originally issued. Lewis would then pass those bonds off as legitimate bonds issued by that improvement district,” the filing reads.
Other times, the FDIC said he created phony improvement-district formation documents tied to his fake bonds.
First Southern recorded its first 13 bonds as loans on its financial statements. In April 2009, the bank’s CEO reached out to BKD representative Ryan Underwood by email to seek advice on whether the bank should record the bonds as investments.
According to the filing, BKD was told Lewis had created improvement districts and that the attorney was “the driving force” behind the change in control of the bank to PAA Trust.
Based on an understanding the bonds were private placements, online records show Underwood suggested the bonds should be considered loans rather than investments.
In June 2009, BKD conducted a loan review, but the bonds were not subjected to BKD’s loan review process despite bond files with “nominal documentation,” according to the FDIC.
A November 2009 audit by BKD found the bank’s balance sheet presented fairly, in all material respects, the financial position of the bank in conformity with generally accepted accounting standards. As a result, the FDIC claims BKD failed in its responsibilities to detect material weaknesses or deficiencies in the bank’s financial statements. The fact that Lewis was selling the bonds, and had led a change in ownership, should have prompted BKD to consider the loans at high risk, the FDIC states.
“(First Southern) specifically relied upon BKD’s superior knowledge, skill and judgment in BKD’s conduct of audits,” according to the suit.
Another contributing factor, according to the federal regulator, was that the accounting firm allowed an inexperienced auditor to lead the 2009 bank audit. The auditor, who is not named in the suit, was a recent college graduate with roughly one year of experience and BKD considered the audit a “training tool,” the civil filing states.
In addition, the employee was not familiar with Arkansas improvement district bonds, according to federal regulators, and did not know the bonds were being treated as loans.
BKD response In several instances, Philip Kaplan of Little Rock law firm Williams & Anderson PLC said BKD didn’t have enough information about Lewis’ history or other dealings with the bank to form an opinion. The firm denies its 2009 audit did not meet generally accepted accounting standards, but BKD acknowledges its lead auditor may not have been aware of Lewis’ role in the PAA Trust.
In a key part of its defense, BKD states that regarding losses, “50 percent or more of the fault lies with the bank, and not BKD.”
BKD CEO Ted Dickman declined a request for an interview, but provided a statement on the civil suit via email: “We stand by the quality of our work and intend to continue to defend ourselves vigorously. We are unable to make any further public comment at this time.”
FDIC officials also declined to comment on the suit.
“The FDIC does not comment on pending litigation,” FDIC spokesman Greg Hernandez said via email. “The lawsuit speaks for itself.”
While Kaplan noted the federal judge overseeing the case threw out the FDIC’s charge of gross negligence last fall, the case is proceeding to determine if BKD’s actions constitute professional negligence and breech of contract.
A jury trial in the case is scheduled for the week of Oct. 19.[[In-content Ad]]
