The federal government is seeking to recover money lost in a fraudulent cow-leasing scheme at a now-defunct bank.
The Federal Deposit Insurance Corp. has filed a lawsuit on behalf of the New Frontier Bank, a Colorado institution that failed in 2009 and is now in federal receivership.
The FDIC claims that the Kansas Bankers Surety Co. has “wrongly denied coverage” by refusing to pay out $11 million owed under an insurance policy taken out by the failed bank.
The fraudulent scheme at the center of the dispute pertains to funds that were de facto lent to Johnson Dairy, one of the bank’s largest borrowers.
Greg Bell, the bank’s chief lending officer, engaged in a “multi-year criminal fraud” in which he used money from New Frontier to prop up the financially ailing dairy, the FDIC complaint said.
The government claims Bell wanted to keep the dairy company operational because he “secretly had his hand in the till.”
“That is, Bell was getting improper personal benefits from the loans, such as a cut of Johnson Dairy’s monthly cow lease payments to the bank’s borrowers, or a cash kickback from the loan — money Bell used for things like a new Corvette,” the complaint said.
Bell reached a plea deal earlier this year to resolve criminal charges and was sentenced to 2 1/2 years in federal prison, the FDIC said.
The scheme was intended to sidestep a regulatory lending limit that barred the bank from making new loans to the dairy, the complaint said.
To accomplish this, Bell would basically channel the money through his “close associates,” the complaint said. These people would take out loans from the bank, then transfer those funds to Johnson Dairy.
The money was superficially meant as a payment for cattle, but the cows never actually left the dairy’s property, the complaint said.
The dairy would instead lease them back at an annual rate that covered the third parties’ loan payments, the complaint said.
Bell received “kickbacks” from each cow lease agreement while his associates realized tax advantages, as they could depreciate the value of the cattle, the FDIC said.
When the dairy went into bankruptcy, the bank lost substantial sums due to the scheme — the cattle lease loans represented more than $15 million on top of the $37 million that had already been lent to the dairy, the complaint said.
When the problem came to light, the bank — and subsequently the government — properly submitted documentation to the insurer, but the claim was denied in its entirety, the complaint said.
Capital Press was unable to reach the Kansas Bankers Surety Co. as of press time.
At the time New Frontier Bank failed in 2009, it was a major lender to farmers in several states, according to FDIC.
The bank’s failure led to an estimated loss of about $669 million to the FDIC, according to an audit by the agency’s Office of Inspector General.
Inadequate risk management practices and a rapidly growing loan portfolio ultimately led to the bank’s demise, the audit said.
The audit also found that the bank’s practice of providing financial incentives to a “senior lending official” for making new loans contributed to its failure.