CORRECTION: Citizens State Bank of Bald Knob lost money in a Ponzi scheme that Little Rock attorney Kevin Lewis pleaded guilty to orchestrating Wednesday. This article did not include the complete name of the bank.
LITTLE ROCK — A Little Rock lawyer pleaded guilty Wednesday in federal court to what U.S. Attorney Chris Thyer called “the largest fraud in the history of Arkansas.”
Kevin Harold Lewis, 43, admitted that he stole between $20 million and $50 million through a Ponzi scheme that he operated from at least 1997 until last October, when a routine Federal Deposit Insurance Corp. audit led to a federal investigation.
The fraud scheme, which prosecutors said amounted to about $47 million, led to the collapse of First Southern Bank, a federally insured bank in Batesville. It also victimized 15-20 other banks, Thyer said in a news conference on the courthouse steps in downtown Little Rock.
Lewis, with defense attorney Tim Dudley at his side, had just pleaded guilty before U.S. District Judge James Moody to a single count of bank fraud, thereby warding off a potential indictment by a grand jury that was meeting in the same building.
Lewis admitted that he carried out his scheme by selling or using as collateral fraudulent bonds.
Thyer told reporters that if it hadn’t been for the FDIC and a subsequent “painstaking” FBI investigation in which a team of forensic accountants gathered evidence at courthouses across the state, “I firmly believe” that Lewis would still be living in his Chenal Valley home and maintaining an “opulent lifestyle” sustained by the proceeds of his crimes over several years.
That lifestyle, he said, included living in a house valued at more than $1 million, driving expensive vehicles and traveling extensively.
“He was able to roll and roll, [to continue] robbing Peter to pay Paul,” Thyer said, noting that as with other Ponzi schemes, the earlier victims were being paid with proceeds of new loans, and none of the notes were in default until November.
Neither Lewis nor Dudley answered reporters’ questions as they walked away from the courthouse after Moody allowed Lewis to remain free on his own recognizance until sentencing, which won’t be scheduled until U.S. probation officers have completed a presentence investigation and report.
Thyer said Lewis will be required to pay restitution of more than $39 million and faces a fine of up to $1 million, as well as prison time of up to 30 years. Thyer estimated that under federal sentencing guidelines, Lewis will face 10 to 12 1/2 years in prison.
Thyer noted that his office has so far seized about $1.5 million of Lewis’ assets, including rental properties, commercial properties, cash and a vehicle, to apply to the restitution.
Lewis has voluntarily surrendered other assets to victims in the case, Thyer said.
Until October, Thyer said, Lewis operated several businesses across the state in addition to running his law practice. The U.S. attorney for the state’s eastern district said Lewis concentrated primarily on developing property owners’ improvement districts and issuing special assessment bonds — also known as special improvement district bonds — to fund those districts.
Lewis admitted to Moody that between Dec. 31, 2008, and Sept. 29, 2010, he sold about $23 million in special improvement district bonds to First Southern Bank after first providing the bank with documents describing the details of the bonds — which were actually fraudulent.
He then used the proceeds to buy a controlling interest in the bank and make other fraudulent investments, prosecutors told the judge. Specifically, in about August 2009, he went through a trust that he had formed six months earlier, PA Alliance Trust, to purchase an interest of about 53 percent in the bank.
To make the purchase, prosecutors said, he borrowed about $4.6 million from First State Bank in Lonoke, using First Southern stock as collateral.
Then in September 2010, again through PA Alliance Trust, Lewis bought an additional $5.5 million in First Southern stock, increasing his ownership in the bank to 64 percent.
To facilitate the purchase, Thyer said, Lewis used funds from the sale of two fraudulent bonds to First Southern Bank.
“In addition to the fraudulent bonds provided to First Southern Bank, a bank that was forced into FDIC receivership upon learning of the status of the bonds, the following financial institutions provided loans to Kevin Lewis which were collateralized, in whole or in part, by fraudulent bonds: Centennial Bank, Citizens, Liberty Bank, First Community, Allied, Simmons and Regions Bank,” Thyer said in a news release.
He said Centennial Bank and the Bank of Augusta “currently hold fraudulent bonds which were originally sold by Kevin Lewis.”
“With each creation of a fraudulent bond,” Valerie Parlave, special agent in charge of the Little Rock office of the FBI, said in the news release, “Mr. Lewis added to this house of cards that ultimately collapsed.”
Standing under bright sunlight on the hottest day on record in Little Rock, ignoring dripping beads of sweat, Thyer told reporters, “To the best of our knowledge, Mr. Lewis’ scheme began as early as 1997 when he received a single small loan collateralized by a fraudulent bond.
“Mr. Lewis’ scheme was simple and repeatable,” Thyer continued. “He was a bond lawyer with intimate knowledge of the market. He knew the rural improvement district bonds were not registered in this state, and he used that knowledge and his position of trust to create fraudulent bonds, and then use those bonds as collateral to obtain money from various financial institutions in Arkansas.
“Essentially, Mr. Lewis was operating what is commonly called a Ponzi scheme, where he used collateral from borrowed ‘new money’ to pay money that he had previously borrowed, likewise, with fraudulent bonds. He used much of the loan proceeds to further the fraud and to fund various businesses he was involved with, and to lead what can only be described as a very opulent lifestyle.”
Thyer said he expects an increasingly large “volume of civil litigation” by banks across the state, with lawsuits naming both Lewis and one another as defendants, as the fight to recoup funds gets in full swing.
“It is my anticipation that civil litigation will continue for years to come,” Thyer said, adding that although some fraudulently obtained funds may be recovered, “There will never be enough to satisfy all the victims.”
In December, First State Bank of Lonoke sued a majority owner of First Southern Bank for nearly $7.7 million, saying the bank should have known that the bonds securing loans that later defaulted weren’t properly documented or didn’t even exist. First State also sued Harold and Ada Lewis of Searcy, who are Lewis’ parents and in whose name PA Alliance Trust, which borrowed the money, was established.
First Community Bank of Batesville sued Lewis the same month for defaulting on $1.8 million in loans.
Soon, state regulators closed First Southern as part of an agreement with the FDIC that included Southern Bank of Poplar Bluff, Mo., assuming some of First Southern’s assets.
About 130 investors in First Southern lost almost $24 million, according to reports at the time.
Centennial Bank also sued Lewis last year, saying he owed the bank more than $4 million.
“This case demonstrates,” Thyer said, “that the actions of one individual can have far-reaching, detrimental effects, including the collapse of a financial institution.”
He said President Barack Obama established the inter-agency Financial Fraud Enforcement Task Force “to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.”
Front Section, Pages 1 on 08/04/2011