Bond certificates yield instant assets for Lewis.
The bogus bonds are linked on paper with real special improvement districts the Little Rock lawyer helped form for clients and others associated with his own projects.
A lawsuit filed by First Community Bank of Batesville makes no bones about his alleged mischief: "Kevin Lewis fraudulently drafted, sold and pledged the special assessment bonds."
As of Dec. 15, four banks had filed five lawsuits against the 42-year-old Searcy native and his various business entities over defaulted loans totaling $16.5 million. More are expected.
All of the cases are connected in varying degrees to special improvement district bonds in which Lewis claimed ownership or sold to others.
"What I hope did not happen is that any banks in Arkansas, based on a history of dealing with Mr. Lewis, would not do their typical due diligence," said Heath Abshure, Arkansas Securities Department commissioner.
"The biggest frauds we see involve people who know the people they're dealing with. The trust is already there."
A perfunctory examination of real estate records could have unfurled many a red flag concerning bond certificates presented by Lewis. It's unclear what efforts lenders made to authenticate the bonds.
Some bond issues that he hawked as genuine don't have the supporting public documents that should be filed with the circuit clerk of the county where the special improvement district is established.
Lawyers and investigators have been scouring courthouse records to determine whether bond certificates that Lewis sold or used as collateral are real or fake. This warning call was sounded throughout the Arkansas banking community last month when First Southern Bank of Batesville attempted to liquidate improvement district bonds bought from Lewis, who became a major shareholder in 2009 only to discover the paper was worthless.
"I have talked with a number of state and federal regulators and agencies, and they're on top of it," Abshure said. "There is a lot of overlapping jurisdiction in this investigation. I realized they had this well in hand, but we're here as a resource."
Under Arkansas law, the special improvement bonds that Lewis handled are exempt from registration with the Arkansas Securities Department.
"They are still securities, and I can go after someone for selling illegal securities," Abshure said. "But there is no filing required to be made with the Arkansas Securities Department."
Special improvement districts often are used as a funding mechanism by a group of property owners to pay for road, sewer or water improvements. An SID advantage is that each property owner is financially liable only for his portion of the total bond issue, as opposed to joint-and-several liability that might accompany a conventional bank loan.
Property owners pay annual assessments, which are typically gathered by county collectors. Those funds are disbursed to the bond trustee, who distributes payments to the bondholders.
Lewis is the trustee on a number of special improvement districts.
A look at Emerald Hill Property Owners' Improvement District No. 1 of Lonoke County, one of several special improvement districts Lewis used to juggle debt, provides a glimpse into his game.
The district is associated with Steeplechase Apartments, a 128-unit complex in Cabot that Lewis developed. The $50,047 property tax bill due Oct. 10 is listed as delinquent by the Lonoke County collector.
So far, Batesville's First Community Bank and two other lenders have publicly acknowledged holding suspect bonds issued by Emerald Hill that Lewis pledged as collateral on loans:
* First Community: Series 2005A, certificates AR-3, AR-4 and AR-7 of unknown values used as collateral on an Oct. 16, 2008, loan of $900,241 to Merchant Capital Finance Inc., led by Lewis. The loan financed receivables held by the venture.
* Capital Bank of Little Rock: Series 2005A, certificates AR-1 and AR-2 of unknown value used on Oct. 28, 2008, as additional collateral to increase the loan backing his Chenal Circle home from nearly $2 million to $2.5 million.
* Centennial Bank of Conway: Series 2002A, certificate AR-5 for $250,000 used on May 21, 2009, as additional collateral to extend a Jan. 9, 2006, loan in the original amount of $55,000. Lewis used the loan to buy a 7.9-acre site in Cabot for a townhome project.
A legitimate special improvement district bond issue should be accompanied by a bond mortgage filed at the county courthouse that reflects SID property securing the debt.
No records of these secondary bond issues are on file with Lonoke County officials. It appears that Lewis claimed ownership of the certificates and used the cash flow represented by the bonds as collateral.
There are two legitimate bond issues associated with the 8.6-acre Steeplechase development, according to Lonoke County real estate records.
The first is a $5 million revenue bond issue through the Arkansas Development Finance Authority. The 1999 funds, which financed construction of the apartments, were borrowed by Emerald Properties I Ltd., led by Lewis.
Steeplechase also was funded by a $400,000 special improvement bond issue, dated Nov. 10, 2000.
The stated purpose of this 20-year bond issue was to pay a portion of the project's infrastructure costs for dirt and drainage work, water and sewer improvements, utilities, sidewalks, etc.
The entire series 2000A issue was purchased by Citizens State Bank of Bald Knob. Larry Kircher, president and CEO of the bank, said Lewis has made timely payments, and the bonds remain in good standing for now.
"Fortunately, our bonds are real and not counterfeit," Kircher said of his bank's mortgage claim on the property.
He said that under Arkansas law Citizen State's bond mortgage represents a first mortgage position although the financing was accomplished after the ADFA funding.
To date, the bank has received annual bond payments totaling $109,152. This year's bond payment of $17,473 is due Dec. 31. The 2000A series is set to mature in 2020.
Hay Meadow Property Owners' Improvement District No. 1 of White County is another vehicle Lewis apparently used to generate bogus bond certificates.
The original file for the rural improvement district remains missing after Lewis, Hay Meadow trustee, checked it out from the White County Clerk's Office on Feb. 10, 2009.
Tanya Burleson, White County clerk, has attempted to rebuild its contents from documents filed with other county offices. The paperwork she has rounded up consists of little more than the June 3, 1997, ordinance establishing the 1.1-acre district, about 3 miles south of Pangburn in northern White County.
Burleson continues to pursue recovery of the original file from Lewis and talked with his parents in November.
"I've made numerous calls to him," she said. "I've even called his parents. They told me that he was out of town, and they would leave a number."
So far, bogus bond certificates bearing the Hay Meadow name have cropped up as collateral on three loans:
* First Community: Series 2006B, certificate AR-2 of unknown value, used as collateral on April 10, 2007, to secure a $450,216 loan for Signature Motors Inc. of Searcy, a used car business owned by Lewis.
* First Community: Series 2000B, certificate AR-2 of unknown value, used as collateral on a May 21, 2008, loan of $250,241 for Lewis' Merchant Capital Finance.
* Centennial Bank: Series 2004C, certificate AR-1 for $500,000 used on May 21, 2009, as additional collateral to extend a Jan. 9, 2006, loan in the original amount of $55,000.
According to White County sources, Lewis was looking to charter a new bank in Searcy before he invested in Batesville's First Southern Bank in May 2009.
Lewis invested more than $4.6 million cash and borrowed an additional $4.6 million from First State Bank of Lonoke to assemble a majority stake in First Southern.
The source of his funds is unknown for now, but First Southern's $22.6 million portfolio of improvement district bonds is splattered with his alleged fraud. Reports of individuals buying bogus bonds from Lewis also have begun surfacing, but so far only banks holding bonds as collateral have commenced litigation. (See related story, Page 17).
By George Waldon
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|Title Annotation:||First Community Bank|
|Comment:||Bond certificates yield instant assets for Lewis.(First Community Bank )|
|Date:||Dec 20, 2010|
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