Bond scandal tally keeps rising: suspect lawyer borrowed more than $26 million.
Since Dec. 1, Lewis, 42, has been named in at least 11 lawsuits initiated by five banks in an attempt to recover the $19.9 million he still owes on loans that are in default.
Banks that have filed lawsuits over loans in which phony bonds were used as collateral include Jonesboro-based Liberty Bank of Arkansas, Centennial Bank of Conway, First Community Bank in Batesville and Capital Bank of Little Rock.
Although it has not sued, Simmons First National Corp. of Pine Bluff revealed last week that it had reserved against a single "outstanding loan relationship of less than $350,000" that is secured by fraudulent rural improvement bonds. Regions Bank of Birmingham, Ala., has denied owning any of Lewis' bonds but is believed to have a multimillion-dollar exposure in the form of collateral on loans.
First State Bank of Lonoke made two loans to Lewis totaling $7.6 million, but the debt was secured by Lewis' shares in First Southern Bank of Batesville. Lewis had sold First Southern $22.7 million worth of bogus improvement bonds, causing it to fail and rendering First State's collateral worthless.
First State Bank sued Lewis on Dec. 1 for defaulting on the loans and for fraudulently misrepresenting the financial condition of First Southern. In his answer to First State's complaint, which criminal defense attorney Timothy Dudley of Little Rock filed in Independence County Circuit Court on Dec. 29, Lewis acknowledged being "under investigation by federal law enforcement authorities" and invoked his Fifth Amendment right against self-incrimination more than two dozen times.
It is the only public statement Lewis has made since his alleged scam was first reported in the Dec. 6 issue of Arkansas Business, and Dudley declined to make any other comment on his client's behalf.
As of last week, Lewis has not been charged with any crime. Sources tell Arkansas Business that federal prosecutors rejected Lewis' offer to waive indictment and plead guilty because the scope of his crime is not yet known.
A review of the 26 loans that Lewis took out either in his name or through his various companies showed he borrowed $26.2 million over eight and a half years, of which $19.9 million is still owed.
The oldest loan that Lewis has defaulted on dates back to March 6, 2002, according to the lawsuits reviewed by Arkansas Business. Lewis borrowed $1.36 million from a Centennial Bank predecessor, Community Bank of Cabot, and used "bonds and proceeds" as collateral.
Centennial filed suit in Pulaski County Circuit Court saying the 2002 loan was in default, but it didn't suggest that the bonds were bogus, as other banks have alleged in other lawsuits against Lewis.
As of Nov. 19, Lewis owed $840,000 in principal on that loan and another $13,500 in interest.
No bank has alleged that Lewis owes money from loans made in 2003, and only one loan from 2004 and two from 2005, for a total of $765,230, are known to be in default. Only $335,000 of his remaining debt is tied to those loans.
In 2006 and 2007, however, Lewis borrowed a total of $6.75 million to finance various projects, including a 96-unit apartment complex in Bryant and a Searcy car dealership called Signature Motors, which closed late last year. In addition to bonds, Lewis used the property and the assets from his car dealership as collateral for the loans.
Lewis' busiest year for borrowing came in 2008. Lewis took out 12 loans for $9.7 million, according to the lawsuits. He still owes $6.1 million on those.
Included in the 2008 total is a $2.5 million loan that he and his wife, Julie, got from Capital Bank, using their west Little Rock home and two of his bond certificates as collateral.
Only one bank, First State of Lonoke, has sued over a loan made to Lewis: $4.6 million lent to Lewis' PA Alliance Trust, which he used to buy a controlling interest in First Southern Bank and which he secured with more than $9 million in First Southern stock.
Loans to Kevin Lewis and Related Entities, 2002-10 Date Loan Amount Collateral Lender Remaining Principal 3/6/2002 $1,358,299 Bonds Centennial $840,157 Bank, Conway 1/6/2004 $365,000 Property in Centennial $157,026 Bryant Bank 1/21/2005 $250,125 Bond First $165,941 Community Bank, Batesville 2/18/2005 $150,105 Bond Liberty Bank $8,695 of Arkansas, Jonesboro 1/9/2006 $245,000 Property in Centennial $162,251 Cabot Bank 1/9/2006 $55,000 Bonds Centennial $39,496 Bank 7/6/2006 $500,100 Bonds Centennial $70,913 Bank 11/14/2006 $500,250 Bonds Centennial $139,068 Bank 4/10/2007 $450,216 Bonds, assets of First $76,765 Signature Community Motors Bank 10/15/2007 $500,200 Bonds, assets of First $237,113 Signature Community Motors Bank 10/18/2007 $4,500,000 Assets of an Centennial $4,127,146 apartment Bank complex in Bryant 1/28/2008 $500,216 Bond, assets of First $35,670 Dealer Lending Community Bank 2/8/2008 $748,000 Bonds, assets of Centennial $396,501 Merchant Capital Bank Finance 3/13/2008 $1,458,431 Bonds Liberty Bank $249,311 of Arkansas 3/13/2008 $1,200,245 Bonds Liberty Bank $1,111,016 of Arkansas 5/21/2008 $250,241 Bonds First $50,247 Community Bank 5/21/2008 $386,556 Bonds, assets of Centennial $95,925 Merchant Capital Bank Finance 6/3/2008 $500,241 Bonds, assets of First $300,928 Merchant Capital Community Finance Bank 7/16/2008 $250,000 Bond, assets of Centennial $129,107 Merchant Capital Bank Finance 10/16/2008 $900,214 Bonds, assets of First $767,055 Merchant Capital Community Finance Bank 10/20/2008 $2,500,000 Bonds, 42 Chenal Capital Bank, $2,442,517 Circle, Little Little Rock * Rock 11/20/2008 $500,241 Bond, assets of First Merchant Capital Community Finance Bank $178,659 11/23/2010 12/5/2008 $500,000 Bonds, assets of Centennial $339,342 Merchant Capital Bank Finance 3/3/2009 $38,594 2009 Infiniti First $19,413 QX56 Community Bank 5/29/2009 $4,628,065 Shares of First First State $4,628,063 Southern Bank of Bank, Lonoke Batesville 9/28/2010 $3,000,000 Shares of First First State $3,000,000 Southern Bank of Bank Batesville Totals $26,235,339 $19,768,323 Date Loan Amount Accrued Late Owed as of Other Defendants Interest Fees 3/6/2002 $1,358,299 $13,507 $500 11/19/2010 Lewis Law Firm 1/6/2004 $365,000 $1,405 $423 11/19/2010 Southtrust Development LC, Emerald Properties II 1/21/2005 $250,125 11/23/2010 Dealer Lending LLC, Signature Motors Inc., Merchant Capital Finance Inc. 2/18/2005 $150,105 $1,146 12/9/2010 Signature Car Rental LLC 1/9/2006 $245,000 $1,095 11/19/2010 Fieldstone Townhomes of Cabot LLC 1/9/2006 $55,000 $246 11/19/2010 Fieldstone Townhomes of Cabot LLC 7/6/2006 $500,100 $398 $2,553 11/19/2010 Signature Motors LLC 11/14/2006 $500,250 $2,105 $250 11/19/2010 Lewis Law Firm 4/10/2007 $450,216 11/23/2010 Dealer Lending LLC, Signature Motors Inc., Merchant Capital Finance Inc. 10/15/2007 $500,200 11/23/2010 Dealer Lending LLC, Signature Motors Inc., Merchant Capital Finance Inc. 10/18/2007 $4,500,000 $57,140 $500 11/19/2010 Southtrust Development L.C., Emerald Properties II 1/28/2008 $500,216 11/23/2010 Dealer Lending LLC, Signature Motors Inc., Merchant Capital Finance Inc. 2/8/2008 $748,000 $5,414 $250 11/19/2010 Merchant Capital Finance Inc. 3/13/2008 $1,458,431 $2,268 $23 12/9/2010 Merchant Capital Finance Inc. 3/13/2008 $1,200,245 $16,809 12/9/2010 AEPM Trust 5/21/2008 $250,241 11/23/2010 Dealer Lending LLC, Signature Motors Inc., Merchant Capital Finance Inc. 5/21/2008 $386,556 1,022 $500 11/19/2010 Merchant Capital Finance Inc. 6/3/2008 $500,241 11/23/2010 Dealer Lending LLC, Signature Motors Inc., Merchant Capital Finance Inc. 7/16/2008 $250,000 $1,638 $500 11/19/2010 Merchant Capital Finance Inc. 10/16/2008 $900,214 11/23/2010 Dealer Lending LLC, Signature Motors Inc., Merchant Capital Finance Inc. 10/20/2008 $2,500,000 12/9/2010 AEPM Trust 11/20/2008 $500,241 11/23/2010 Dealer Lending LLC, Signature Motors Inc., Merchant Capital Finance Inc. 12/5/2008 $500,000 $3,252 $500 11/19/2010 Merchant Capital Finance Inc. 3/3/2009 $38,594 11/23/2010 Dealer Lending LLC, Signature Motors Inc., Merchant Capital Finance Inc. 5/29/2009 $4,628,065 $41,064 11/3/2010 PA Alliance Trust, Harold and Ada Lewis, John Gregg 9/28/2010 $3,000,000 $15,609 11/3/2010 PA Alliance Trust, Harold and Ada Lewis, John Gregg Totals $26,235,339 $164,119 $5,998 Sources: Lawsuits filed by lenders. All amounts rounded to the nearest dollar. Simmons First National Corp. of Pine Bluff has acknowledged a single loan to Lewis of less than $350,000, but the date the loan was made is not known. * Interest in loan subsequently transferred to Blast 5 LLC, a company incorporated on Dec. 21.
On Sept. 28, Lewis took out his only loan of 2010 that is in default: another $3 million from First State Bank. That money was used to buy another 42,308 shares of First Southern Bank, which were used as security for the loan.
Where's the Money?
Attorney Stanley Langley of Jonesboro, who is representing Liberty Bank of Arkansas in three lawsuits against Lewis, said he's not sure what Lewis did with the money.
Up until October, Lewis was current on Liberty loans totaling $1.4 million. But the payment stopped after word began spreading in the banking community that Lewis might have used fraudulent bonds as collateral, Langley said.
Lewis appeared to have been operating a Ponzi scheme. In a typical Ponzi, money from later investors is used to pay returns to earlier investors. In Lewis' case, he appeared to be making new bank loans in order to make payments on earlier loans and phony bonds.
One source who is familiar with Lewis' case said that he doesn't think Lewis has a stash of money somewhere. Instead, he likely used most of the money he's received over the years to pay principal and interest on loan payments and bonds.
The source also said that the scrutiny of Lewis' bonds may have been relaxed because he had a good reputation and was considered an expert on rural improvement district bonds, which do not have to be registered in Arkansas.
"People in the county that needed improvements in their community that the county couldn't do, well, their county judge would refer them to Kevin," the source said. "Kevin would set up these rural improvement bonds, which were great financing devices.
"At some point in time, he [apparently] just realized that since they are unregistered, he might be able to get away with doing what he did."
Lewis' father, Harold Lewis of Searcy, told Arkansas Business that he couldn't explain his son's actions.
"It's just as puzzling to me as it is to everybody," Harold Lewis, 78, said last week. "I just don't have the slightest idea. I really don't."
During a routine examination of First Southern Bank in October, the Federal Deposit Insurance Corp. questioned the $22.7 million worth of improvement district bonds that were included in the bank's investment portfolio. The total, which represented 118 percent of the bank's capital, was far too high a concentration in a single investment category, said Luther Guinn, Arkansas State Bank deputy commissioner.
"We just had concerns about the total investment the bank had made in those bonds," Guinn said.
Lewis knew about the examination in October, the source told Arkansas Business.
Sometime that month--real estate records don't indicate the exact date--Kevin Lewis asked Capital Bank of Little Rock to remove his wife's name from the personal guarantee on the $2.5 million loan they took out in October 2008, according to the bank's lawsuit filed in Pulaski County Circuit Court. The bank complied. An attorney for the bank, Stuart Hankins of North Little Rock, declined to comment.
(Capital Bank has since transferred its interest in the loan to Blast 5 LLC, a company that was created on Dec. 21. Capital Bank's name is now off the lawsuit and replaced with Blast 5 as the plaintiff. Jeb Joyce of Fayetteville, an attorney with the Quattlebaum Grooms Tull & Burrow firm, is listed as the incorporator/organizer for Blast 5, but he referred questions about the transaction to his law partner, Timothy Grooms. Grooms did not respond to a request for comment, nor did Capital Bank President Kyle Patton.)
On Oct. 27, Julie Lewis filed for divorce in Saline County.
Kevin Lewis, her husband of 13 years, "has treated [Julie Lewis] with such general indignities as to render [her] condition in life intolerable," according to the complaint, which was filed by her attorney, Danny Crabtree of Little Rock.
Kevin Lewis hasn't filed an answer in the case, but he has filed paperwork saying the divorce can move forward.
Crabtree, who shares an office address and phone number with Kevin Lewis' defense lawyer, Tim Dudley, declined to comment on the divorce.
In October, bank regulars and First Southern Bank officials discovered that the $22.7 million worth of bonds the bank bought from its largest shareholder were bogus, said state Sen. David Wyatt, D-Batesville, who was a director at First Southern.
As the bond problems were coming to light, Wyatt said another First Southern board member spotted Lewis in Little Rock and asked him what was going on.
"Kevin said, 'There are some issues with some of the bonds,'" Wyatt said.
Soon the word was spreading to other banks that bonds tied to Lewis might be fake. That sent bank officials rushing to county tax assessor's offices to verify the existence of the improvement districts and their bonds.
In many cases, they weren't legitimate.
"First Community Bank's investigation has revealed that Defendant Kevin Lewis intentionally misrepresented the value of the collateral he offered to secure repayment of the loans [of the bank]," First Community President Boris Dover said in an affidavit filed in Independence County Circuit Court.
"Kevin Lewis fraudulently drafted, sold and pledged the special assessment bonds," First Community's lawsuit said.
First Community is owed $1.8 million, according to its lawsuit.
Other banks also raced to the courthouse to sue Lewis.
Liberty Bank of Arkansas has filed three lawsuits against Lewis and is seeking $1.4 million. Centennial Bank has filed five lawsuits against Lewis, claiming it is owed $6.6 million as a result of Lewis' defaulted loans.
Centennial's lawsuits don't say if the bonds used as collateral were legitimate.
Centennial's publicly traded parent company, Home BancShares Inc. of Conway, was also forced to admit that it had invested directly in some of Lewis' bonds. In a Jan. 3 press release, Home BancShares said its investment portfolio would take a $3.6 million hit.
Centennial has written off the balance due on Lewis' loans, but bank officers said they might try to recover some money from the lawyers who were involved in the bond transaction.
"There were attorneys that had given--I won't say an opinion--but close to an opinion" that gave the company faith in the quality of the bonds, CEO Randy Sims said in a Jan. 4 conference call.
Sims said the bank would scrutinize every document related to the bonds and consider every avenue for recovery.
"If you hear a little tone of aggressiveness, it's there," he said.
By Mark Friedman
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|Comment:||Bond scandal tally keeps rising: suspect lawyer borrowed more than $26 million.|
|Date:||Jan 17, 2011|
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