The Jig Is up on Fraudulent Cow Leasing
DENVER (CN) - The chief lending officer of New Frontier Bank ran a criminal Ponzi scheme based on "fraudulent cow leasing" that enriched him and his cronies but put the bank out of business, the FDIC claims in court.
The FDIC sued Kansas Bankers Surety Co. in Federal Court. The insurer is the only defendant. The FDIC sued as receiver of New Frontier Bank, in Greeley.
"This action arises from a multi-year criminal fraud, in the nature of a Ponzi scheme, perpetrated by Gregory William Bell ... the former chief lending officer of New Frontier Bank ... involving millions of dollars of bank loans to or for the benefit of Johnson Dairy, LLC ('Johnson Dairy') and its affiliates," the FDIC says in the lawsuit. "Before it went bankrupt in 2009, Johnson Dairy was one of the largest dairy operations in Colorado and one of Bell's largest bank customers."
The FDIC claims that Bell pumped more than $37 million into the failing dairy while loaning $15 million to his friends so they could buy cows from the dairy and lease them back for huge profits.
"The bank's loans supported Johnson Dairy's operations for several years, and looked legitimate on the surface," the FDIC says in the complaint. "But they were actually fraudulent; Bell was concealing Johnson Dairy's financial woes and using NFB loans to keep it alive because Bell 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 Federal Deposit Insurance Corp. took over New Frontier's assets when the bank collapsed in 2009. It sued Kansas Bankers Surety for refusing to cover New Frontier's losses under an $11 million fidelity bond.
Citing an adversary complaint filed against Bell and New Frontier by the bankrupt Johnson Dairy, the FDIC portrays the lending arrangement as a Ponzi scheme.
"'All of the cow lease arrangements generally worked as follows: (a) First, a bank director, family member or friend of a bank officer, would put up a small amount of capital or collateral with NFB, and agree to serve as an 'owner' or 'lessor' in an outside agreement with Johnson; (b) Second, NFB would loan money to the 'owner' or 'lessor,' at an interest rate of 8-9 percent; (c) Third, the 'owner' or 'lessor' would provide close to the same amount of money to Johnson to 'buy' heifers or cows from Johnson; (d) Under the same or subsequent agreement, Johnson would lease back the same cows for a cost of approximately 8-9 percent more annually than what the 'lessor' had paid and borrowed from NFB; (f) As such, Johnson would effectively borrow money from NFB paying double interest - interest to the 'lessor' as well as interest on the lessor's loan from the Bank; (g) The cows would never leave Johnson's property, and the risk of death or disease, as well as all other incidents of ownership, remained with Johnson; (h) The right to depreciate, however, went to the 'owner' or 'lessor,' resulting in an additional financial gain to the 'owner' or 'lessor,' because his/her entire income would be offset and he/she would therefore pay no income tax on other, unrelated income during the term of the cow lease.'"
Bell got $75,000 in kickbacks and other benefits from the loan arrangements, but the dairy was failing badly, the FDIC says.
"As Johnson Dairy's financial condition steadily worsened, Bell orchestrated a series of Johnson-related financings and refinancings ... in a deliberate, fraudulent effort to keep Johnson Dairy afloat and thereby perpetuate the flow of secret and improper financial benefits to Bell and his close associates. In addition, over time Bell inserted himself ever deeper into the management and control of Johnson Dairy's financial affairs and accounts with NFB, in order to conceal Johnson Dairy's financial woes, maintain and increase NFB's direct and indirect financing of Johnson Dairy's operations, and thereby continue the flow of improper personal benefits to Bell and his close associates, at NFB's expense. When Johnson Dairy failed, NFB held nearly $37 million in direct loans for Johnson Entities' operations and over $15 million in related cow lease loans to Bell's close associates, including DK and SK, and WB and CB."
The 22-page lawsuit does not identify DK, SK and WB, nor three other of Bell's "close associates," who also are referred to by their initials.
The scheme crashed when Johnson Dairy filed for bankruptcy in 2009, prompting a federal investigation of Bell.
Bell was charged in December 2012 with four criminal counts - bank fraud, making false bank entries, misapplying bank funds, and money laundering - "specifically including the fraudulent cow leasing and financing schemes," the FDIC says in the complaint.
Bell pleaded guilty in February this year and was sentenced to 2½ years in federal prison.
The FDIC claims that the Kansas Bankers Surety refused to cover New Frontier's losses despite having unfettered access to the bank's records and "voluminous documents bearing on the allegations of the adversary complaint and detailing NFB's lending relationships with the Johnson Entities and the other alleged participants in Bell's fraudulent scheme."
The FDIC wants $11 million.
It is represented by David Bryant with Gable Gotwals, of Tulsa, Okla.