At least two TARP recipients among victims of alleged Ponzi scheme

Federal prosecutors have filed charges against the owner of a Minnesota company that allegedly duped banks out of nearly $80 million by selling them excessive participations in many of the same loans.

Corey N. Johnston, the owner and operator of First United Funding LLC, is charged with bank fraud as well as filing false income tax reports.

Two of Johnston's 17 alleged victims, The National Bank, of Bettendorf, Iowa, and Bank Forward of Jamestown, N.D., are subsidiaries of companies that got taxpayer aid through the Troubled Asset Relief Program.

National Bancshares Inc, parent company of The National Bank, sold nearly $24.7 million in preferred stock to the Treasury Department on Feb. 24, 2009.  Security State Bank Holding Co., which owns Bank Forward, got a little more than $10.75 million in TARP money on May 1, 2009.  Neither has repaid any of the principal, although both have made their required dividend payments.   

Based on the timeline in the fraud case, one of The National Bank's ill-fated deals came after it received its government assistance.

The U.S. Attorney's Office for the District of Minnesota charged that, between 2005 and 2009, Johnston blatantly oversold participations in large commercial and personal loans arranged by First United Funding.  Johnston is accused of "selling more than 100 percent participation in at least ten different loans that FUF had made with third parties."

In other words, Johnston allegedly sold and resold the same loans, to the point that the total dollar value of the participations held by the banks was several times the original value of the loans.

Prosecutors say Johnston used the proceeds from the duplicative loan sales  to pay principal and interest to the banks that he had earlier courted, buying time and perpetuating the Ponzi scheme. The indictment also claims that Johnston diverted funds for his and his family's personal benefit.

Both TARP banks were allegedly duped in a plan for a project known as "White Out Way Investments." According to court documents, the original White Out Way loan was sold for $7 million to Western National Bank of Midland, Texas, in January 2008. Johnston sold another 100 percent participation to The National Bank for $7 million. He also placed a $2 million participation with Bank Forward, and sold additional interests to three other banks. All in all, Johnston allegedly received $23.65 million from the six banks for their participations in the single $7 million White Out Way Loan.

A second scheme evolved in March of 2009, around what came to be known as the JM Land II Loan.  Western National was again the first to buy full participation, for $8 million. The National Bank purchased what it thought was full participation for $8 million, raising its stake in First United Funding's deals to $15 million. 

Although Bank Forward did not buy into the second scheme, Johnston still managed to solicit $38.65 million in participations from eight banks for the JM Land II Loan.

The U.S. Attorney asserted that Johnston received $79.95 million in combined excess participations from these two schemes and at least eight other loans.

The alleged fraud began to unravel for Johnston in October 2009, when Community First Bank of Wisconsin, which held partial participations in both the White Way Out Loan and the JM Land II Loan, filed an emergency motion for a restraining order. The federal judge in Minnesota who granted the order also appointed a local management group as receiver for First United Funding. 

The FBI's Minneapolis Bureau became fully involved in the case by mid-November 2009 when Western National Bank, $25 million deep in First United's loan participations, began to speak to federal agents through the bank's attorneys.  The case was also investigated by the Internal Revenue Service-Criminal Investigation Division and the Federal Deposit Insurance Corporation.

According to the FBI press release, Johnson could receive thirty years in prison for bank fraud and an additional three years on the false income tax charge.

 

 

 

blog comments powered by Disqus