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The trustee overseeing the bankruptcy of a local forest products company has sued four South Florida banks, accusing them of participating in a check-kiting scheme that cost the company’s creditors $22 million. The creditors seeking to recover money include the Federal Deposit Insurance Corp. The federal banking regulator claims that Hamilton Bank, which it took over in 2002, lost $19 million as a result of the check scheme — money that the FDIC ended up having to cover when the Miami-based institution failed. Lewis B. Freeman, the liquidating trustee in the bankruptcy of Miami-based Pacific Forest Products, filed the suit last year against SunTrust Bank, International Finance Bank of Miami, Mellon United National Bank and Colonial Bank. In December, Bankruptcy Judge Barry S. Schermer denied a motion filed by attorneys representing the banks that sought to dismiss the lawsuit. He gave the defendants until Feb. 13 to submit requests for a jury trial in federal district court. Freeman, who declined to be interviewed, claims in the lawsuit that the banks failed in their duty to recognize the check kiting and did not stop it despite mounting evidence. He claims the banks collected fees from questionable transactions that they should have stopped. “Colonial, SunTrust, IFB and Mellon either knew or should have known that Pacific and its principals were engaging in an improper (and probably illegal) check-kiting scheme,” according to the lawsuit. “The debtor [Pacific] which reported historical annual sales of no more than $13 million, engaged in banking transactions involving the deposit and payment of literally hundreds of millions of dollars, which transactions had no apparent legitimate business purpose.” Calls to attorneys representing SunTrust, Colonial and IFB were not returned. The attorney representing Mellon declined comment. So-called “know your customer” banking laws require financial institutions to be vigilant and proactive in spotting fraud and money laundering. Federal law puts much responsibility for spotting and reporting questionable financial activity on banks. For example, the suit claims that Pacific bounced about one in four checks it wrote on its accounts at IFB in 1999 and roughly one in two in 1998. These would not be repaid for days or even weeks. These should have been red flags that IFB bankers should have noticed and reported, according to the suit. A principal of Pacific was also a director of IFB and chaired its loan committee. “These overdrafts acted as improper provisional extensions of credit granted by IFB to Pacific which apparently were ignored” at the bank, the suit said. According to the suit, the company would write a check to itself on an account at one bank and deposit the check at a second bank. Pacific would then write a check to itself on that account at the second bank and use those funds to write a check to itself that was deposited at a third bank, and so on. Most of Pacific’s checks were written against its Colonial account, and deposited into its accounts at SunTrust and, to a lesser degree, Mellon United and IFB, the suit claims. Checks were then written against the deposits at SunTrust, Mellon United and IFB, and deposited into Colonial. From January through November 1999, Pacific deposited 4,800 checks — about 15 a day — worth about $215 million from itself into its SunTrust account. About $2.7 million of these checks were returned for insufficient funds, which should have alerted the bank, according to the lawsuit. HAMILTON AND FDIC The alleged check-kiting scheme began in 1998, according to the lawsuit, as Pacific’s owners tried to keep their money-losing company alive. Hamilton got stuck with a stack of bad checks when the two-year scheme came to an end and the bank forced the Miami-based wood importer and distributor into bankruptcy, according to the lawsuit. The FDIC, which lost $165 million after it shut down Hamilton, in January 2002 — wants the banks to reimburse it for the money Hamilton lost as a result of the alleged check scheme. “It is pretty simple and unsophisticated, given that it was simply checks that they [Pacific] wrote to themselves,” said attorney Brett Amron of Genovese Joblove & Battista law firm in Miami. He filed the lawsuit along with John Genovese and David Cimo in U.S. Bankruptcy Court in Miami on behalf of Freeman. On behalf of the FDIC and 70 smaller creditors, the trustee is suing the banks and three area businessmen to recover $22 million. Freeman filed suit after an extensive review of Pacific’s bookkeeping produced evidence that funds were incorrectly diverted from the failed company, according to the lawsuit. The suit accuses Pacific’s principals, Andres Delgado and Antonio Goitia, of coordinating the check scheme to cover up the fact that their company was undercapitalized and not producing the profits suggested by the financial records they showed their banks. Goitia was a director of IFB and headed up its loan committee. The bulk of the money sought by the FDIC is a $13 million loan Hamilton extended to Pacific based on the inflated financial statements, according to the lawsuit. Garth Scott, one of Pacific’s clients from the Caribbean, is accused in the lawsuit of using five foreign companies he owned to participate in the alleged scheme. Scott’s attorney said his client is innocent and declined further comment. Counsel for Goitia and Delgado did not return a call for comment. The lawsuit claims that Hamilton was drawn into the check-kiting scheme in June 1999, when the bank provided the $13 million line of credit to Pacific to be used for working capital and to purchase inventory. Underwriters reasoned that Pacific’s operations and growth would cover the debt payments. The financials that Pacific submitted to Hamilton showed that the forest products company had grown consistently. “Pacific was several million dollars under water and lacked from the inception of the Hamilton loan the ability to repay Hamilton bank,” according to the lawsuit, which estimates Pacific lost about $7 million from 1995 until 2000. The lawsuit does not say anything about where the rest of the proceeds from the alleged scheme went. When Hamilton loaned money to Pacific, it tried to protect itself by obtaining a blanket lien on the forest products company’s assets. According to the lawsuit, the company’s bogus financials estimated the assets at $7.2 million in 1998. The Hamilton loan was used to pay Pacific’s outstanding loans and late charges due to Colonial, Mellon United and SunTrust. Some of the Hamilton loan was also used to cover charges for overdrafts, returned checks, service and being late with payments to those banks and IFB, according to the suit. “Stated simply, the Hamilton loan was intended to fill the hole that had been created by Pacific’s scheme and to permit Pacific to continue the misconduct,” the lawsuit states. Pacific Forest defaulted on the revolving credit line in June 2000. The Pacific line of credit was one of the questionable loans made by the former Hamilton Bank before federal bank regulators shut it down. In closing Hamilton, the FDIC proceeded to sell off the bank’s assets and assumed the liabilities, making it the primary creditor in Freeman’s lawsuit. The banks are expected to seek a jury trial in federal court. Amron said if the case goes to trial it would probably take place in early 2005.

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