FORT WAYNE, Ind. (WANE) — The bank that blew the whistle on a massive check-kiting scheme strongly rejected accusations made in a federal bankruptcy court that it was involved in, or knew of, the crime.

Warsaw-based Lake City Bank and four of its officers were named in the suit filed in the U.S. Bankruptcy Court, Western District of Michigan, Southern District, stemming from the collapse of payroll company Interlogic Outsourcing Inc. (IOI) of Elkhart in 2019.

The company also had an office near Ludwig Road in Fort Wayne.

IOI owner Najeeb Khan, 69, of Edwardsburg, Michigan, was charged with operating a long-running check-kiting scheme that caused a financial loss of nearly $170 million to businesses around the country and KeyBank, headquartered in Ohio.

According to a release from U.S. Attorneys in Ohio, “In a check-kiting scheme, checks are continually written back and forth to fraudulently inflate account balances deceiving banks into honoring checks written with insufficient funds.”

Khan, who was widely admired as a philanthropist and successful businessman who lived a lavish lifestyle, pleaded guilty in federal criminal court in Cleveland on Jan. 12.

Now, the bankruptcy court is trying to claw back some of the losses by targeting the $13 million Lake City made over nine years through “uncollected funds fees” paid by IOI.

Lake City Bank President and CEO David Findlay rejected any hint of impropriety.

“Unfortunately, the good thing we did in terminating this kite resulted in the loss to KeyBank and therefore resulted in them pursuing Lake City Bank through the trustee for collection of some of the losses they incurred,” explained Findlay.

Findlay was added to an amended claim in the bankruptcy case along with Lake City Bank officers Lisa O’Neill, Kristin Pruitt and Eric Ottinger.

Federal criminal attorneys in Ohio said Khan “wrote checks from IOI accounts at Lake City Bank for deposit into IOI accounts at KeyBank and then wrote checks from IOI accounts at Berkshire Bank for deposit into IOI accounts at Lake City Bank.  To cover the check funds issued from Berkshire Bank, Khan is accused of wiring funds from IOI accounts at KeyBank to IOI accounts at Berkshire Bank.”

In court documents, the bankruptcy trustee in Michigan, Mark T. Iammartino, said the kite, which he said started in 2011, should have been easily discovered by Lake City Bank.

“Khan’s scheme was obvious to anyone in the banking industry who had even a modicum of training in risk management as required by the Bank Secrecy Act and its attendant regulatory framework.”

Findlay quickly shot down that notion in a phone interview with WANE 15.

“The activity that we permitted IOI to run through their Lake City Bank accounts was credible business activity, with credible charges associated with them,” he said.

“It was not identified as a fraudulent activity, or a kite, until the day in which it was terminated in July of 2019.”

A written statement from Lake City also argued it was not involved or it would be tried in a criminal, not bankruptcy, court.

“To our knowledge, there are no indications that law enforcement is pursuing any other parties for assisting Mr. Kahn in this fraud,” it read. “These are the simple facts.”

The statement expressed hope the bankruptcy case would be dismissed.

“Unfortunately, the wheels of justice turn slowly, and we expect the next step to occur in mid-April when oral arguments will be presented. We remain confident in and committed to our strong defense of the false accusations.”

Lake City Bank Statement, March 24, 2023

In July of 2019, the bank terminated its relationship with IOI, a large national payroll processing
company headquartered in Elkhart owned by Najeeb Kahn. The bank provided treasury management and loan products to IOI and its affiliates, as well as to Mr. Khan, over a long period of time prior to the termination of the relationship by the bank. Lake City Bank’s termination of the relationship with IOI was the result of the discovery of a massive check kiting scheme involving three banks, Lake City Bank, KeyBank and Berkshire Bank. As a result of our proactive termination of the relationship, Lake City Bank did not incur any losses. Unfortunately, the termination of the kiting scheme resulted in significant loss to KeyBank. We do not believe that Berkshire Bank incurred any losses. Recently, Mr. Kahn pled guilty to orchestrating this massive fraud and is expected to be sentenced to serve a prison term. To our knowledge, there are no indications that law enforcement is pursuing any other parties for assisting Mr. Kahn in this fraud. These are the simple facts.

Since the July 2019 termination of the relationship, the bank, and now four of our officers and one of our directors, have been the targets of a series of allegations accusing both the bank and the officers of wrongdoing in the matter and seeking restitution for the losses incurred by KeyBank, IOI clients and other interested parties. The accusations against the bank and its officers have been long anticipated as a result of KeyBank’s loss. Thus, we were not surprised by the complaint’s content when it was first filed 19 months ago in August of 2021. An amended complaint was filed 7 months ago in August of 2022. The amended complaint added the four officers and one independent director of the bank with expanded false allegations. This was not an unexpected evolution of the complaint.

There is a trustee who represents the interests of KeyBank and other creditors, including former clients of IOI, and certain IOI-related entities. We believe that the trustee and his legal counsel have made it clear from the beginning that they were willing to attack the bank with the complaint to pressure the bank into a settlement. Lake City Bank will not back down from our strong defense.

We do not expect this to have any material income statement or balance sheet impact in 2023 and beyond. As required by the Securities and Exchange Commission, we have included disclosures related to this matter in every quarterly 10Q and annual 10K since the issue emerged, a copy of which is at the bottom of this email. The misleading and false allegations in the legal complaint, and resulting publicity, have done nothing to change our approach to managing this matter. We remain committed to the truth emerging as we move through this process.

Finally, we have filed a compelling motion for dismissal of the complaint. Unfortunately, the wheels of justice turn slowly, and we expect the next step to occur in mid-April when oral arguments will be presented. We remain confident in and committed to our strong defense of the false accusations.

Disclosure in 2022 10K Filing with SEC
The Bank discovered potentially fraudulent activity by a former treasury management client involving multiple banks. The former client subsequently filed several related bankruptcy cases, captioned In re Interlogic Outsourcing, Inc., et al., which are pending in the United States Bankruptcy Court for the Western District of Michigan. On April 27, 2021, the bankruptcy court entered an order approving an amended plan of liquidation, which was filed by the former client, other debtors and bankruptcy plan proponents, and approving the consolidation of the assets in the aforementioned cases under the Khan IOI Consolidated Estate Trust. On August 9, 2021, the liquidating trustee for the bankruptcy estates filed a complaint against the Bank and the Company, and agreed to stay prosecution of the action through August 31, 2022. The original complaint focused on a series of business transactions among the client, related entities and the Bank, which the liquidating trustee alleged are voidable under applicable federal bankruptcy and state law. The complaint also addressed treatment of the Bank’s claims filed in the bankruptcy cases.

On August 31, 2022, the trustee filed his amended complaint against the former client, the Bank, the Company, four officers of the Bank and one independent director of the Bank. The amended complaint alleges that the former client engaged in a check kiting scheme involving multiple banks. The amended complaint alleges that a series of business transactions among the client, his related entities and the Bank are voidable under applicable bankruptcy and state laws. The amended complaint also alleges that the Bank, the Company and the five individual bank representatives who are named as defendants violated various federal and state laws in assisting the former client in his check kiting scheme. On October 26, 2022, the trustee filed his second amended complaint which was virtually identical to his amended complaint. On January 5, 2023, the Bank, the Company and the five individual bank representatives filed motions to dismiss the second amended complaint. The motions are being briefed and will then be considered by the court. Based on current information, we have determined that a material loss is neither probable nor estimable at this time, and the Bank, the Company and the five individual Bank representatives who are named as defendants intend to vigorously defend themselves
against all allegations asserted in this amended complaint.