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A bank failure shattered trust in this Kansas town.

Joe Denoyer - April 7, 2024 6:53 pm

By Max McCoy Kansas Reflector

ELKHART — Eight months after a bank failure shook this historic and close-knit community, new details are emerging that indicate just how deeply the bank’s collapse was felt in town.

It’s a story about the theft of $47 million, which authorities allege the bank’s CEO used to cover his losses in an online cryptocurrency scam, but ultimately it’s a tale about trust and money and what happens when an institution that most of us take for granted collapses.

“People need to know what occurred,” Brian Mitchell, a third-generation resident and one of the targets of the scheme, told me. “There was a turning point when the victim became the thief.”

Shan Hanes, the CEO of Heartland Tri-State Bank, is charged in federal district court with embezzling $47.1 between May and July of last year to purchase cryptocurrency. If convicted, he could be sentenced to the maximum penalty of up to 30 years in prison.

Hanes, 52, also faces 29 felony counts in Morton County District Court in connection with the same scheme, for acts officials say he committed between January and July 2023. The state charges, outlined in an amended complaint filed last week, range from the misappropriation of millions from the bank to taking $20,000 from an investment club he had with long-time friends to stealing $40,000 from his own church. He’s also charged with unlawful acts involving a computer and to making false statements about the bank’s amount of liability coverage to gain access to more funds.

“It was definitely a devasting thing to the community,” said county prosecutor David A. Thompson. “I think it was a scheme. It seems to meet the criteria for pig butchering.”

Pig butchering, as I described in a September column, is a vicious online scam. The “pigs” to be butchered are victims lured into investing in virtual or foreign currencies by scammers using fake identities with elaborate storylines to gain trust and fatten the stakes. These schemes are often run from Southeast Asia by organized crime gangs that exploit the victims of human trafficking, according to an alert from the federal Financial Crimes Enforcement Network.

Hanes, through his attorney, declined a request for an interview. The attorney, John Stang of Wichita, also chose not to comment. Hanes was released from custody on $25,000 bond on the federal case, and $50,000 bond for the Morton County charges, but he is confined to house arrest through an electronically monitored ankle bracelet.

Hanes pleaded not guilty Feb. 28 during arraignment on the federal charge.

The federal charge consists of one count of embezzlement by a bank officer. If convicted, in addition to the prison time, Hanes could also be hit with a monetary judgement equal to the amount of the alleged embezzlement. A spokesperson for the U.S. Attorney’s Office in Wichita declined to comment on the case, but it appears any hope of recovering the money is slim, as federal judgments do not extend to organized crime rings in Southeast Asia.

Thompson, the Morton County attorney, said he’s not seeking to recover any money in the state case. The charges are based on an investigation by the local sheriff’s office, he said. Thompson is the interim county attorney and has a private law practice in Creede, Colorado, about six hours away by car. The office of Morton County attorney is up for election in November, but so far no candidates have filed for the post, according to the county clerk’s office.

A February 7 report from the Office of the Inspector General of the Federal Reserve found the Heartland Bank failed because of a “pig butchering” scheme that entangled Hanes, who used his considerable influence at the bank and in the community to get by for months with illegal wire transfers and other allegedly criminal activity.

“Significant internal control breakdowns and the influence of the CEO as a dominant management official created an opportunity for the series of apparently fraudulent wire transfers to be initiated and processed,” the report reads. “These wire transfers significantly impaired Heartland’s capital and liquidity, causing the bank to become insolvent.”

Hanes had previously held offices in state and national trade associations, the report said, and was described as “an important figure in Elkhart who held leadership roles in local organizations.” He apparently began trading cryptocurrencies with his own funds, then dipped into other accounts — the church and the investment club — and finally is accused of embezzling from the bank. The trust that bank employees had in Hanes caused them to circumvent, under his direction, wire policy and limits, the report said.

Heartland had a wire limit of $5 million per transaction before June 2023 and $3 million after. Some of the transfers to obvious cryptocurrency accounts exceeded these limits by several million dollars. Two of the transfers, on June 14 and June 23, were $10 million each.

On July 5, Hanes asked Brian Mitchell to meet with him at the bank.

The bank was in the shadow of the town’s massive grain elevator, which is appropriate because most of its business was in agriculture. Hanes, who was among the bank’s largest shareholders, had led a group of investors in 2011 in acquiring the National Bank of Elkhart.

Mitchell has described himself, in testimony before a Kansas Senate committee, as a “third-generation southwest Kansas dirt farmer” with an out-of-control movie theater hobby. The family owns 15 theaters in seven states, including the recently remodeled Doric Theatre in downtown Elkhart, originally built in 1918.

Mitchell had known Hanes since the 1990s. Hanes was involved in the community, Mitchell remembered, serving on the school board and other civic groups. Together they were members of the Santa Fe Trail Investment Club, a small group which had been around for decades. But sitting in Hanes’ office that morning, Mitchell recalled, something just wasn’t right.

“It wasn’t a normal conversation,” Mitchell said. “I could tell he was preoccupied. He’d be focused for a little bit and then he’d look off into the lobby and then look back at me.”

Hanes, Mitchell said, asked him for $12 million.

“He said there was a problem with a wire transfer from a Hong Kong bank,” Mitchell said. “He showed me this app on his phone. There was a balance of some 40 million in his account but he needed another $12 million to access it.”

Mitchell, a former certified public accountant, turned him down.

“I said, ‘I think you’re in a scam.’ ”

That same day, according to a timeline in the report, Hanes made an $8 million wire transfer using bank funds. Mitchell believes at that point Hanes was about $30 million in debt.

On July 21, the bank’s chief financial officer finally notified regulators of suspicious activity.

Six days later, Heartland’s capital was negative $35 million, according to the report. On July 28, the Kansas Office of State Bank Commissioner closed Heartland and appointed the FDIC as receiver, which estimated the cost of the failure to be about $54 million. Depositors were protected from loss by the FDIC. Heartland was acquired by Dream First Bank of Syracuse, Kansas.

It was the fourth of five bank failures nationwide last year.

“Basically, what happened was that in January 2023, Shan started trading crypto,” Mitchell said, “and he went through his own savings accounts, he went through his kids’ college funds and then … well, then he turned and started stealing money.”

One of the entities he’s accused of stealing from, according to the state charges, was the Elkhart Church of Christ. Hanes was not only a member of the congregation but sometimes officiated at funerals. The church closed, Mitchell said, but it wasn’t because of the loss of funds, because a third party made up the difference. But it was a small congregation, and it was difficult to overcome scandal.

The Santa Fe Trail Investment Club also disbanded.

“We decided to liquidate the club,” Mitchell said. “Nobody was shorted when all was said and done.”

While depositors were protected by the FDIC, Mitchell said, some employees and shareholders of Heartland bank suffered potentially catastrophic consequences. This included, in some cases, the loss of investments and pensions.

Hanes has waived his right to preliminary trial on the state charges and the case is set for trial May 6.

During a status hearing Feb. 29 in Morton County, Magistrate Judge Ethan Harder denied a request to allow Hanes to travel to Florida to attend his daughter’s swim meet and to take the family to Disney World on a “mini vacation,” according to court records.

Earlier, Hanes had been forced to surrender his passport in Wichita as a condition for bond in the federal case. During the frantic weeks leading to the bank failure, Mitchell said, Hanes had flown to Perth, Australia, in an attempt to meet with those who owed him money.

Mitchell said he’s done a lot of pondering about technology since the bank failure and believes that the increasing use of digital documents since the pandemic has created an environment ripe for fraud.

“Technology lends itself to (this type of scam),” he said. “It’s something we’re going to have to deal with.”

Elkhart is a resilient community, Mitchell said, the kind that “celebrates the good times and pulls together during the adversity.” A town of fewer than 2,000, it was founded in 1913 and was in the part of the country hardest hit by the Dust Bowl.

“You have a lot of good working people who have been devastated by this,” Mitchell said of the Heartland bank failure. “These are really nice people who have been wronged.”

For the town to heal, Mitchell said, frank talk based on the facts is necessary.

On Tuesday, prosecutor Thompson held a meeting in Elkhart for those who were swindled. About 30 attended, according to Mitchell, including members of the former Santa Fe Trail Investment Club. The sense of betrayal was deep. Of particular concern was the allegation that just days before the scheme collapse, Mitchel said, Hanes had lied to the bank’s board about how much liability insurance the institution had. The CEO claimed it was $100 million, Mitchell said, but the actual amount appeared to be just $2 million.

When Thompson asked what the group of about 30 or so thought an appropriate sentence for Hanes would be, Mitchell said, one response was: “If he was released one day before he died, that would be too short of a sentence.”

 

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