Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, February 21, 1991 TAG: 9102210143
SECTION: VIRGINIA PAGE: A1 EDITION: METRO
SOURCE: DAVID M. POOLE STAFF WRITER
DATELINE: LENGTH: Long
Some blame should be assigned to First Virginia Bank-Southwest, he said.
Hess questioned First Virginia's response to the discovery in 1988 that a senior bank officer lent Hess and his partners more than $700,000 through some 30 strawman loans.
Hess said First Virginia officials demanded that Hess pay off the debt and suggested he borrow the money from other banks.
"They did it at other banks' expense," said Hess, whose financial and legal problems recently led him to surrender his state mortgage broker's license.
First Virginia President Jim Hinson denied the bank limited its losses by transferring its problems to other banks.
Hinson said he learned only recently that Hess got strawman loans at other banks to pay off similar loans at First Virginia. In such transactions, a "strawman" is a person who obtains financing for a third party who wants to remain anonymous.
"Mr. Hess told us he was selling lots at Smith Mountain Lake," Hinson said. "If we had known [about the strawman loans], we would not have accepted the money."
Hinson acknowledged that he did not ask Hess many questions about his business dealings.
"We didn't care," Hinson said. "We just wanted him to pay us."
Strawman loans figure heavily in an FBI investigation of possible bank fraud in the Roanoke Valley and possible land sales fraud at Smith Mountain Lake.
U.S. Attorney Morgan Scott has declined to provide details of the investigation, but said strawman loans are illegal if their purpose is to conceal a borrower's identity from a bank regulators or a bank's loan committee.
The full scope of the strawman arrangement has yet to emerge. Many participants have refused to talk for fear of state and federal criminal prosecution. Bankers have withheld information because of privacy laws or embarrasment over less-than-prudent loans.
A broad outline of the loans has emerged from lawsuits, bankruptcy filings and dozens of interviews. Other details were provided by Hess, who agreed last week to his first interview since the bank fraud investigation began a year ago.
Hess will say more today at a meeting with creditors listed in his bankruptcy court petition. Hotel, subdivision fail
The strawman arrangements began in 1987, when Hess and his partners embarked on a plan to finance a motel in North Carolina and a subdivision in Salem.
Neither venture panned out, forcing Hess to borrow more money to pay the interest on earlier loans. By 1990, the plan careened toward collapse, fueled by money borrowed from more than a half-dozen lending institutions in the Roanoke Valley.
The bank that knew the most about Hess' financial problems was hurt the least.
For two years, First Virginia-Southwest whittled its portfolio of Hess-related loans with money Hess and others borrowed elsewhere.
First Virginia now stands to lose less than $100,000. Others - including Bank of Shawsville, Central Fidelity, Commercial Credit, First Security and Salem Bank & Trust - are out a total of nearly $1 million.
In 1987, Hess and three partners - Joseph G. Marshall, William C. Noell Jr. and Frank R. Quinn - came up with the idea to build a hotel off Interstate 77 near Mount Airy, N.C.
When no bank would finance the project, the partners raised capital through "investors" who got personal loans in their own names. They turned the money over to the partners, who formed HMNQ Investors Corp.
In return, HMNQ made the monthly payments and signed notes promising investors a profit when the hotel was completed.
The investors got prearranged loans from Thomas E. Hartman, then a senior vice-president at First Virginia.
Hartman approved about 30 strawman loans totaling more than $700,000 at First Virginia. Some of the money went to Billy's Barn, a Roanoke County nightspot once operated by Marshall, and Ellis Court, a Salem subdivision developed by Hess.
Hartman evoked the Fifth Amendment when asked to testify about the loans at a recent civil proceeding in U.S. Bankruptcy Court. He has declined requests for interviews.
Charles Cornelison, a lawyer for First Virginia, said the individual loans - all under $25,000 - were within Hartman's lending authority.
But, Cornelison said, the bank was never made aware that the true beneficiary of the loans was HMNQ, a commercial project that would have required approval of the bank's loan committee.
First Virginia officials say they discovered the strawman loans in May 1988, when Hartman resigned to help organize a new bank, First Security.
Cornelison said First Virginia notified federal banking authorities within a week, as required by law when a bank suspects a loan officer of making fraudulent loans.
First Virginia said it made no public announcement because it would have revealed confidential loan information.
\ Real-Vest enters picture
\ In the summer of 1988, First Virginia set out to recover the $700,000 in strawman loans that had begun to fall delinquent.
The bank reworked its strawman loans so that Hess, Quinn, Marshall and Noell became primarily responsible for the payments.
The responsibility for repayment eventually fell to Hess. Quinn filed for bankruptcy, Marshall lost control of Billy's Barn and Noell settled with First Virginia.
Hess stepped forward so that the HMNQ "investors" would not have to pay. "I didn't want people to think I was a crook," he said.
Facing payments of $30,000 a month, Hess needed to generate a lot of cash.
First Virginia helped with an unusual loan arrangement with Real-Vest Inc., a land sales company at Smith Mountain Lake.
The bank gave Real-Vest several real estate loans, with the understanding that a portion of payments would be applied to Hess' accounts.
Hess said the deals worked for everyone involved: First Virginia made a profit on the new loans and repaid some of the strawman loans; Real-Vest got money to buy land that it was selling through direct-mail pitches; and Hess paid some of his debt.
To generate more cash, Hess recruited strawmen to stand in for him at Salem Bank & Trust and United Companies, a mortgage firm.
Hess said First Virginia officials kept in touch daily and knew he was raising money through a fresh batch of strawman loans.
"I told them," Hess said. "That's something I'm more than willing to take a polygraph on."
Hinson denied any knowledge of strawman loans. He said Hess told the bank he was generating money through land sales at Smith Mountain Lake.
"He said he was selling lots like crazy," Hinson said. "He said he could make money any day of the week."
The lot sales, in fact, turned out to be strawman loans disguised as real estate transactions.
The "buyers" would finance lots at Smith Mountain Lake and actually close on the deals. Hess paid them a commission, made the payments and offered to split any profits when the lots were resold.
Some of the strawmen were the same people who had stood in for Hess at First Virginia.
\ Hess turns to Hartman
\ In the last six months of 1988, Hess' surrogates got eight loans totaling $125,000 at United Companies mortgage and another eight loans totaling $80,000 at Salem Bank & Trust.
"We obviously were under the impression that these were lot purchases," said Carl E. "Sonny" Tarpley, Jr., senior vice president at Salem Bank & Trust.
Hess also got loans elsewhere, particularly small banks looking to expand their loan base. In 1989, The First National Bank of Ferrum lent him nearly $100,000. The bank has been able to collect none of the money.
The new loans that kept Hess current with First Virginia escalated his debt to a growing list of lenders. By 1989, he needed to generate $40,000 a month to make all the payments.
Hess turned to Hartman, who was then the top loan officer at First Security Bank.
Hess said he told Hartman that chances were good that the First Virginia strawman loans would become public knowledge if Hess could not pay them off.
"Whatever hit would hit," Hess said. "If that's blackmail, then it's blackmail. But it's the truth."
Hess said Hartman raised nearly $1 million through his loan authority at First Security and through loans that Hartman took out in his own name.
"He didn't pay that money because he liked me," Hess said. "He paid it to save his a--."
Some of the money went to Golfview Estates, a Smith Mountain Lake subdivision that Hess believed would make enough money to pay off all his creditors.
In 1989, Hartman handled a $150,000 First Security loan that enabled Hess and his partner, Roanoke lawyer Lance Hale, to put a downpayment on the 90-acre Golfview tract in Bedford County.
According to Hess, Hartman also approved several smaller strawman loans totaling $200,000 that paid for development costs such as dredging a cove on Smith Mountain Lake.
Hartman also took out a $75,000 loan at Commercial Credit Corp. to help Hess buy lots in the Hemlock Shores subdivision in Bedford County.
Hartman also helped with Hess' obligation to First Virginia Bank.
\ Hess' credibility attacked
\ In January 1990, Hartman signed an agreement with First Virginia and later paid the bank $350,000, according to Cornelison.
For his efforts, Hartman wanted half-ownership interest in all of Hess' companies and properties. The two men met with an attorney, but partnership papers were never drawn up.
It is unclear when First Security learned of Hartman's business dealings with Hess, but the bank forced Hartman to resign in June.
"It was not real obvious where Mr. Hartman's loyalties were," said Gary Peck, who at the time was president of First Security.
By the end of 1990, Hess and Hartman had borrowed their way into U.S. Bankruptcy Court. Their hopes of a big pay out from Golfview had been dashed when financial problems forced Hess to give up his interest in the project.
Hess and his wife, Shirley, filed a Chapter 7 petition, stating they owed more than $2.7 million to creditors, most of them unsecured.
Hartman was named in an involuntary bankruptcy petition filed on behalf of three banks that claimed the former loan officer owed them more than $700,000.
Central Fidelity Bank, Hartman's largest creditor, claimed that Hartman and Hess were jointly responsible for a $431,000 note unsecured by any collateral.
Central Fidelity officials have declined to disclose the nature of the loan, but Hess said Hartman used some of the money to pay off First Virginia.
Hess said he and Hartman had paid First Virginia at least $700,000 since 1988. Much of the money, he said, came from the same banks that are now trying to recover their money in bankruptcy court.
Hess claimed First Virginia's strategy from the start was to keep quiet about the strawman loans. Hess said First Virginia officials went so far as to suggest banks that might lend him money.
"As long as they left me alone and didn't threaten me, I was willing to do what I could," Hess said.
Cornelison denied that First Virginia intended to dump its problems on other banks or knew Hess was getting strawman loans from other lenders.
Cornelison dismissed Hess' allegations as the "ravings" of a man who would say anything to avoid taking responsibility for a scheme that bankrupted many of his investors - as well as himself.
"This man has a credibility problem," Cornelison said. "There has never been any contrition."
Cornelison said First Virginia had no apologies for its aggressive collection strategy.
"It has been a mess," Cornelison said, "but the bank acted properly throughout."
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