Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SATURDAY, April 20, 1991 TAG: 9104200341
SECTION: VIRGINIA PAGE: A-1 EDITION: METRO
SOURCE: By DAVID M. POOLE/ STAFF WRITER
DATELINE: LENGTH: Medium
The lawsuit, filed Thursday in U.S. District Court in Roanoke, portrays First Virginia as a moving force behind a "straw-man" loan scheme that has led to an FBI bank-fraud investigation.
A First Virginia spokesman issued a statement Friday denying allegations in the suit.
"We are not aware of any wrongdoing by First Virginia or any of its employees in regards to the . . . loans," said Roanoke attorney Charles Cornelison, retained by First Virginia.
Cornelison said he would have no further comment until he had a chance to study the 63-page suit. The bank has 20 days to file a formal reply.
The lawsuit is the latest chapter in the complicated straw-man loan scheme that burned several Roanoke Valley lending institutions between 1987 and 1990.
A "straw man" is a person who obtains financing for a third party who wants to remain anonymous or who otherwise might not qualify for the loan. The scheme originated at First Virginia Bank, where a senior loan officer secretly funneled nearly $1 million to a group of developers through more than 30 individual borrowers.
Cornelison has acknowledged that former First Virginia Vice President Thomas E. Hartman used third-party borrowers to conceal loans to Richard A. Hess, Joseph G. Marshall, William C. Noell Jr. and Frank R. Quinn.
Straw-man loans violate federal banking laws if their purpose is to conceal the true borrower's identity from a bank's loan committee or federal regulators.
Hartman has declined to discuss the loans, citing his right to avoid possible self-incrimination.
First Security says First Virginia became a party to the fraudulent scheme when Hartman's superiors discovered the loans in 1988.
The lawsuit alleges that First Virginia officials conspired with Hartman to pay off the $1 million in loans at the expense of other banks, particularly First Security.
In the summer of 1988, Hartman resigned to take a job with fledgling First Security Bank, which opened a few months later on Williamson Road.
The lawsuit contends that First Virginia engaged in a cover-up so Hartman could get hired at First Security and use money from the new bank to pay off some of the straw-man loans.
The lawsuit alleges that First Virginia failed to fully disclose the fraudulent loans to federal authorities, who might have tipped off First Security.
"When Hartman arrived at First Security Bank, he brought with him a veritable portfolio of unlawful First Virginia loans," the lawsuit states.
"First Security had no inkling that what appeared to be the result of the industrious services of a new employee was the natural product of a fraud perpetuated upon it by Hartman and First Virginia Bank."
The lawsuit contends that First Virginia had a legal obligation to warn the public and First Security that Hartman was less than a "law-abiding and capable" loan officer.
The lawsuit claims that First Virginia officials pressured Hartman to pay off the straw-man loans "by whatever means available" and knowingly accepted payments derived from straw-man loans at First Security and other banks.
First Virginia ultimately paid off all but $100,000 of its loans, while First Security ended up with nearly $1 million in virtually uncollectable loans.
First Security fired Hartman last June after questions arose about his loan portfolio.
First Security seeks damages under several different legal theories, including federal racketeering laws.
The $84 million judgment sought by First Security and shareholders is nearly five times the bank's current assets of $17 million.
The lawsuit was filed on behalf of the First Security Board of Directors and three shareholders by attorneys Joseph L. Anthony and Frank G. Selbe III, both of Roanoke.
Defendants named in the lawsuit include: Robert H. Zalokar, chairman of Falls Church-based First Virginia Banks Inc.; James N. Hinson Jr., president of First Virginia-Southwest; Ellis L. Gutshall and Henry H. Hicks, Jr., officers of First Virginia-Southwest; Hartman; and Hess.
The allegations are nothing new to First Virginia Bank. They were leveled first in February by Hess, a former Salem mortgage broker whose companies benefited from the original straw-man loans.
"I'm sure Richard will be very gratified to hear that someone believes him," Jonathan Apgar, an attorney for Hess, said Friday.
Cornelison, the First Virginia attorney, has 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.
In February, Cornelison said First Virginia had no apologies for its aggressive collection strategy. "It has been a mess," he said, "but the bank acted properly throughout."
Staff writer Sandra Brown Kelly contributed information to this report.
by CNB