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Iowa Capital Dispatch: Davenport banker accused of fraud in million-dollar scheme targeting the SBA
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Iowa Capital Dispatch: Davenport banker accused of fraud in million-dollar scheme targeting the SBA

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Valley Bank

The former Valley Bank building in Moline.

An Iowa banking executive, accused of attempting to defraud the Small Business Administration through a scheme involving millions of dollars, has pleaded guilty to a charge of wire fraud.

Larry Charles Henson of Davenport, the former president and chairman of the now-shuttered Valley Bank in Moline, is expected to be sentenced March 8. He is accused of conspiring with others to shift millions of dollars in potential losses from Valley Bank to the SBA.

Court records indicate Valley Bank worked with a lending institution based in Clive, identified by prosecutors only as “Company 1,” to assist Valley in making SBA-backed loans that the federal agency would pay off should the borrowers default.

According to prosecutors, the founder and president of Company 1, identified by prosecutors only as “Co-Conspirator 1,” worked with Henson and other Valley Bank employees to engineer those loans so that it appeared the borrowers qualified for SBA guarantees. To do this, they allegedly completed loan-guarantee applications that included false statements about both the borrowers’ eligibility to receive the loans and the eventual disbursement of the loan proceeds.

For example, in September 2011, Valley Bank allegedly attempted to shed itself of any risk associated with a $5 million loan it had made to a Kentucky-based business that was highly leveraged and had limited capital.

Co-Conspirator 1 allegedly advised Henson to “do everything possible to make sure the borrower is not more than 29 days late” in payments to ensure that their application for an SBA-backed refinancing of the loan would be approved – even if that meant having Valley Bank grant the borrower a 90-day deferral of payments. Co-Conspirator 1 also is alleged to have called Henson and suggested a variety of ways in which a bank could fraudulently conceal from the SBA the fact that a loan was at risk of default.

Shortly after that, Co-Conspirator 1 called Valley Bank Vice President Andrew Erpelding to alert him that the loan couldn’t be refinanced by the SBA because of previous past-due payments. Erpelding allegedly called Henson and told him of the problem, after which the two men jointly called Valley Bank Vice President Susan McLaughlin, instructing her to alter the bank’s loan-payment reports.

McLaughlin allegedly complied, changing the borrower’s payment history to eliminate any delinquent payments. The bank, along with Co-Conspirator 1, then transmitted the falsified information to the SBA as part of the application for refinancing.

At around that same time, the SBA denied Valley Bank’s application to refinance a $4.6 million loan involving a Florida company, pointing out that the borrower was already a guarantor on two other SBA loans that were in default. Co-Conspirator 1 is alleged to have then submitted a new application for the loan, this time identifying the borrower only through an acronym of the borrower’s actual name.

With no credit history attached to that fictitious name, the SBA contacted Valley Bank and asked for its payment records and other documents tied to the loan. Co-Conspirator 1 allegedly emailed Erpelding and explained to him that the bank would need to “rewrite” its loan documents to put them all in the fictitious name used on the SBA application and then make sure there were no delinquent payments referenced in those documents.

The SBA approved the falsified application and the borrower ultimately defaulted, leaving the federal agency on the hook for $2.1 million.

A few months later, in January 2012, Valley Bank attempted to shift to the SBA its risk of losses tied to a loan the bank had made to another Florida company, court documents state. As before, it attempted to do so by refinancing the loan through the SBA. As part of that refinancing, the borrower was requesting $5 million, with $3.7 million to be used in paying off loans and $1.3 million designated as working capital.

One problem with the refinancing request: The borrower had a net worth of only $408,000. To help ensure SBA approval, Co-Conspirator 1 is alleged to have falsely inflated the borrower’s net worth to $2.2 million, with $750,000 in savings and other assets worth more than $1 million. Prosecutors say Erpelding then falsely informed the SBA that the borrower would be injecting $750,000 of his own money into the business.

The SBA ultimately approved the $5 million loan. The borrower defaulted and the SBA sustained $34 million in losses.

Henson was recently indicted on a single count of wire fraud. He pleaded guilty to the charge Tuesday and acknowledged that he now faces a maximum sentence of 30 years in prison and a fine of $1 million.

As for Co-Conspirator 1 and the role played by others in the alleged scheme, the U.S. Department of Justice said Wednesday the case remains under investigation.

In 2016, the Federal Deposit Insurance Corp. and Henson entered into a settlement under which the former executive consented to an order of prohibition from any further participation in the affairs of any financial institution.

Published through a sharing agreement with Iowa Capital Dispatch. Visit them at iowacapitaldispatch.com

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