Booneville-based First Western Bank has filed its response to the Arvest Interpleading and countersuits stemming from the Dennis Smiley loan saga, which cost him his job as a top bank Arvest bank executive in March.
First Western is one of 20 banks known to have loaned the former Arvest Bank-Benton County president an estimated $4 million since 2011. At least 10 of those banks were defrauded by Smiley who used the same collateral – his Arvest Group Bank stock gifted to him as a top executive – for each loan.
Arvest Bank noted in its April 2 interpleading with the Benton County Circuit Court that Smiley knew the stock was not transferable when he pledged it as collateral. Several banks including First Western have provided documents to the court that show at least three other top Arvest executives signed security control agreements on behalf of Arvest Bank granting the lender access to the shares in case of default.
First Western noted its May 9 filing that Arvest knowingly allowed and directly participated in Smiley’s fraudulent pledge of his shares of Arvest Bank Group shares as collateral for a loan of $125,000 in February 2011 for real estate investments. Unknown to First Western at the time of the loan was that Smiley had already pledged that same collateral in loan with the Bank of Fayetteville.
First Western said it relied on financial statements provided by Arvest agent Euva Phillips and Smiley showing the shares could be used as collateral when making the loan. Absent the fraudulent statements from Arvest’s authorized agent and Smiley, First Western said it would not have made the loan, much less entered into a second loan arrangement with Smiley. In November 2013, Smiley borrowed another $85,983.86 from First Western through his limited liability company HDS Holdings.
First Western said Smiley did the same song and dance by misrepresenting his true financial status and again pledging the Arvest Bank shares as collateral through a signed control agreement by an Arvest officer Jeb Mills.
Phillips and Mills continue to work at Arvest Bank and spokesman Jason Kincy told The City Wire, and no other executives have resigned or left the company as a result of the Smiley situation.
First Western said it is owed $210,899.85 from Smiley’s fraudulent pledges in two loans made with Arvest signatures which shows that the bank knew or should have known of Smiley’s actions to pledge the stock as collateral. First Western notes that Arvest breached its contract to provide payment out of the stock account in case of default.
In its filing First Western said it reserved right to countersue any of the parties involved. The bank has not yet done so as of the close of business on Friday (May 9.)
Arvest has already been sued by Bank of Fayetteville, First Bank Hampton and First National Bank of Fort Smith, with each alleging that Arvest knew the collateral was pledged multiple times, given the same Arvest signatures appear multiple times on control agreements which they have disclosed to the court.
Outside of the Arvest interpleading on April 2, the bank has not made any public statements about their discovery of the Smiley situation. Kincy said the bank does not comment on pending litigation.
Arvest notes in its interpleading that Smiley knew he was not permitted to pledge or otherwise encumber the shares in the Arvest Bank Group common stock plan. Counsel for Arvest asked the court for a release of any liability related to Smiley’s stock proceeds ($551,754) which were deposited with the court on April 4.
There have been no criminal charges filed against Smiley or his former employer. There is a federal criminal investigation underway into Smiley’s loan activity. Sources believe there is enough evidence to waive a grand jury seating and move straight to a plea bargain with the U.S. Attorney’s Office.
It will be up to courts to decide the extent of Arvest’s liability in the alleged loan fraud perpetrated by Smiley, an officer and high ranking bank official. Acts of individual employee fraud can protect companies to a certain extent. But, the Federal Deposit Insurance Corporation notes in its regulations that bank management is responsible for preventing and detecting fraud and insider abuse: “The primary responsibility to prevent fraud and insider abuse rests with the board of directors and senior management.”
Smiley was senior management, but the FDIC states there should be checks and balances in place to circumvent and detect suspicious activities at the executive level.