Racism, Fraud Allegations Fuel Lawsuits Over Bank

Damian Sinclair said federal regulators closed his Gravette bank because it was making too many loans to minorities and low-income residents of Benton County.

Sinclair said the U.S. Office of the Comptroller of the Currency approved the business plan for his bank so it could sabotage the institution.

“We believe the OCC has a pattern of identifying banks they want to drive out of business,” said Helen Davis Chaitman, Sinclair’s attorney in New York City. “One of those methods is character assassination. They’ve tried for a year and a half to damage Mr. Sinclair’s reputation.”

The OCC said it took over Sinclair National Bank on Sept. 7 because of “grossly inadequate” business practices, suspicious loans and “secret payments.”

Chaitman said attorneys for the OCC have no evidence that fraud occurred at SNB, but the OCC referred to a potentially fraudulent loan scheme at the bank in a brief filed Sept. 5 in U.S. District Court in Fayetteville.

“They wrote this paper that said [they had to close down the bank] because this guy’s a crook,” said Sinclair, making a reference to himself.

Sinclair, who lives in Springfield, Mo., talked to the Northwest Arkansas Business Journal on Oct. 8 by telephone from Chaitman’s home in New Jersey.

The Sept. 5 filing said SNB was paying “prime prices for subprime assets” to Stevens Financial Group, a business Sinclair sold to Clarence Stevens Jr. of Springfield in July 1999.

“The OCC has clear evidence that Mr. Sinclair received large secret payments from SFG on a monthly basis, and Ms. Sinclair also received secret periodic payments from SFG, all without disclosure to the bank’s board of directors or to the OCC, and despite specific inquiries from the OCC,” stated the brief filed by Rosa M. Koppel, assistant director of the litigation division of the OCC in Washington, D.C.

Koppel went on to say the Sinclairs claimed to be unpaid consultants for SFG and were receiving the payments “while the bank was incurring significant losses.”

But the OCC said in the brief that it can’t come up with hard numbers for how much SFG paid the Sinclairs. The Sinclairs have filed suit in U.S. District Court in Missouri under the Right to Financial Privacy Act to try to prevent the government from prying into their business operations.

Chaitman said the OCC is making a slanderous insinuation in the brief to damage Sinclair’s reputation.

“If he had been a criminal, why wouldn’t they have indicted him?” said Lamar Pettus, Sinclair’s Fayetteville attorney. “I think it’s because they didn’t have any evidence.”

Koppel said she couldn’t comment further about what was in the court document.

“It’s just hard to talk about some things while they’re pending in court,” said Robert Garsson, a spokesman for the OCC. “You take a few lumps along the way, but you hope it comes out all right in court.”

Stevens Connection

Stevens Financial Group filed for bankruptcy in March 2001. Vernon Schweigert was appointed by the court to examine the business’ finances. By the time he was done with the write down, SFG’s $77.3 million in assets had been reduced to $16.4 million.

Chaitman said the difference was because the $77.3 million figure was based on assets for the future operation of the business, not because all of the loans were bad. About $2.5 million of the write down was on the value of SFG’s real estate, said Ray Plaster, a Springfield attorney representing SFG investors.

Instead of cash, SFG’s 2,500 investors will receive stock in a new corporation, SFG Holding.

Meanwhile, Sinclair is suing the OCC in U.S. District Court in Fayetteville for compensatory damages (estimated at about $5 million) and unspecified punitive damages. A request for preliminary injunction to stop the closure of the bank was filed in August. It was amended in October to include the allegations of civil rights violations by the OCC and to request damages.

Sinclair sued the OCC in October 2000 in the U.S. Court of Federal Claims in Washington, D.C., for breach of contract and alleging civil rights violations, asking for $2 million in damages. SNB filed a separate, similar breach of contract suit with the same D.C. court in February. An undisclosed number of investors in SNB also lost their money when the bank was closed.

Stevens Financial Group filed what appears to be a copycat civil rights suit in February in U.S. District Court in Missouri against a different arm of the federal government.

SFG said former U.S. Commissioner of Securities Douglas F. Wilburn and current Commissioner Douglas Ommen had committed civil rights violations by not allowing SFG to loan money to minorities and lower-income borrowers in that state.

“The Wilburn administration sought to shut down our business because we make loans to people who are not necessarily white and who are not necessarily rich,” Stevens was quoted by the Springfield Business Journal as saying at a press conference announcing the civil rights suit. “We refuse to stop making loans to hard-working Americans, no matter what their race or national origin. And this is why the ex-commissioner wants to shut us down.”

That case was dismissed in May when SFG filed for Chapter 11 bankruptcy protection. Chaitman also served as SFG’s attorney.

In the D.C. court, the OCC asked the judge to dismiss Sinclair’s suit, but Judge Christine Odell Cook Miller denied the motion to dismiss in an April 16 ruling, so that case will likely go to trial.

After the April 16 ruling, Chaitman said, the OCC got really nasty in its war against SNB.

“After we were permitted to take discovery, we were doomed at that point,” she said.

The Clamp Down

Northwest National Bank was founded by former state Sen. Kim Hendren in October 1996. Sinclair purchased the struggling bank from the Hendren family in March 2000 for $2.75 million. Hendren has had no involvement with the bank since he sold it.

Sinclair said he also invested $2 million of his own money in the operation during the 19 months he owned the bank. Besides the main office, SNB had a branch location in Bella Vista. The bank has never had a profitable year under any of its owners.

Initial shareholders included Sinclair, his former wife Susan Sinclair and Don Gibson, a former vice chairman of Great Southern Bancorp of Missouri. The board was initially composed of the Sinclairs, Gibson, Richard Wilson (former senior vice president and chief financial officer for Great Southern) and Kent Chambers, who had been a cashier with Northwest National Bank.

This was Sinclair’s second bank. He and two other investors founded Sinclair Bank & Trust in Maine 1998, but that bank closed after only a year in operation. It was the nation’s first uninsured wholesale bank, also known as “woofies.” Uninsured banks don’t accept deposits of less than $100,000, and depositors must have a net worth of $1 million or have reported income of at least $200,000 for two years in a row.

Sinclair told the Springfield Business Journal that he quickly learned that banks need to be FDIC insured to survive.

The OCC named the Federal Deposit Insurance Corp. as receiver for SNB, which had total assets of $30.7 million and total deposits of $25.7 million when it was shut down. The FDIC immediately sold the bank to Delta Trust & Bank Corp. of Little Rock. SNB depositors automatically became Delta depositors.

Risky Business

Sinclair’s D.C. lawsuit said that the OCC didn’t like the idea of Sinclair National making high-risk loans to “minorities” (i.e. Hispanics) and lower-income applicants.

Sinclair’s court filings say the OCC gave him the go-ahead with approval of his business plan, then jerked the rug out from under him, interfering with the bank’s operation for 18 months before finally shutting it down.

According to the suit, John A. Bodnar, deputy comptroller of the currency, in a telephone conversation on Feb. 28, 2000, “expressed a strong dislike … for any of ‘his’ national banks lending to ‘those kind of people.’ “

“Bodnar called, and all of a sudden this guy starts yelling,” Sinclair said. “I thought, ‘It’s obvious he’s going to turn my application down.’ So I said, ‘What you’re telling me is unless you’re rich and white, you can’t get a loan?’ There was dead silence then. He said, ‘I’ll sleep on it and call you back in the morning.’ “

The next day, Bodnar called Sinclair back to tell him his business plan had been approved, so Sinclair purchased the bank only days later.

Sinclair said he later learned that the OCC and Bodnar in particular had been accused in the past of having a racial bias when it comes to bank loans.

“Obviously,” Sinclair said, “when I made that statement, it hit a nerve.”

“He did not say any of those things,” Garsson said referring to Bodnar. “There would be absolutely no tolerance at this agency for that kind of behavior. That’s just not the way the OCC does business. Equal opportunity, tolerance are values that are important to the OCC and every individual who works for the OCC.”

A month after Sinclair purchased the bank, the OCC initiated an obvious plan to shut it down, Pettus said, adding that the plan was probably in the works before Sinclair actually purchased the bank.

In April 2000, OCC bank examiners set up camp at his bank for five months to monitor its subprime lending practices. As of April 2001, subprime lenders include anyone who has been 60 days late on a payment within the last year or has been late on two payments for 60 days each over the past two years.

“If you’ve missed a couple of payments to me, then you’ve paid them and a $10 late fee, you’re subprime,” Sinclair said, noting that many people fall behind on their bills when they encounter problems such as unemployment.

Sinclair said half of SNB’s loans were made to minorities, and 90 percent of the bank’s loans were to low- to moderate-income borrowers.

“People in Arkansas don’t make a lot of money, but they pay for their homes and their cars,” Sinclair said. “Banks aren’t here to just do business with big corporations.”

Sinclair said one examiner leafed through his bank books looking at all the Hispanic names and sniffed, “Don’t you make loans to anyone with normal names?”

“I think the OCC has a policy they won’t write down and they won’t admit to,” Chaitman said. “They don’t like making loans to minorities and lower-income people.”

“There is nothing wrong with subprime lending,” Garsson said. “It makes credit available to a lot of people who might not be able to get credit otherwise.”

Sinclair said SNB would have been the only bank in Arkansas that made most of its loans to minorities and lower-income borrowers. He said the loans were performing well: Only one home loan was delinquent, and that borrower had made regular payments for three years.

“Fifty days into the relationship, they stopped the bank from all lending activity,” Sinclair said.

On Aug. 30, Sinclair’s lawyers filed a motion in U.S. District Court in Fayetteville asking for a restraining order to keep the OCC from taking possession of the bank.

Sinclair had a plan to save the bank and make it profitable again. An Aug. 30 letter from Gerri Dolan, president and CEO of Sinclair Bank, to Ronald G. Schneck, director of the Special Supervision/Fraud Division of the OCC, said it had a plan to restore capital.

The bank would reduce the number of its subprime loans through amortization and sales, reduce total assets and inject $2 million into the bank (through the sale of the bank or of Sinclair’s personal residence).

Dolan also said the bank’s board would redirect “its strategic focus into traditional banking activities by reducing expenses.”

The OCC has also cited the “loan-to-one borrower” rule, a federal statute that prohibits too much business being done with one borrower. Pettus said the $3 million in loans in question were spelled out in SNB’s business plan, which was approved by the OCC before Sinclair purchased the bank. Those loans were purchased from Stevens Financial Group.