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Civil lawsuit accuses Peoples National Bank and its leaders of racketeering, fraud

Carbondale Southern Illinoisan

Sunday, March 19, 2017  |  Article  |  Molly Parker

Banks (7) , Courts (27) Bryant, Terri--State House, 115 , Fowler, Dale--State Senate, 59 , Schimpf, Paul--State Senate, 58

GRAND CHAIN — A brewing feud between two longstanding Southern Illinois banks has gone public.

In a lawsuit filed this past week in federal court, Grand Rivers Community Bank accuses Peoples National Bank and its leaders of usurping control of Grand Rivers for racketeering activities from August 2010 through the present time to the detriment of Grand Rivers.

The lawsuit accuses Peoples and its leaders of “rampant self-dealing, preferential transactions, and improper transfer of low-quality assets from Peoples to Grand Rivers.” It further alleges that Peoples sought to acquire Grand Rivers in August 2015 for the purpose of concealing those activities.

On Friday, a representative of Peoples National Bank’s corporate office in Mount Vernon, said the bank and the defendants named in the lawsuit had no comment at this time on the allegations made against them in the 61-page filing.

Grand Rivers claims it only became aware of the illegal activities it alleges after the merger was finalized on Nov. 27, 2015.

Therefore, Grand Rivers claims that based on its allegations of Peoples “fraudulent concealment of the true purpose of the agreement,” that the merger agreement “is based entirely on fraud and is void.” The lawsuit also alleges that the board of directors of Grand Rivers was illegally constituted at the time of the merger, in violation of Illinois law and Grand Rivers’ bylaws.

The lawsuit specifically accuses Frank William Bonan II, former chairman of the Grand Rivers Community Bank and a current director of Peoples, of using the bank “as a personal account from which he could borrow unlimited amounts of money.” Collectively, the defendants are accused of infiltrating Grand Rivers and its sole shareholder, Main Street Bancshares Inc., and managing them “for their own illegal purposes.”

Named as defendants in the lawsuit brought by Grand Rivers and Main Street are:

• Peoples National Bank;

• Peoples’ sole shareholder, Market Street Bancshares;

• Bonan II, of Harrisburg, who also formerly served as Peoples’ president of the Southern Illinois District;

• his father, Frank William Bonan, of Mount Vernon, the chairman, president and general counsel of Peoples and vice chairman of Market Street;

• and Keith Botsch, of Carmi, a former member of Grand Rivers’ Executive Committee, a CPA who does accounting work for Grand Rivers, and a current director of Market Street and Peoples.

Key components of the case

The lawsuit’s chief accusations are as follows:

• In 2010, Bonan II and Botsch came to constitute a majority of Grand Rivers’ three-member Executive Committee, which is charged with approving all loans. Many of the loans made while Bonan II and Botsch were controlling members benefited their insiders, Bonan II’s family members and friends, or one of five separate business entities controlled by Bonan II, it is alleged.

The lawsuit does not name those business entities, but a search of online newspaper archives and government records shows Bonan II is a key member of businesses dealing with real estate, group health insurance and video gaming parlors located in 11 Southern Illinois communities called Nikki’s Place.

According to the lawsuit, Bonan II and Botsch did not disclose the substantial nature of certain loan transactions to Main Street, Grand Rivers, or the third independent member of the executive committee. “When questions were raised as to the quality of these transactions, Bonan II exercised dominant control to further the scheme.”

• Market Street and Peoples asserted control over and indirect ownership of Main Street and Grand Rivers without the required approval of the Federal Reserve, it is alleged.

• On June 29, 2012, Grand Rivers extended three loans totaling $1.47 million to family members of a shareholder, director, and a Peoples insider, the lawsuit alleges. All three were in their 20s at the time, and none were customers of Grand Rivers. It is alleged that they were straw borrowers in a scheme orchestrated on behalf of Peoples. Non-existent collateral was pledged on these loans.

The loan proceeds were paid from Grand Rivers to Market Street Bancshares (the sole shareholder of Peoples) via wire transfer on July 5, 2012. The lawsuit alleges that on Aug, 9, 2012, Market Street and Peoples used these “illegally obtained funds” to repay the federal government money owned under the Troubled Asset Relief Program. The TARP program was signed into law by President George W. Bush in October 2008 to help banks regain financial stability during the subprime mortgage crisis that sparked the Great Recession.

• It is alleged that Peoples bank routinely used Grand Rivers to serve as a refinancing source for Peoples' high-risk loans, in order to improve Peoples’ balance sheet. The troubled loans inappropriately refinanced by Grand Rivers total about $10 million, accounting for about 21 percent of Grand Rivers’ entire loan portfolio, it is alleged.

In one such case, it is alleged that Grand Rivers Credit Analyst Don Nave was instructed by Bonan II to extend credit to a borrower Nave had flagged as a substandard credit risk. The refinancing deal exposed Grand River by more than $1.26 million on behalf of a borrower that was continuing to experience cash flow issues, the lawsuit claims.

After Nave expressed his concerns, Bonan II responded, “Are you asking if I give a s--- Don? You have no idea what is going on. If you would like to know please let me know. You guys work on this loan or pack your s--- and get out,” according to an email exchange included in the lawsuit. That same day, Grady Gaskins, the bank’s CFO, submitted the restructured loan for approval to the executive committee, which signed off on it. “The loan remains unpaid, and has caused Grand Rivers to suffer loses,” the lawsuit states.

'Rampant self-dealing' alleged

Bonan II is accused in the lawsuit of personally engaging in a pattern of self-dealing to benefit himself, his family members and friends, and a romantic partner. The lawsuit alleges Bonan II sent an email June 7, 2015, to CFO Gaskins and others stating, “I need to get my gross income up to $250,000 per month very soon. We will go over cash flow so everyone will know how than [sic] contribute. Remember the deal. The more money the business makes the more money you guys make. I have always done this and will continue to do this.”

The lawsuit details allegations of lines of credit issued at the direction of Bonan II, to benefit friends of his and businesses with which he is associated.

The lawsuit claims that a substantial part of a $1.325 million loan was used to purchase an apartment building for a company Bonan II is involved with. And a $300,000 loan, obtained through a straw borrower, was used as a down payment on a building purchased by a company owned and controlled by Bonan II and Botsch, Grand Rivers’ CPA, it is alleged. 

It is further alleged that at Bonan II’s direction, Grand Rivers extended loans to another company with which he is involved in the amount of $1.262 million. The loan was guaranteed by two individuals with extremely limited financial capacity, one of which had a net negative worth, and whom were employed by Bonan II in his other activities, the lawsuit alleges.

A portion of the money — about $358,000 — was used to refinance a mortgage loan owed to Peoples National Bank by another company whose managing members were friends of Bonan II's, one of whom it is believed he was engaged in a romantic relationship with at the time, the lawsuit alleges.

Merger called into question 

As to the merger agreement, the lawsuit alleges that on or about July 12, 2015, Botsch, the CPA, contacted Bonan (Bonan II’s father) regarding Botsch’s knowledge of Bonan II’s improper activities related to Grand Rivers, and “expressed in words or substance that, unless Bonan I were to do something about it, Bonan II would go to prison.”

On Aug. 20, 2015, Gaskins sent an email to Bonan II at his Peoples email address with the subject “PLAN” that outlined the intended terms of the acquisition of Grand Rivers by Market Street and Peoples. On Aug. 24, 2015, Market Street, at the direction of the elder Bonan, its chairman, entered into a letter of intent to acquire the outstanding stock of Grand Rivers. Bonan II executed the letter of intent on behalf of Grand Rivers. On Oct. 20, 2015, Bonan II abruptly resigned from the Grand Rivers Board of Directors, the lawsuit claims.

The day after his resignation, in a telephone conversation with Grand Rivers CEO Whitney Stringer, Bonan II said he would consider reinstating himself as chairman of the board to get the merger on track, but advised that CEO Stringer would need to speak with the elder Bonan to determine whether the merger was going forward. On Oct. 21, 2015, Bonan confirmed that Market Street would go forward with the acquisition if Botsch, the CPA, resigned from the board, according allegations in the lawsuit.

That same day, Bonan II advised CEO Stringer that, for the merger to proceed, everyone except for board member Jake Campbell would have to resign; Bonan II would be able to choose his own board, and he would be paid $10,000 per month as chairman.

He stated his demands must be met by 4 p.m. Main Street and Grand Rivers went along with the deal, claiming in the lawsuit they did so because they were “unaware of the self-dealing, preferential transactions, and transfer of low-quality assets” directed by Bonan II to the determinant of Grand Rivers, and at the time desired to go forward with the merger. Under the terms of the deal, Bonan II then named to the board himself, CEO Stringer, CFO Gaskins, Campbell, a prior board member, and Luke Phelps, a business insurance agent from Eldorado and the son of former Congressman David Phelps.

• The lawsuit claims that Bonan II inappropriately controlled the election of the majority of directors of Main Street when making the above directive on Oct. 21, 2015, regarding constitution of the board. It is alleged that Bonan II purported to serve as chairman, but was neither appointed nor elected as required by Illinois law or the Grand Rivers’ bylaws. Citing the alleged improper constitution of the board and alleged concealment of fraudulent acts including racketeering, Grand Rivers claims the merger should be voided.

• The plaintiffs additionally seek compensatory and punitive damages and attorneys’ fees, all to be determined in a trial.

The lawsuit was filed Tuesday in the U.S. District Court for the Southern District of Illinois. It was originally assigned to Judge Phil Gilbert, but court records filed Wednesday show he has recused himself, and the case has been reassigned to Judge Staci Yandle.

Lawsuit alleges RICO violations

The lawsuit alleges five counts of civil violations of the Racketeer Influenced and Corrupt Organizations Act, more commonly known to by its acronym, RICO. The 1970 RICO Act allows for both civil claims and criminal charges to be brought against alleged violators. To date, the newspaper is not aware of any federal criminal charges brought against the defendants as it relates to the allegations of racketeering outlined in the civil lawsuit.

The lawsuit additionally alleges financial institution fraud, breach of fiduciary duty and two counts of fraud.

About Peoples Bank

Peoples Bank, headquartered in Mount Vernon, is one of the largest locally owned and controlled banks in Southern Illinois. Its roots date back to 1893, when a private firm called Peoples Bank was founded in McLeansboro. It was chartered as a national bank in 1909, according to the bank’s website. In 1988, shareholders Bill Bonan and Hunt Bonan — Bonan II’s father and uncle, respectively — formed a bank holding company, Market Street Bancshares, Inc., for the purpose of acquiring 100 percent of the stock of Peoples.

Peoples, under the Bonan family’s leadership, has enjoyed much success over the years and currently has Illinois branches in West City, Benton, Carmi, Carterville, Centralia, Dahlgren, Eldorado, Equality, Fairfield, Harrisburg, Herrin, Marion, McLeansboro, Mount Vernon, Salem and West Frankfort, in addition to branches in the Missouri cities of St. Louis and Clayton.

The Bonans have been active in both charity and politics in the region and state.

Combined, Bonan, Bonan II, Hunt Bonan, Market Street Bancshares and other companies affiliated with the Bonans have given tens of thousands of dollars in campaign donations to political candidates on both sides of the aisle. The family was among the largest financial supporters of former Gov. Rod Blagojevich.

During the Blagojevich administration, Hunt Bonan served as chairman of the Board of Review of the Illinois Department of Employment Security, and Bonan II was appointed by Blagojevich to serve on the SIU Board of Trustees, of which he was a member from October 2008 to April 2011.

More recently, the Bonans financially supported the campaigns of Dale Fowler, who is employed as the Southern Illinois business development officer for Peoples, in his successful 2015 run for mayor of Harrisburg and 2016 bid for the state senate. Fowler, R-Harrisburg, toppled longtime Democratic Sen. Gary Forby, D-Benton in a surprise upset this November. Combined, the Bonans, individually and through companies with which they are associated, gave $47,500 since 2015 to Fowler’s campaign accounts for mayor and state senator. The elder Bonan and Fowler are co-founders of the nonprofit Fowler-Bonan Foundation that provides clothing and shoes to children in need, and Bonan II serves on the charity’s board.

The Bonans have also given smaller amounts to other politicians, including recently Republicans Rep. Terri Bryant, Sen. Paul Schimpf, and Leslie Munger, who lost a bid for Illinois comptroller in November, as well as Democrats that include Williamson County State’s Attorney Brandon Zanotti, and Judge Jo Beth Weber, who lost her judicial race in November for the 5th District Appellate Court.

In August 2016, Peoples made headlines after a Jackson County Circuit Court Judge rendered a judgment against the bank in excess of $16 million, most of which was to be paid to two Herrin brothers who said the bank's fraudulent activities caused them to lose their Taco John's franchise in Southern Illinois.

In their lawsuit, Robert and Terry Newman accused Peoples, their longtime financial institution, of illegally converting their assets, forging documents that left them on the hook for hundreds of thousands of dollars in indebtedness, and failing to provide reasonable and honest communication to clients whom they had a fiduciary responsibility, resulting in the Newmans losing rights to reclaim their business when the party they sold to defaulted on its loans. At the time, Peoples said it planned to appeal the decision.

About Grand Rivers

Grand Rivers Community Bank is a much smaller operation in business scope and influence. Peoples is a nationally chartered member of the Federal Reserve System, where Grand Rivers is a state-chartered bank.

Grand Rivers has roots in Pulaski County dating back to 1902, with current branch locations in Grand Chain, its headquarters, Karnak and Shawneetown. The bank had apparent financial struggles before 2010, the year Bonan II is alleged to have begun his reign of undue influence over Grand Rivers.

In 2009, Grand Rivers entered into a consent decree with the Federal Deposit Insurance Corp. and the Illinois Department of Professional and Financial Regulation to correct unsafe or unsound bank practices alleged to have been committed by the bank. The bank entered into the consent decree, which called for corrective business and management practices, without either denying or admitting to the claims that caused regulators to flag the bank and issue a cease and desist order.

It was one of 55 Illinois banks that state regulators issued enforcement against in 2009, at the height of the recession, as many financial institutions struggled.

The order was terminated on Aug. 15, 2011.

Grand Rivers entered into a second consent order with state’s regulatory arm on May 24, 2016. Again, the bank did not admit to or deny the allegations of unsafe and unsound banking practices alleged by state regulators that led to the enforcement action. The standard language consent order calls for the rapid hiring of a skilled financial manager and greater board participation and oversight to ensure sound financial practices.

In 2016, Grand Rivers was one of only six banks state financial regulators issued enforcement action against. The consent order remains in effect.