Lake City Bank, with home offices in Warsaw, has found itself in potential litigation in a massive check-kiting scheme. The bank is a party of a complaint in the U.S. Bankruptcy Court, Western District of Michigan, Southern District.

Mark Iammartino is the liquidating trustee in a bankruptcy filed by Najeeb Khan, Edwardsburg, Mich., former CEO of Interlogic Outsourcing Inc., an Elkhart-based company that processes payroll for over 6,000 clients across the country.

The bankruptcy resulted from a lawsuit filed by KeyBank in 2019 and federal charges against Khan after he allegedly defrauded clients out of more than $180 million in what documents say may be “the largest and longest-running case of blatant check kiting in United State history.” KeyBank is based in Cleveland, Ohio, with offices in Warsaw, Syracuse and Nappanee.

Khan possessed an estimated $98 million worth of property, including homes, air planes and dozens of classic cars. His property was sold to satisfy creditors.

Iammartino alleges Khan could not have carried out the massive scheme without cooperation of Lake City Bank officials.

The complaint seeks to recover $73 million Khan misappropriated from IOI’s debtors. The trustee says Lake City Bank is also liable because it benefited from the scheme by collecting $13.6 million in negative balance fees from IOI.

The complaint additionally names Lake City Bank CEO David Findlay, Executive Vice President and Chief Financial Officer Lisa O’Neill, Executive Vice President and Chief Administrative Officer Kristin Pruitt and Executive Vice President and Chief Commercial Banking Officer Eric Ottinger. The names were added to an amended filing in October 2022 and then went further into detail of the bank’s alleged role in the scheme.

The 39-count complaint alleges this core group and Khan “orchestrated, collaborated and engaged in an extensive fraud scheme and a ‘pattern of racketeering activities,’ causing IOI and its customers and creditors to incur significant damages.”

The documents also allege the association-in-fact enterprise was a continuing unit that functioned with the purpose of unlawfully enriching Khan and Lake City Bank.

The complaint claims Lake City Bank had reason to believe as early as 2014 Khan’s actions were nothing more than a fraud on IOI’s creditors. It claims IOI’s accounts at Lake City triggered 888 alerts on the bank’s daily check-kiting reports between 2011 and 2014. Another 563 alerts were triggered in 2015 and 594 in 2016.

Additionally, the complaint alleges in the spring of 2019, Khan’s daily deposits and withdrawals were generating negative collected balances exceeding $100 million, creating a liquidity problem for Lake City Bank.

The trustee also alleges in the complaint mid-level bank employees persisted in raising questions about Khan’s practices, which were becoming hard to ignore. Iammartino alleges a decision was made to transition Khan’s business out of the bank.

Lake City Bank filed a motion to withdraw from the case, but it was denied in January.

No ruling has been made on the bank’s motion to dismiss, in which the bank accuses the trustee of conducting “a fishing expedition” through the thousands of internal documents turned over, but not coming up with legitimate claims to involve Lake City Bank.

Findlay, in a phone interview, offered clarification to the suit. It was in July 2019 that Lake City Bank brought the checking-kite scheme to light, and contacted Kahn requesting he not use the balance sheets in the means that he was.

“We are being falsely accused,” Findlay stated.

The bank officials are prepared, through legal council, to appear in court and address the claims against them and making oral arguments supporting their innocence.

Findlay stated the accusations by Iammartino, a liquidating trustee on behalf of KeyBank, are “false, malicious with no truth to them. Our actions uncovered the scheme,” Findlay said, adding it was those actions taken by the bank that stopped the scheme. “The kite stopped and KeyBank occurred the losses.”

Findlay pointed out there has been full disclosure of what occurred in its quarterly 10Q and annual 10K reports. “The disclosures were extensive and we’ve been transparent with our investors. Our performance before and since have been exceptional.

“These are false claims. We’re happy to defend, discuss and prove them. We and our board are not concerned. There is nothing negative to the bank and our shareholders.

“None of us did what we’re being accused of,” concluded Findlay.

The check-kiting scheme came to light in July 2019 when KeyBank filed a federal lawsuit in Southern Ohio’s District Federal Court, Ohio, alleging Interlogic Outsourcing Inc. made a $122 million overdraft by initiating wire transfers without having money to cover the transactions and never paid the money back. The scheme was executed from 2014-19.

That lawsuit, which was put on hold, claimed Khan knew there wasn’t money to cover the transfers. The timeline showed Khan issued checks through Lake City Bank from a pair of related companies, TimePlus and IOI Payroll, to Interlogic. He then ordered wire transfers from IOI to a trio of other banks — Berkshire Bank, Wells Fargo and JPMorgan Chase — totaling $122 million.

It wasn’t until the transfers were processed that KeyBank was notified by Lake City Bank the checks were being returned because of insufficient funds.

After IOI and Khan filed petitions separately for Chapter 11 bankruptcy the case was closed.

But things weren’t over. Khan was charged Dec. 13, 2022, in the Northern District of Ohio federal court, with one count of bank fraud and one count of attempted tax evasion. In January he pled guilty to the charges.

A plea agreement allowed attorneys on both sides to argue the appropriate sentencing. He also agreed to pay back the money he stole, including $121.4 million from KeyBank and $27.2 million from IOI’s customers, over 6,000 clients across the country.

Khan allegedly reported the scheme himself to federal authorities. He is scheduled to be sentenced May 8.