Big bank loss, fraud, deleted files at center of lawsuit

Sept. 15--CORRECTION -- An earlier version of this story incorrectly said that Michael LoCash referred to Bank @Lantec CEO Susan Ralston as his rock. LoCash was referring to his wife. This story has been corrected.

NORFOLK

A scheme that cost a local bank nearly $3 million began when Michael LoCash, its chief financial officer, met a suave strip-club-owner-turned-investment-broker from Michigan named Dante DeMiro.

They partied together, played video games, watched sports and shared soft-core pornography via email. LoCash would later call it a business relationship. Some of his colleagues at Bank @Lantec, however, raised their eyebrows. But LoCash was a trusted, longtime employee, so no one openly objected.

In 2010, LoCash purchased on the bank's behalf $2.75 million in certificates of deposit as an investment from DeMiro.

Turns out all DeMiro was selling was a Ponzi scheme. DeMiro ultimately was convicted in federal court and sent to prison.

Meanwhile, the bank's eyes turned toward LoCash. He never was implicated criminally, but he resigned under pressure a week after the FBI alerted bank executives of the scheme.

Just before leaving, LoCash destroyed 3,000 emails, dozens of voice mails and thousands of pages of documents, including most communications with DeMiro (and the exchange of the pornography). Or at least he thought he did.

The bank and its insurance company want to know why.

Federal Insurance Company, which covered the bank's $2.75 million loss plus interest, is suing LoCash in federal court here, accusing him of being complicit in the Ponzi scheme and seeking to recover its payout.

The trial begins Tuesday.

LoCash, a Tennessee native, served as Bank @Lantec's CFO for 15 of his 17 years there, rising up from accounting clerk. By 2010, he was earning $115,00 per year plus 5 to 25 percent annual bonuses.

For 12 of those years, he was acquainted with DeMiro, who cold-called him one day in 1998 soliciting an investment. They talked many times over the initial years, but the bank never purchased anything from him until 2010.

As CFO, LoCash had the authority to make investments of up to $1 million on behalf of the bank without the approval of President and CEO Susan Ralston or the bank's board of directors.

In the spring of 2010, LoCash recommended that the bank purchase a short-term CD from DeMiro worth $1.5 million.

While the bank had five or six brokers with whom it usually worked, Ralston signed off on it based on LoCash's longtime relationship with the man from Michigan, LoCash says in court filings. The insurance company says Ralston never formally approved the investment.

LoCash made the purchase on June 9, 2010. The next day, he left for a two-week Caribbean vacation, a trip that the insurance company believes DeMiro intended to join but did not make, according to court filings.

The next month, a colleague informed LoCash that she was concerned the bank had not received any paperwork from DeMiro.

All the bank had was a computer screen shot displaying a CD. By September, Sandra Carmell, the bank's controller at the time, again asked LoCash for the paperwork. Court records say she never got a response.

That same month, LoCash changed the company's investment policy, removing any limits on the amount of money that could be invested in CDs without approval. He sent a note to Ralston and other executives, stating that "not many changes" were made to the policy, and never indicated the investment limits were removed. Later, he would say that he frequently tweaked the policy over 17 years.

Sept. 9, 2010, LoCash authorized the purchase of an additional $1.25 million in CDs from DeMiro's MuniVest company.

Eight days later, the FBI called.

The executives at Bank @Lantec were a tight-knit bunch. Most had worked there a decade or more.

Ralston started there in 1994, when it was called Atlantic Fleet Federal Credit Union. (It converted to a bank in 2004.)

Ralston said in her deposition that LoCash was a valued employee.

So when the FBI called that day to say DeMiro had been indicted and arrested, the executives gathered around in shock.

"We were all in disbelief," LoCash recalled, according to his deposition.

LoCash said he turned white as a sheet of paper.

"I could not believe it," he said in his deposition. "I felt like I was in some sort of dream or something. Or nightmare."

LoCash walked to Ralston's office. She was on the phone.

"I could see on her face that she could see on my face -- we had worked together for so many years -- that there was something tragically wrong," LoCash said.

When Ralston came down to LoCash's office, he said to her, "I guess this is the end of my career here."

Instead of asking for his resignation that day, a Friday, Ralston tried to calm him down and get him to begin working things out -- with the FBI, the insurance company and the bank's image.

But over the next week, LoCash did something else. That Monday, he began erasing files from his computer. He installed two data-wiping programs and over the next five days he destroyed, or thought he did, 22 gigabytes of data. (One gigabyte equals about 894,000 pages of text.)

LoCash resigned Friday, Sept. 24, 2010. When bank officials found his laptop, its power cord had been mangled. LoCash later said the plug was simply bent from being stepped on.

"Just prior to resigning, the FBI had asked LoCash for a written explanation of his prior dealings with DeMiro," the insurance company says in its complaint. "LoCash chose to destroy data and resign rather than comply with the FBI's request."

The FBI began investigating DeMiro in August 2010, but by then, he already was being scrutinized by regulators over the previous year, something LoCash says he never knew.

LoCash claimed he had done his "due diligence" in vetting DeMiro, but Ralston would say later that he had not. He had not checked into DeMiro's license status, or the background of his firm's brokerage, or whether he had complaints, the insurance company alleges. LoCash would have found many, says the insurance company.

The insurance company, through its interviews with bank employees and LoCash's associates, believes that LoCash and DeMiro were close friends who socialized whenever DeMiro came to town.

"He was just an acquaintance," LoCash later said in his deposition.

Yes, they hung around together on occasion, LoCash acknowledged. But they played video games only once, he recalled, and watched sports once or twice.

"I wouldn't call him up to be in my wedding," he said.

Some of his co-workers saw things differently.

"They had a more personal relationship than what someone would normally have with a broker, but it wasn't my place to say that it was inappropriate," said Carmell, the former controller, in her deposition.

LoCash maintains that he only kept up the relationship because it was business. They did not vacation together even though they discussed a Caribbean trip once.

"I'm a stand-up guy," he said in his deposition. "I do the right thing."

In April 2011, DeMiro pleaded guilty in federal court in Port Huron, Mich., to five counts of bank and wire fraud. In DeMiro's court file, LoCash's name is never mentioned in connection with the crime.

DeMiro admitted using the proceeds to buy property, gamble and purchase expensive "toys," as the government described them, such as watches, motorcycles and luxury cars. He also would use money from one client to pay off another.

He was sentenced to 10 years in prison and ordered to repay more than $13 million. Besides Bank @Lantec, other victims include municipal governments, unions, school districts and credit unions around the country.

Prosecutors wrote that DeMiro "turned to greed over hard work and exploited the trust that these school districts and townships placed in him to safely invest their taxpayers' money."

His plea bargain does not require him to cooperate, and he has since refused to discuss the matter, according to court filings.

LoCash, through his lawyer, did not respond to a request for an interview. His lawyer, Barry Koch of Virginia Beach, would say only that there is no evidence linking LoCash to DeMiro's crimes and, more specifically, no evidence that LoCash received any of the proceeds from DeMiro.

One of the lawyers for the insurance company, Keith Dutill, wouldn't comment on the evidence and would say only that, "We look forward to presenting the facts to the jury."

Contacted last week, Ralston released a statement saying that the bank recovered its loss from the insurance company and that the lawsuit is solely between LoCash and Federal.

"Bank @LANTEC remains profitable and well-capitalized providing a safe and secure place for our members to keep their money," she added.

Federal Insurance Company's lawyers, meanwhile, hired a computer forensics expert and recovered most of the files that LoCash thought he had destroyed.

Tim McGlone, 757- 446-2343, [email protected]

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