A former New York-based Bank of America executive received tens of thousands of dollars at a time in cash bribes, federal prosecutors say, in exchange for fraudulently helping a New Jersey firm get a line of credit at the bank.
Kurt Phelps, the executive, was arrested Oct. 29 and charged with bank bribery and conspiracy to commit bank fraud. Phelps' arrest is a rare instance of an executive at a major U.S. bank arrested for their conduct as a banker.
Federal prosecutors accused Phelps of a bribery scheme in which he coached Starnet Business Solutions, a Mahwah, N.J. print shop, to falsify financial records to get a line of credit from Bank of America in exchange for cash. Phelps pocketed hundreds of thousands of dollars in bribes over a number of years, prosecutors said.
According to a law-enforcement affidavit filed with the federal charges, Phelps told a co-conspirator that others inside the bank were involved in facilitating the scheme and receiving payoffs as well. No other bank employees appear to have been charged in the alleged bribery scheme, according to public records.
At the time of his arrest, Phelps was a New York City market executive for Bank of America Business Banking. That meant he was responsible for much of the bank's lending to mid-sized businesses in America's largest city.
Phelps' employer was referred to only as "Victim Bank-1" in an October press release from New Jersey's U.S. Attorney, but Bank of America confirmed Phelps' identity and job title to The Charlotte Observer.
"Mr. Phelps has been fired and we are cooperating with the investigation," said Bill Halldin, a spokesman for the bank. He declined to say whether other bank employees have been fired or placed on leave. Two people familiar with the situation said Bank of America has started an internal investigation into the case.
Three executives at Starnet pleaded guilty to crimes related to their roles in the scheme. They have yet to be sentenced.
Phelps' lawyer, public defender Kevin Carlucci, did not respond to an Observer request for comment. Lawyers for Gary Swenson and John Scott Brink, Starnet executives who pleaded guilty, did not reply to requests for comment.
Kerry Lawrence, attorney for Starnet President Douglas Arbolino, who also pleaded guilty, said that "Mr. Phelps is the most culpable player in this conspiracy."
The case is unusual for the how long the alleged scheme lasted — about six years — and for the seniority of the bank executive who was charged.
"You don't see cases like this very often because there are safeguards. There are checks and balance in place," said Dennis Lormel, a security consultant in Virginia who once served as chief of the Federal Bureau of Investigation's financial crimes program.
"To what extent was there maybe complicity? How good was this person at manipulating the system?" Lormel said of the scheme.
Inside the scheme
Phelps coached the team at Starnet through the scheme, according to an FBI affidavit and court filings related to the others charged in the case.
Mainstream banks such as Bank of America have a high bar on the credit they give businesses. The banks want to make safe loans to businesses with established cash flows. Prosecutors said in filings that Phelps instructed Starnet on how to cook its books to make it look like one of those loans and get access to millions of dollars in credit.
Starnet got its first line of credit from Bank of America for $1.5 million "in or around 2013," according to federal court filings prosecutors made in New Jersey in connection with the guilty pleas from Starnet executives. By 2018, that line had grown to $8 million.
To get that credit, executives sent inflated or false information about the firm's finances to the bank, according to the filings. Phelps helped direct the fraud, they said, by reviewing draft information and giving feedback on how the executives should fudge the numbers.
In a 2017 text message exchange cited in an affidavit submitted by FBI agent Victor Hernandez, Phelps told a Starnet executive that the firm's accounts receivable — money owed to Starnet — seemed a bit low.
"Should I raise it?" the executive texted Phelps.
Phelps replied: "If you can raise a bit would br (sic) better ... . Up the receivable a bit ... . Couple hundred thousands."
One problem with the scheme: Bank of America, like all major banks, has teams of auditors and compliance staffers whose job it is to ferret out fraud. A close look at Starnet's books might catch the goosed numbers.
The specific mechanics aren't clear from the court filings, but Phelps says in texts cited in an FBI affidavit that he helped Starnet dodge the bank's audits. Text messages cited by the FBI show Phelps telling a Starnet executive that another unnamed Bank of America employee had joined in on the scheme.
"Get me the finsncials (sic) and let me see what I can do with or (sic) friend" Phelps said in a text exchange from 2014. "I have an idea. But we need to get this done before he leave (sic). Especially the no audit thing. You know what I mean."
Arbolino, Swenson and Brink pooled their cash to pay the bribes, which were hand-delivered in FedEx envelopes, the FBI and prosecutors allege.
Phelps also indicated in text messages that he was paying bribes to others inside the bank. In a text message exchange from 2014, the FBI's Hernandez said, Phelps was referring to another bank employee when he wrote, "(A)ss clown wants 14 ... I said no. Got him to 10." Hernandez said the numbers referred to a $10,000 bribe in connection with avoiding an audit.
The filings do not indicate whether any other Bank of America employees are under investigation. Phelps oversaw a team of 11 relationship managers, according to his LinkedIn page.
Phelps may have run a similar bribery scheme with other companies, according to texts Phelps sent that the FBI cited. In 2017, Phelps sent a Starnet executive saying "By the way this stuff ... is what has kept you and the other three clients in their current status." Hernandez said that the "stuff" in question was bribes.
Matthew Reilly, a spokesman for New Jersey's U.S. Attorney, said that the charges remain pending against Phelps, but declined to elaborate. "Not much else we can say at this point," Reilly said. Starnet's line of credit came due in 2019, according to prosecutors' filings. It has not been repaid.
To Lormel, the security consultant, the biggest unanswered question is the true scale of the bribery.
"If there's any credibility about him being able to bribe other people in the bank, that's a much broader problem," Lormel said. "The regulators are going to need to determine if this is a one-off situation."(c)2020 The Charlotte Observer (Charlotte, N.C.) Distributed by Tribune Content Agency, LLC