By: Ken Mixon
In 1998, I was working at a bank in Plano, Texas. My boss called me into his office and told me he wanted me to meet with William (Bill) Brooks. Bill had an unusual request and my boss thought I was the perfect guy to talk with him since I had both a lending and operations background.
Bill was a current customer of the bank. He had grown up in Plano and was like a son to one of our directors. Bill owned a number of companies. One was an armored car company but his main company was an ATM company. He placed ATMs in convenience stores throughout Texas, Arizona, and Colorado. At the time I met with Bill, the bank had a couple of small loans to the ATM company totaling less than $100,000.
I sit down with Bill. Bill explained the nature of his request.
Bill had more than a hundred ATMs in stores and he had to keep cash in these machines. He had an arrangement with a bank in Colorado where they were providing him with over $4,000,000 in cash to stock his ATMs.
At first, I thought that the Colorado bank was loaning Bill the $4 million to stock his ATMs. But he said no, they were only supplying the cash. I was confused. Bill explained that the cash was owned by the banks and was shown on their balance sheets as vault cash. This made no sense to me but I listened to his further explanation.
Bill said that because the cash was in the control of a bonded armored car company, the Colorado banks were able to show that the cash was still in their control. He said the accounting had been approved by the banks’ regulator and that he could get me a copy of that opinion.
I asked Bill why he wanted my bank to start providing him with cash if he already had a bank providing it. He said that, while the bank was happy with the business, they kept increasing the cost of providing the cash. The cost was currently $4,000 dollars a month and Bill wanted to reduce that cost.
I took the billing information from the other banks back to my office to give it some study. After I looked at the information for a while, my boss came into the office. After hearing the details, he was fired up to do the deal. He said we could charge Bill $3,000 a month and that $36,000 a year would greatly help our cost center. I looked at my boss and said that I could not see how I could recommend that our bank take this over. I said this arrangement made no sense to me.
My boss said, “Mixon, you are not getting it. Our bank is going to make $36,000 a year with almost no risk.” Plus, he reminded me, Bill was well known to our bank. We had a long discussion. He criticized me for not thinking out of the box.
I told him that I could not figure out how to make the risk equal the return. What Bill was proposing was for his two companies to have complete access and control to $4 million of our bank’s cash. I could not calculate the return the bank would need in order to take on that risk.
My boss asked me if I was smarter than this Colorado bank. I said I did not know but the deal just did not make any sense to me. My boss was not happy with me (and later included this on my review). But we turned down the request.
About two years later, Bill disappeared with the funds. He reappeared in a few months and was arrested.
This is from Denver AP, 2002:
William E. Brooks, 38, of Southlake, Texas, was found guilty in October of 46 counts of bank fraud, wire fraud and money laundering for a scheme targeting BestBank of Boulder. BestBank has since been taken over by Pueblo Bank & Trust.
Brooks was sentenced to nearly six years in prison for defrauding two Colorado banks of about $9 million and ordered to pay $9.2 million in restitution to the FDIC, the U.S. attorney’s office said Tuesday.
For more than a year, he used his companies to divert money designated to stock ATMs into accounts that he controlled, the U.S. attorney’s office said.
To me, there are a number of lessons in this story:
- Be thoughtful when calculating risk versus return. Do you really understand the risk?
- Beware the deal that does not make good sense. Just because another bank is doing it does not mean that it is good business.
- Trust your instincts. I know when I have ignored my instincts; the outcome has usually been unfavorable for the bank.
I do not know how this scam grew from $4 million to $9 million.
Ken Mixon is President and CEO of City National Bank in Corsicana, Texas.