$323.5 million bank fraud's unraveling cuts a wide swath Story unfolds: Despite the millions involved, the loan scheme was relatively simple and its victims went along easily.

April 22, 1996|By Bill Atkinson and Gary Cohn | Bill Atkinson and Gary Cohn,SUN STAFF

Everything was collapsing around him, and Robert Merrick knew it.

"We have a major problem," Mr. Merrick, senior credit manager of Signet Banking Corp., advised his hushed colleagues in the bank's Richmond, Va., headquarters. "The Nelco deal is a fraud."

The prospect of bank fraud on such a huge scale was so devastating that some chose not to believe him -- holding out faint hope that everything would still work out.

But those hopes evaporated 24 hours later, on Tuesday, March 19, as details of one of the largest frauds in U.S. banking history began to unfold.

The scheme went undetected for two years. By the time it was exposed, seven banks from the United States, Canada, Japan and Austria were left holding the bag for $323.5 million. A highly respected computer company was pushed into bankruptcy. An embarrassed Signet Bank, whose roots in Baltimore date back two centuries, faced a multimillion dollar lawsuit. And two people -- Edward J. Reiners of New York and Jody Bachiman of New Jersey -- were arrested on federal bank fraud charges.

The FBI's investigation continues and indictments are expected soon.

Unanswered, though, is how could so many be duped for so long?

A reconstruction of the case by The Sun shows that the scheme worked because despite the millions involved it was actually relatively simple and the victims went along easily.

Details of the case come from interviews with more than three dozen people, including federal authorities, bankers, neighbors and business associates of Mr. Reiners, and an examination of FBI affidavits and other documents filed in federal courts in Alexandria, Va., Richmond and White Plains, N.Y.

What emerges is a story of fraud of huge proportions aided by those entrusted with safeguarding the banks' money who:

Failed to make even rudimentary checks on Mr. Reiners before lending him millions of dollars.

Ignored obvious warning signs of trouble, including Mr. Reiners' extraordinary caution that his employer would disavow any knowledge of a secret program that the loans would finance.

Feared offending Philip Morris Cos. Inc., a Fortune 100 company with immense influence in Richmond.

Were lured by the prospect of huge payoffs, especially for Signet, which knew it could become one of the region's big players in loan syndications.

"These people come out of the woodwork and con the drawers off the banks," Bill Gearin, chief of Financial Security Consulting Services and the former director of security for Shawmut

National Bank, would later observe.

Project Star

The mastermind of the scheme, the FBI says, was Edward Reiners, who worked for Philip Morris for 20 years before leaving the company in 1992.

It began in late 1993 when Mr. Reiners was ushered into the tightly secured second-floor executive offices of Nelco Ltd., a computer leasing company on the outskirts of downtown Richmond.

Richard A. Nelson, Nelco's president and chief executive officer, was pleased to once again see Mr. Reiners, whom he believed still to be an executive with the tobacco giant, and greeted him with a firm handshake.

The two men had known each other for the past decade while Mr. Reiners helped arrange the purchasing and leasing of computer equipment for Philip Morris.

After exchanging the customary pleasantries, Mr. Reiners got to the point of his visit.

Philip Morris, he revealed, had a top-secret program -- code name Project Star -- that would involve millions of dollars in computer equipment.

He explained that the company wanted Mr. Nelson to go to the banks and help arrange financing. It made sense because Nelco had an excellent reputation with the largest banks in Richmond and had done business with Mr. Reiners and Philip Morris for years.

Mr. Reiners presented a document from Philip Morris, signed by the company's assistant corporate secretary, authorizing him to conduct business for the company until Dec. 31, 2003. The corporate seal was affixed to the instrument.

Mr. Nelson was eager to help. He had started Nelco in 1979 in his basement and seen it blossom into a company with sales of almost $100 million a year. But this new deal would not only

provide Nelco with a cash payment of up to 2 percent of the size of the loan for the computers, but more importantly would offer a large profit later by selling the computer equipment when Philip Morris was through with it.

F: Mr. Reiners smiled. Everything was working as planned.

Wheeler-dealer

Mr. Reiners' ability to talk people into following him didn't surprise his associates.

They describe the 51-year-old New Yorker as a smooth talker, with a trim 6-foot frame and light brown, slightly graying hair. His preferred dress is casual slacks and button-down shirts. He came off as a wheeler-dealer -- dashing from one meeting to another in a 1994 red Jaguar, flashing business cards listing himself as an executive of at least four different companies and boasting about the latest big deal he was about to complete.

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