Pa. bank alleges Signet misled it CoreStates blames syndication leader for fraud losses

April 25, 1996|By Bill Atkinson | Bill Atkinson,SUN STAFF

Signet Banking Corp. misled a Philadelphia-based bank by persuading it to lend millions for a top-secret project that turned out to be a huge fraud, according to a lawsuit filed in Philadelphia.

CoreStates Financial Corp. is seeking $18 million in damages and attorneys' fees because Signet agreed to "indemnify" the bank for losses arising out of "any inaccuracy or other breach of any representation or warranty," according to the suit filed Tuesday in U.S. District Court in Philadelphia.

"Put simply, CoreStates bought something from Signet and it didn't get what it paid for," said Eric Kraeutler, an attorney representing -CoreStates.

Signet, a Richmond, Va.-based banking company, led a $253.5 million loan syndication to finance what it believed was a top-secret, offshore project by Philip Morris Cos. Inc. designed to study "cigarette alternatives."

But the project turned out to be a fraud.

CoreStates contends it was misled by Signet. It alleges that: Signet said Philip Morris' senior management knew of CoreStates' potential involvement in financing computers for the project. Philip Morris did not know of CoreStates' involvement, the suit said. In fact, the cigarette maker said there never was a project.

Signet approached -CoreStates, saying it had been included on a "list of banks approved" by Philip Morris' chief financial officer.

During a meeting in February 1995, Signet bolstered its case for funding with a Wall Street Journal article that reported that Philip Morris had filed for patent protection for a secret project to develop a new form of cigarette, the suit claimed. But the article wasn't referring to the Signet-led deal.

A Signet spokeswoman declined to comment, saying she was unaware of the suit.

The purported scheme was allegedly masterminded by Edward J. Reiners, who persuaded seven banks to lend him $323.5 million to buy computers for the project over a two-year period. But it unraveled last month when the banks confirmed that the project was nonexistent.

Mr. Reiners, a former Philip Morris employee, and his alleged accomplice, Jody Bachiman, were arrested March 19 on bank fraud charges. Signet is seeking to recover $81 million and NationsBank Corp., which led its own syndication, is out about $64 million.

CoreStates said it was brought into the deal by Signet in September 1995 to fund loans to Nelco Ltd., a Richmond-based computer leasing company and a Signet customer that would buy the computers and lease them to Philip Morris for the project.

CoreStates claims that Signet needed other banks to get in on the deal because Signet was nearing its legal lending limit with Nelco. Signet also needed CoreStates' help because "NationsBank was trying to take over Signet's relationship with Nelco," the complaint said.

On Nov. 1, 1995, CoreStates lent $19.1 million to Nelco believing that Philip Morris was backing the project. CoreStates was prepared to make another $10 million loan when the fraud was uncovered, the complaint said.

About $1 million of the Core-States loan has been paid back, Mr. Kraeutler said.

Besides CoreStates' suit, Signet filed a motion this week in U.S. District Court in Richmond seeking the court's advice on how $200 million frozen by the FBI will be divided among the banks.

"We have taken this action to expedite the recoveries associated with this fraud," said Sara Wilson, Signet's general counsel. "We believe it is in the interest in all parties that the court declares in advance of further collection efforts how the funds will be allocated."

Pub Date: 4/25/96

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