By James McNair
The Cincinnati Enquirer
An Erlanger lawyer said Tuesday he has obtained taped telephone conversations that appear to confirm an FBI allegation that former bank president John Finnan arranged an emergency $4 million loan for the financially strapped Erpenbeck Co. without the approval of the bank's directors.
A transcript of the tape, part of a series believed to have been made by Bill Erpenbeck, was filed Tuesday in U.S. District Court in Covington by lawyer Jerry Miniard, who represents subcontractors in a federal class-action lawsuit against the defunct Peoples Bank of Northern Kentucky. He said he obtained the tape from a subcontractor whom he wouldn't identify.
The conversations took place in February and March 2002, several weeks before the Erpenbeck Co. collapsed in debt, leaving homebuyers stuck with $33 million in unpaid construction mortgages. Miniard said the tape contradicts Finnan's assertions that he was unaware that Peoples' biggest borrower had problems until that month.
"It confirms that Finnan and (former executive vice president Marc) Menne were financially propping up Erpenbeck so that he could stay in business," Miniard said. "They obviously knew that he had overdrafts - and that it wasn't the first time."
Dealing with the Erpenbeck Co.'s liquidity problem was the focus of the longest conversation between Finnan and Erpenbeck. The two discussed a $4 million loan that Finnan approved during an undisclosed month when the bank's board did not meet. Loans that large would have required the board's approval.
"You ever making a loan without them (directors) saying, 'Make a loan,' I would think that's tough," Erpenbeck said in the tape.
"Yeah. That's a problem. No question it's a problem," Finnan replied. "... But it's better than the alternative of sitting here with that overdraft for a long period of time."
No further details of the $4 million were mentioned, but it appears to be the same $4 million in loans that Finnan and Menne obtained for Erpenbeck from several Eastern Kentucky banks in 2001. According to an FBI affidavit filed in federal court in Cincinnati last year, the loan applications did not say that the money was for overdraft protection, but for real estate projects. Erpenbeck defaulted on those loans.
"How did you make the one, the $4 million deal, how'd you make that not show up?" Erpenbeck asked Finnan.
"It was in a month that it wasn't - that we didn't have a board meeting," Finnan said. "It was a month before a month we didn't have a board meeting."
The bank board forced Finnan and Menne to resign in April 2002 after learning that the two men had been buying model homes from Erpenbeck through a separate venture. The two men maintain they were not part of the bank fraud already confessed to by Bill Erpenbeck and two of his employees, including his sister Lori.
Finnan's lawyer, Richard Goldberg of Hyde Park, said nothing in the tapes contradicts Finnan's previous statements.
"John Finnan had to make a decision as CEO of the bank to honor the overdraft and convert it into a loan - or not honor it and let Erpenbeck tumble," Goldberg said. "It was a judgment he made in the interest of the bank. It turned out to be the wrong decision."
Covering overdrafts with loans was just one of the measures Erpenbeck, Finnan and Menne discussed in the homebuilder's waning days. On several occasions, Finnan has said he believed Erpenbeck would sell enough homes to cure its problems. He also said Bill Erpenbeck had mentioned the prospect of receiving a $5 million line of credit from another bank.
The new tape also includes a conversation between Finnan and Menne about complaints from Erpenbeck homebuyers. Erpenbeck pleaded guilty in April to a bank fraud scheme in which his employees took home-sale proceeds and, instead of paying off its construction loans, kept the money in company accounts at Peoples and U.S. Bank. As a result, homebuyers had two mortgages.
One customer apparently complained more loudly than others. Finnan and Menne agreed to put up $40,000 to resolve his problem.
"We'll keep this guy quiet today and let him get on with his life so that hopefully the others will keep quiet," Menne said.
Menne's lawyer, Harry Hellings, did not return a telephone call Tuesday.
Peoples Bank went out of business in November 2002 through the sale of its operations to The Bank of Kentucky. First, though, it set aside $16.8 million to pay off many of the first mortgages on homes sold by Erpenbeck.
Miniard's lawsuit accuses Peoples, Finnan, Menne and Bill Erpenbeck of racketeering and fraud. It accuses all of Peoples' board members of gross negligence. Peoples also faces lawsuits from shareholders who charge that board members are responsible for the devaluation of their privately owned stock.
Although the government has alleged in civil filings that Finnan and Menne bought homes with proceeds of bank fraud, it has not charged them with any crimes.
Reporter Patrick Crowley contributed to this report. E-mail email@example.com
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