© 2014 The Texas Lawbook.
By Mark Curriden, JD
Senior Writer for The Texas Lawbook
(February 17) – Two national financial lenders have sued Dallas-based NexBank Securities and its investment banking subsidiary, one of its clients and the client’s accountants and a lawyer for conspiring together to commit a $66 million fraud.
Regions Bank and MCG Capital Corp. claim that NexBank Securities, NexBank Capital Advisors and its officials worked with Color Star, a now bankrupt greenhouse and nursery company with large operations in Sanger, Texas, to procure a $66 million loan “through a massive accounting fraud” scheme. A third major bank is expected to file its own lawsuit soon.
Regions Bank claims it lost $35 million and MCG Capital says it is out $13.5 million.
“For years, Color Star management overstated earnings, inventory and profits” – a fact that Color Star’s accountants, investment advisors and lawyer intentionally hid from bank lenders, according to the complaint filed by Dallas lawyers Robert Gifford and Kenneth Johnston, who represent Regions Bank.
“Had Regions known Color Star’s true financial condition, it would not have agreed to loan Color Star… $35 million,” Gifford and Johnston, lawyers at Kane Russell Coleman & Logan in Dallas, state in court records filed in State District Court in Dallas.
But James Walker, a partner in the Fort Worth office of Cole Schotz who represents NexBank Securities, says the allegations against the financial firm and its employees are “meritless.”
“We are eager to defend ourselves, and anticipate that the Court ultimately will absolve us of all liability in connection with this case,” Walker wrote in an email.
Lawyers for the other defendants did not respond to requests for comments.
The lawsuits by Regions Bank and MCG Capital focus on an effort by Color Star, which supplied plants such as Easter Lilies and Poinsettias to Lowes and Wal-Mart, to refinance a $40 million loan that was due at the end of 2012. Without the loans, Color Star would be bankrupt within weeks, according to legal documents.
The greenhouse and nursery hired Dallas-based Barrier Advisors to handle its debt capital loan applications. Last month, Barrier was renamed NexBank Capital Partners and became a subsidiary of the commercial bank NexBank. NexBank Capital’s Managing Director and Head of Investment Banking, Barrett Kingsriter, handled the Color Star account.
In the 47-page complaint filed by Gifford and Johnston, Color Star’s own auditors initially alerted Color Star owners on June 30, 2012 that the company’s reported inventory of $14.3 million was overstated by $6.6 million.
Neither the company nor NexBank’s Kingsriter, who is a licensed lawyer and a registered agent with the Financial Industry Regulatory Authority, reported this revelation to the lending banks, according to the lawsuits.
On Oct. 13, an auditor at EKS&H, a Colorado accounting firm handling Color Star’s financial matters, wrote to Color Star officials that the “6/30/12 financial statements presented to your current bank and potential lending sources should be adjusted for the inventory write down that is supported by your internal records. The inventory is overstated by $6.6 million.”
Three days later, Color Star’s own internal controller, Brock Hostetter, wrote an email to the company’s owners that he would no longer sign off on Color Star financial reports until the inventory adjustment issue had been addressed.
“If we don’t report this, it is the definition of FRAUD,” Hostetter said in the email.
One minute later, according to court documents, Hostetter revised Color Star’s financial statements to reflect the $6.6 million adjustment.
Only 14 minutes after that, Color Star Chief Financial Officer Jack Ormberget sent Hostetter an email reprimand for insubordination, ordered him to reverse the entry and told him to leave the company’s premises immediately, according to the complaints. Hostetter was fired a few days later.
That same afternoon, Oct. 16, Color Star minority owner Brett Verbeek emailed Ormberget and Kingsriter:
“I am formally protesting your approach to the June 30, 2012 inventory valuation. We KNOW the number in the current financial statements is wrong. I understand that I have been outvoted, but I do not agree or support the decision to withhold this adjustment.”
Twenty minutes later, Kingsriter responded by email saying that he should talk about this matter with his father, Huibert Verbeek.
“One more reminder,” Kingsriter wrote, “he is your CEO.”
On Oct. 19, Brett Verbeek wrote to Kingsriter again: “Can you please put in writing to disclose to all Parties (Regions, Comerica & MCG Capital) that they are okay with the inventory write down up to $6.6 million for year end. That there will be no default fees applicable for this write down.”
Kingsriter responded 18 minutes later, “We have disclosed to Regions that the company has a poor inventory management and has consistent adjustments at year end. The Company is not trying to hide an inventory issue; it simply do [sic] not have an audit in place to support a specific number.”
Regions’ lawsuit also claims that Color Star’s lawyer, Nikki Gibson, knew that her client’s financial information as filed with the bank was incorrect and helped hide the truth from Regions Bank, thus facilitating the fraud.
Regions approved the loan on Nov. 12, 2012. Barrier’s (now NexBank Capital) was paid a $1 million fee.
Five months later, Color Star informed Regions that the company would default on the covenant relating to the senior leverage ratio. Color Star blamed a slow selling season.
Color Star filed for Chapter 11 bankruptcy protection in December 2013 in U.S. Bankruptcy Court in Plano.
Gardere is representing Color Star. Wilson Elser is representing the accounting firm EKS&H. Cowles & Thompson is reportedly advising the Verbeeks.
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