Mountain Bancorporation (Mountain Bancorp) was a holding company headquartered in Kentucky. The company had assets of just under $ 1 billion. During the heady days of the early 2000s, inflation was moderate, the economy was growing, and banks were making large real estate loans. As the economy improved, competition among banks for all types of loans intensified, with commercial loans considered to be the most desirable of all. One specific commercial loan is the focus of this case study. During this time, a new resort named Sky High was being developed near a major recreation area. This resort was aimed at upscale clients from New York and New Jersey, and it included all the appropriate amenities. The total cost of the development was about $ 12 million. Mountain Bancorp competed for this loan but lost it to another banking company. A few years after the project was completed, one of Mountain Bancorp’s directors, who also served as legal counsel for Sky High, suggested that the resort might be interested in refinancing with Mountain Bancorp. The lenders began to analyze Sky High’s financial statements and perform other diligence work. In the middle of this process, Sky High’s management unexpectedly informed Mountain Bancorp that the loan must be completed within two weeks or the resort would stay with its present bank. The bank officers responsible for authorizing this loan were Terry Randall and Paul Tyre. Randall was the senior lender for Mountain Bancorp’s largest bank. He was a 45- year- old college graduate with 20 years of lending experience. Tyre was the president of Mountain Bancorp’s largest bank. He was a 43- year- old high school graduate with 18 years of banking experience. The loan presented several problems for Mountain Bancorp. First, the amount of the loan was $ 12 million, which was $ 9 million above Mountain Bancorp’s legal lending limit. This meant that $ 9 million of the loan needed to be shared with a larger banking organization. The organization that Mountain Bancorp normally used for such sharing arrangements was a large regional bank (Correspondent National). Correspondent National’s lenders also had to perform financial analysis and other due diligence for the loan, which would take longer than two weeks to complete. Another problem was created by the abbreviated loan processing period. When it came time to disburse the $ 12 million, the required financial analysis had not been completed. Moreover, there was only an informal commitment from Correspondent National to participate in the sharing agreement. Even so, Mountain Bancorp’s lenders proceeded to close the loan, confident that Correspondent National would eventually under-write the $ 9 million. Correspondent National eventually accepted the $ 9 million portion of the loan, but with one important caveat. The bank required that the loan participation agreement include a recourse clause that allowed Correspondent National to return the loan to Mountain Bancorp at Correspondent’s discretion. The significance of this recourse clause was that, for legal and regulatory purposes, the entire $ 12 million remained as Mountain Bancorp’s credit risk. Thus, a third problem was created— the loan was now in violation of state and federal laws and regulations. Mountain Bancorp’s lenders never informed its board of this recourse provision, and subsequent audits by regulatory examiners, internal auditors, and external auditors never discovered it. The lending- limit violation went undetected until the real estate market crashed. When this happened, Correspondent National experienced significant loan losses. To reduce the risk of further charge- offs, Correspondent returned the Sky High loan to Mountain Bancorp in accordance with the recourse agreement. This required that Mountain Bancorp send $ 9 million to Correspondent National and that Mountain Bancorp rebook the amount. To get the $ 9 million on the books of Mountain Bancorp, its lenders divided the loan into three loans in the amount of $ 3 million, each with a different name. This made it appear that each sub-loan was under the bank’s legal lending limit. The transaction was not reported to Mountain Bancorp’s loan committee or its board, as required by loan policy. When the economy entered a recession, Sky High could no longer make payments on the $ 12 million loan. In response, Mountain Bancorp’s lenders waived principal payments and capitalized interest, without informing the loan committee or the board. This action was predicated on the belief that the economy would eventually recover, allowing Sky High to resume its full loan payments. However, the situation worsened, and Sky High went into bankruptcy. At this time, it was discovered that Mountain Bancorp held the entire $ 12 million risk related to this loan. This was the final problem to beset Mountain Bancorp’s lenders. Because of the bankruptcy, a real estate appraisal valued the property at about $ 3 million, which led to a $ 9 million charge- off that significantly reduced the bank’s capital position. In fact, had Mountain Bancorp not been acquired by another banking organization, it would likely have failed. As a result, jobs were lost, shareholder value was destroyed, and lives were ruined. These events were discovered by a fraud investigator hired by the bank’s board of directors. Following a three- month investigation, the investigator prepared a comprehensive report detailing his findings. This report was used by the local prosecuting attorney to bring charges against several of Mountain Bancorp’s officers, including Randall and Tyre. In their defense, Randall and Tyre argued that they approved the loan because they were under pressure from the board to obtain Sky High as a customer. They further asserted that they were blindsided by Correspondent National’s requirement for a recourse agreement and failed to inform the board or the loan committee about it because the funds had already disbursed. Based on the facts presented in this case, respond to the following questions:

1. Is this a white- collar crime? Explain.

2. Do Randall and Tyre fit the profile of a typical fraudster? Explain.

3. Are the three elements of the fraud triangle present in this case? If so, identify and discuss each.

4. Assuming the role of the fraud investigator, how would you plan your investigation? What evidence would you gather, and how would you analyze it?

5. How might the prosecution attempt to establish fraudulent intent on the part of Randall and Tyre?

6. Can the calculus of fraud be used to explain the actions of Randall and Tyre?

7. Is there an indication that Randall and Tyre used the neutralization techniques described in this chapter?

8. Assuming the role of the defense attorney for Randall or Tyre, what arguments might you present to combat the prosecution’s allegation of fraudulent intent?

9. Speculate as to the outcome of the criminal proceeding. Do you think Randall and Tyre were convicted of a crime? As a juror, what evidence would you find the most compelling?