20 years later, BestBank saga draws to end

BOULDER — Twenty years after the failure and closure of BestBank in Boulder, Federal Deposit Insurance Corp. has finally ended its receivership, bringing a two-decades-long sage to a close.

The FDIC took over as receiver for the bank in July 1998 after the bank’s collapse. Its job was to administer the assets of the business and make sure its debts were paid. In December 2017, the FDIC announced it would terminate its receivership for the institution.

“The liquidation of the receivership assets has been completed. To the extent permitted by available funds and in accordance with law, the receiver will be making a final dividend payment to proven creditors,” according to a FDIC announcement.

The bank collapsed in 1998 due to fraud related to the bank’s sub-prime credit card business.

The bank’s demise came as a complete shock to the banking industry at the time. Richard Fulkerson, who served as Colorado banking commissioner from 1996 to 2008, said that “the industry was doing remarkably well nationally and in the state of Colorado.”

He said that the state had experienced a “remarkable period that continued on up to the Great Recession of 2007/2008 of a very healthy industry in Colorado. Going back to BestBank, for the size of the bank, the loss was huge, relatively speaking.”

The bank had $314 million in assets when it was closed on July 23, 1998, and the estimated loss to the FDIC’s Bank Insurance Fund as of Dec. 31, 1998, was $171.6 million. That amount ballooned to $200 million.

In 2007, three executives with the bank were found guilty of bank fraud, conspiracy, false reporting and wire fraud. Those convicted included the bank’s founder and chief executive officer, Edward Mattar III, who committed suicide before he could be sentenced. Also convicted was the bank’s president, Thomas Alan Boyd, and its chief financial officer, Jack Grace Jr. They immediately appealed U.S. District Judge Richard Matsch’s decision.

Boyd, Grace and the two men who ran the credit card company Century Financial, Douglas Baetz and Glenn Gallant, were sentenced in 2010 to between six and 11 years in jail and were ordered to pay restitution to the FDIC-R. Baetz and Gallant, who came up with the scheme, were assessed $49.5 million and $49.4 million in restitution, respectively, while Boyd was ordered to pay $11.9 million in restitution. Grace was ordered to pay $16.5 million in restitution.

So how did this all come about? Government regulators accused BestBank of overstating the value of its credit-card business, which was operated and marketed by a Florida-based company, Century Financial. The company offered credit cards to nearly half a million sub-prime cardholders or those who could not get credit any other way because of bad credit, no credit history or who posed a higher risk that they would not be able to pay off any debt they accumulated on their credit card.

Under the agreement between BestBank and Century Financial, Century Financial would solicit new credit-card account holders and, in exchange for the credit card, account holders would secure them by opening up an account with BestBank with a minimum deposit of $250. The agreement between the two companies changed a number of times over the next couple of years as more of the account holders defaulted on their credit-card payments. Under the agreement, Century Financial was to purchase from BestBank any accounts that were more than 120 days delinquent, including accounts that were not considered collectible. Later they were to purchase any account that was 60 days or more delinquent.

“Despite these protections, BestBank had to absorb any additional losses out of BestBank’s own bad-debt reserve if delinquent or uncollectible accounts exceeded Century’s ability to pay,” according to the United States Court of Appeals, Tenth Circuit ruling in United States v. Gallant in 2010. “If these losses, in turn, exceeded BestBank’s ability to pay, then state and federal regulators would shut down the bank, and the FDIC would insure BestBank’s depositors for up to $100,000 each — which, ultimately, is what happened.”

Only a few accounts exceeded that $100,000 level, said Fulkerson.

Century Financial started opening accounts without the mandatory $250 security deposit. In many cases, according to the Appeals Court, Century did not issue cards or account statements to the purported card holders to conceal the existence of the accounts from the card holders themselves.

“Sometimes, Century reduced the credit limit on the accounts to zero or charged the security deposit to the card. Century charged the $129 annual fee, as well as other fees and charges, to these accounts, causing BestBank to transfer funds for these amounts to Century’s operating account and to record the amounts as receivables on BestBank’s books. With the number of accounts steadily exceeding the number of cardholder payments, BestBank’s receivables continued to grow,” according to the Court of Appeals.

As more and more accounts stopped paying their debt, Century’s executives took measures to cover up the defaults from BestBank, even going so far as to put money into the accounts themselves to make them look like they were viable.

It was a BestBank employee who became concerned in early 1995 about delinquencies in the portfolio. According to the Appeals Court, he noticed that many delinquent accounts had been re-aged or had been subjected to simultaneous debits and credits for the annual fee. He also noticed that many of the accounts had balances greater than 151 per cent of the credit limit.

“Many of these accounts had been charged annual fees, late fees, and interest, but they had never received a security deposit and their credit limit was zero,” the document stated.

The employee concluded that someone was concealing delinquent accounts. He raised his concerns with Boyd and Grace in January 1995. Boyd communicated with Baetz and Gallant that they should stop re-aging accounts, but they continued opening new accounts and re-aging delinquent accounts. In 1996, Century and BestBank sold about 20,000 performing accounts to BankFirst of South Dakota. Through this sale, Century earned $1.9 million, $1 million of which was paid to BestBank and $500,000 of which was devoted to setting up a bad- debt reserve to cover non-performing accounts that it had sold.

In May 1996, Century and BestBank started a new credit-card venture. This time the accounts were unsecured. Each card had a limit of $600, but, to receive a card, an applicant had to join the All Around Travel Club, which was owned by Baetz and Gallant, for $498. The AATC offered travel discounts and a voucher for a free cruise. Recipients were also charged a $45 annual fee. The AATC was only purchasing 1,000 travel vouchers a month but Century was opening up 8,000 to 10,000 new accounts a month. Delinquencies in these accounts rose quickly. As of March 31, 1998, 307,000 of 343,000 accounts were delinquent, over their credit limit or were blocked from using their accounts. Century disguised these delinquencies to avoid its obligation to purchase delinquent and uncollectible accounts from BestBank.

Another BestBank employee discovered what was going on and expressed his concerns to Boyd, Mattar and Grace. He became convinced the executives weren’t going to do anything about it so he resigned and reported his findings to the Colorado Division of Banking. The bank’s executives misled regulators, lying about the credit card program’s performance and the controls that had been put in place to ensure accuracy. Century continued opening new accounts and Mattar and Boyd received quarterly bonus payments totaling $6.9 million, while Grace received bonus payments totaling more than $100,000.

It was difficult for regulators, the state of Colorado and the FDIC to figure out what was going on with BestBank because the credit-card processing facility where the fraud was taking place was offsite in Texas “and the credit cards looked like they were current and paid as agreed because as funds came in they would issue credit cards, sell it and make fake payments on the existing credit cards to make sure everything looked current. It looked like the credit card portfolio was performing as agreed,” Fulkerson said.

He added that the Division of Banking had a “real confrontational relationship with primary owner and CEO Ed Mattar. He made it extremely difficult for us to have access to his books and records. Everything took a court order or the threat of a court order for examiners or us to do our jobs.”

With everything else that was going on, fraud was taking place at the offsite data center and Colorado’s examiners didn’t have the authority to go into that facility. The FDIC had to battle legal hurdles before they were able to get in and view the records of this third party, he said.

Because of this, the FDIC and the state of Colorado put in place procedures to expedite access to a third party provider like that.

BestBank’s return on equity and return on average assets were so good it looked like it was leading the nation.

“That’s always suspicious when someone is that profitable,” he said.

He said that the bank’s failure caused him a lot of heartburn because of the never-ending civil actions and criminal proceedings that took place afterward. The BestBank failure was the only bank to fail during his term.

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