4 Accused of Bilking Banks of $1 Billion

A global metals trading scam allegedly swindled up to $1 billion from banks ranging from giants like FleetBoston Financial Corp. and J.P. Morgan Chase & Co. to two small Southland lenders, federal prosecutors said Tuesday.

Bank officials and prosecutors expressed amazement at the scope and subtlety of one of the largest bank frauds on record. According to charges unsealed in a New York federal court, the scheme allegedly cooked up by four men in New Jersey hoodwinked at least eight banks into financing bogus metals shipments in India, Hong Kong and elsewhere.

“This was a very, very sophisticated operation,” U.S. Atty. James Comey said at a news conference in New York. “These folks lined up people around the world, places that could only be reached by rickshaw, to pose as metal traders.”

Comey estimated the loss at $600 million to $1 billion--enormous as bank scams go but apparently not enough to jeopardize the financial stability of any of the institutions.

In the largest bank fraud on record, the villain was the institution: Bank of Credit & Commerce International, which was shut down by the United States, Britain and other countries in July 1991. BCCI pleaded guilty to racketeering and conspiracy after depositors’ losses reached $15 billion.

In another big scam in 1996, a former Philip Morris Cos. employee pleaded guilty to fraudulently obtaining a $350-million loan from a group of seven banks by claiming he needed the financing for a top-secret international project of the tobacco company. The government recovered $200 million of the loan.

The latest alleged scam also involved a group of banks, including General Bank, operated by Los Angeles-based GBC Bancorp, and Torrance-based Chinatrust (USA), a subsidiary of Taiwan’s China Trust Commercial Bank. The banks are part of a cluster of local banks catering largely to ethnic Chinese customers. Executives at the banks said their institutions got caught up in the fraud through their East Coast offices.

Prosecutors alleged the four defendants concocted a global Ponzi scheme, using New Jersey-based metals trading companies to take out loans supposedly to pay metals suppliers and instead using it to repay old debts or simply spending it. Because the old debts were being repaid, the defendants’ credit actually improved during much of the scheme, prosecutors said.

The scheme allegedly involved forging thousands of documents, creating “sham” collateral for loans and a paper trail of transactions that never occurred.

The scheme began to unravel in September, when a J.P. Morgan representative walked to the Manhattan offices of one of the companies and found a door with a peephole--not a sophisticated metals trading operation, Comey said.

Many of the banks learned only in the last month or last few days that they lost money in the scheme, prosecutors said.

Prosecutors said the scam started in May 2000. But bank officials said the operation began long before that.

“These [metal trading] companies had been in business upwards of 10 years,” said Li-Pei Wu, chairman of General Bank, which began lending to the purported trading firms four years ago and had little trouble getting repaid until early this year. GBC Bancorp has $27million in potential exposure and already has set aside $13.5million to cover losses, he said.

“They had been dealing with many larger banks around the world,” Wu said. “If it’s a scheme, it had been going on for a long time.”

Chinatrust Chief Executive Henry W. Peng said his bank loaned the alleged scam artists $8.8million but should recover $2million to $3million because the bank has the mortgage on their New Jersey office building.

Primarily a real estate lender, Chinatrust considered the bogus metals traders to be among its strongest commercial borrowers during a five-year lending relationship, Peng said.

“This makes me very frustrated, very shocked,” he said. “They were fabricating all the bills of lading, all the invoices.”

When loan payments stopped coming in last fall, the suspects first blamed the global economic downturn that followed the Sept. 11 terrorist attacks, he said.

The Southland banks’ damages are small by comparison. Comey said FleetBoston’s loss totals $130million, and Fleet spokesman Jim Mahoney said the firm will write off about $70million in the second quarter. Pittsburgh-based PNC Financial Services Group Inc., owner of Pennsylvania’s largest bank, already has taken a $50-million charge to earnings, spokesman Brian Goerke said. J.P. Morgan reported a relatively modest $2.7-million loss.

In their complaint, prosecutors identified other banks that were defrauded as KBC Bank, Hypovereinsbank, and Dresdner Bank Lateinamerika. Comey said other banks may come forward to report losses.

The men named in the complaint are Narendra Kumar Rastogi, Anil Anand, Manoj Nijhawan and Udha Shankar. Their metals trading companies, based in Piscataway, N.J., included Allied Deals Inc., Hampton Lane Inc. and SAI Commodity Inc., prosecutors said.

Virendra Rastogi, the brother of Narendra Rastogi, was arrested earlier this month in London while shredding documents at his small metals trading company, RBG Resources, prosecutors said.

The men appeared late Tuesday before Magistrate Judge James C. Francis IV in New York. All remained in federal custody except for Balakrishna, who was freed on $500,000 bail and placed on electronic monitoring.

Jeremy Temkin, a lawyer for Rastogi, said, “Mr. Rastogi intends to plead not guilty and will defend the case vigorously.”

Lawyers for the other suspects did not immediately return telephone messages.

If convicted on charges of conspiracy to commit bank fraud, mail fraud and wire fraud, each of the defendants could face a maximum sentence of five years in prison.

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Bloomberg News and Associated Press were used in compiling this report.