Fraud infecting commercial-loan agreements

Zeke had been in business for more than 10 years leasing golf carts to country clubs and other groups who enjoyed the sport in the Midwest. On the surface, his financial statements looked solid — thanks to a crooked CPA. But, in reality, Zeke was losing money each year, and he was resorting to commercial-loan fraud to keep afloat.

Here’s an example of how Zeke gamed the system until he was caught. Zeke’s customer, a country club called Lucky Star, wants to replace its old fleet of 60 golf carts with new ones, which they rent to golfers each day. Zeke agrees to lease the carts for $360,000 over five years plus an option in Lucky Star’s favor to purchase the carts for $150,000 when the lease expired.

Zeke then goes to a financial institution and borrows the money to buy the golf carts from the manufacturer on similar terms to the lease agreement with Lucky Star. The bank takes the lease agreement as collateral and then submits a Uniform Commercial Code (UCC) filing with the secretary of state, listing the 60 golf carts’ serial numbers as collateral. Because golf carts aren’t titled vehicles, the state doesn’t do title searches. The bank has the responsibility to ensure that no one else has filed a UCC statement listing the golf carts’ serial numbers as collateral. But during Zeke’s 10 years in business, nobody checked to make sure that he hadn’t double-listed the serial numbers on another UCC statement. That was until Zeke’s new honest comptroller detected similar UCC filings and reported the suspicious activity to one of the banks, which called in the FBI.