Bank of Oswego fraud trial underway in Portland
Editor's note: This story has been updated to reflect additional information contained in pretrial briefs filed by the prosecution and defense.
Sixteen jurors have been chosen, opening arguments have been made and government witnesses are now being presented in a bank fraud trial that accuses former Bank of Oswego CEO Dan Heine and CFO Diana Yates of conspiring to hide bad loans from the financial institution's board of directors, shareholders and regulators.
The trial, which started Oct. 10 in the Portland courtroom of U.S. District Court Judge Michael Simon, is expected to last four to six weeks.
Heine and Yates face charges of conspiracy to commit bank fraud and making false bank entries, reports and transactions. If convicted, they face a maximum of 30 years in prison for each count, as well as the forfeiture of any money or property obtained as a result of the violations.
Heine founded The Bank of Oswego, and both he and Yates worked at the community-based financial institution from its inception in 2004 until Yates resigned in 2012 and Heine retired in 2014. Both were arrested and arraigned on June 26, 2015. Heine was in Florida at the time and now makes his home there, while Yates still lives in Oregon.
The bank sold its assets to Seattle-based HomeStreet Bank in August 2016, and both of its former Lake Oswego locations now operate as HomeStreet branches. HomeStreet did not assume any liability for The Bank of Oswego's legal troubles, however — that responsibility remains with The Bank of Oswego, which still exists as a corporate entity but no longer operates as a bank.
In fact, Simon ruled in November 2015 that The Bank of Oswego must cover the defendants' legal costs, saying the bank's articles of incorporation require it to pay all legal expenses for any person involved in a criminal proceeding as a result of their role as a director or officer of the bank.
The original 27-count grand jury indictment, which was unsealed on June 24, 2015, and a superseding 20-count indictment filed in March 2017 allege a complex scheme to hide bad loans from September 2009 through 2014 in an effort to portray the bank's financial condition as much better than it was.
The superseding indictment accuses Heine and Yates of conspiring to use bank or third-party proceeds to make payments on customers' delinquent loans, mischaracterizing assets in reports to the bank's board of directors and the FDIC, and concealing information about loans made to bank insiders. The indictment says Heine and Yates made at least 19 false entries in the bank's reports to the FDIC and to the board of directors about the status of those loans and transactions.
The indictments and pretrial briefs also name Geoff Walsh, the bank's former senior vice president of lending, as part of the conspiracy. Walsh was fired by Heine in 2012 due to what is described in court documents as "misconduct on lending practices."
Heine told The Review in April 2016 that when he discovered "internal irregularities" involving Walsh and Yates in 2012, he reported them to the board and to federal and state regulators, and said bank officials then "fully cooperated" with the government's investigation.
Pretrial documents filed on Heine's behalf repeat that assertion, saying that after both Walsh and Yates had been terminated by the bank, the former CEO "became increasingly concerned about dishonest conduct by Mr. Walsh and suspicious that Ms. Yates may have known and permitted such conduct."
Heine filed a Suspicious Activity Report with the Financial Crimes Enforcement Network on May 29, 2012, the defense says, and he called the FBI to report his concern that possible criminal activity had occurred.
One month later, the FBI seized filing cabinets and boxes from Walsh's home and storage unit. And after additional interviews with Heine and Yates, the government indicted Walsh on multiple counts of fraud, money laundering and making a false statement on a loan application.
Those charges were not related to the current Bank of Oswego case. But during subsequent interviews with investigators, Walsh was asked about transactions he had handled at the bank, and a subsequent indictment added additional charges against him involving funds used to pay off a $1.7 million line of credit for the Allison Kehoe Trust.
On June 24, 2015, Heine and Yates were indicted by a federal grand jury on 27 counts involving bank fraud. On July 22, 2015, Walsh accepted a plea agreement in which the government agreed to drop several charges and not bring additonal charges against him. He is scheduled to be sentenced in Simon's courtroom on Nov. 14, and the prosecution expects to call him — and nearly 50 other people — as a witness in the current trial.
"The uncorroberated testimony of an accomplice may be used to establish the existence of a conspiracy," the prosecution says in a 41-page pretrial brief filed earlier this year.
The government's case draws in part on the Pinkerton theory, established in a case called Pinkerton v. United States, which allows for defendants to be convicted for crimes they did not directly commit if it can be proven that they were willing participants in a broad conspiracy to commit those crimes.
Under the Pinkerton theory, prosecutors from the U.S. Attorney's Office say, if the jury finds that both Heine and Yates were part of a conspiracy and determines that at least one of them is also guilty of making false entires in the bank's records, it could also convict the other on the same charges.
To prove that a conspiracy did exist, the prosecution says, it will introduce statements made by Heine and Yates themselves, including emails to employees, associates and regulators, videotaped depositions and recorded telephone conversations.
But Heine's defense team, led by New York attorneys Jeffrey Alberts and Mark Weiner, describes the events as "multiple, narrow conspiracies" rather than a broad overall conspiracy to defraud the bank. Their 14-page pretrial brief describes Walsh as a "lone wolf acting out of self-interest who misled and manipulated other bank employees," and argues that the government cannot prove that Heine was aware of the conspiracy, nor that he intended to help Walsh even if he knew about it.
Heine's role at the bank was "largely outward-facing" and focused on nurturing relationships with shareholders, customers and the community, the defense says, while Yates dealt with internal matters — operations, procedures, finances and accounting. By contrast, Yates's own defense team has asserted that Heine was indeed part of the conspiracy.
Heine has made several motions to sever his case from Yates, but they have all been denied. The defense's memo references those events and states that Heine will submit additional motions to strike certain claims made by Yates in an effort to stop her from becoming "a second and far more powerful prosecutor, who will seek to prove the government's case against Mr. Heine using techniques that the government cannot or would not employ."
Heine himself has repeatedly denied any wrongdoing, telling The Review that "the notion that I was personally involved in a scheme or scandal to conceal problem loans and delinquencies from the bank's examiners is preposterous."