By James McNair and Patrick Crowley
The Cincinnati Enquirer
On the eve of the collapse of the Erpenbeck Co. and Peoples Bank of Northern Kentucky last year, former homebuilder Bill Erpenbeck was already cozying up to federal investigators with the secretly recorded comments of his longtime friend and banker at Peoples, John Finnan.
The tape recording, disclosed in a lawsuit filed against the defunct bank's board members Monday, offers the first public indication of the conflicting legal interests of the two central figures in the $100 million fraud scandal. The two men were longtime friends and business partners, but when the FBI showed a serious interest in the case, Erpenbeck apparently decided to memorialize Finnan's remarks.
Erpenbeck, 42, pleaded guilty to one count of bank fraud in April and faces a federal prison sentence of up to 30 years. His sentence will hinge, in part, on the amount of assistance he provides in the government's pursuit of other individuals. Although the U.S. Attorney's office won't identify its suspects, it has shown great interest in Finnan.
The 19-page transcript of the taped April 11, 2002, conversation between Erpenbeck and Finnan contains the ruminations of two men in the calm before a hurricane-sized scandal. They talked about the federal investigation, their legal exposure, their talks with banks and the inevitability of media coverage.
"How's it been with you? What's happening?" Erpenbeck asked early in the chat.
"Well, you name it," Finnan replied. "We've got everybody all over us."
Finnan, who has not been charged, said he took daily calls from agents of the Federal Deposit Insurance Corp. and had received an overture from U.S. Bank calling for Peoples to assume its $24 million-plus in Erpenbeck loans. Erpenbeck braced for the worst.
Erpenbeck: "It's not going to be fun."
Erpenbeck: "I'm sure they'll be all staring down my throat."
But Erpenbeck, who placed the call, clearly gets the most from the exchange. He asked 50 questions, Finnan four. At the end of the conversation, Erpenbeck signs off on the tape: "The date today is 4/11. I just hung up at 12:27 from my house to John Finnan's phone at the bank."
The tape was found under the cushion of a chair bought in the March 14 auction of Erpenbeck's possessions. Erpenbeck's lawyer, Glenn Whitaker, confirmed that Erpenbeck recorded the talk, but would not elaborate. The FBI also has a copy of the tape.
"We do have in our possession a tape," said FBI spokesman Jim Turgal. "It appears to be Bill Erpenbeck's voice on it, but I wouldn't say we authenticated it."
Finnan's lawyer, Richard Goldberg of Hyde Park, said he has no reason to doubt the tape's authenticity. He said he hadn't heard it as of mid-Monday, but, having read the transcript, he pointed out that it contains no admissions of wrongdoing.
As for Finnan's reaction to having been secretly recorded, Goldberg said, "Nobody likes the fact that you're being recorded without being told. I'm sure John Finnan feels the same way as anybody else would." Recording phone conversations without the other party's consent is legal in Kentucky.
Erpenbeck's firm, once the fourth-biggest homebuilder in Greater Cincinnati, took $33.9 million in home sale proceeds and put the money into its accounts at Peoples Bank and U.S. Bank without paying off its construction loans and subcontractor debt. Finnan and another former bank officer, Marc Menne, are under suspicion because Peoples allowed Erpenbeck Co. employees to deposit checks made out to construction lenders. The two bankers were further entwined with Erpenbeck through their purchase of model homes from Erpenbeck
Goldberg said the government caught Erpenbeck "red-handed with his fingers in the cookie jar." He said he does not know what Erpenbeck is saying to the FBI.
"John's not worried about Bill Erpenbeck telling anything to the feds as long as he's telling the truth," Goldberg said.
Monday's lawsuit against Peoples Bank of Northern Kentucky was filed by shareholder Mark Eschenbach and seeks class-action status for other shareholders. It seeks to hold directors - including Finnan and bank lawyer Mark Arnzen - responsible for the devaluation of the bank's privately owned shares from about $38 apiece to "without substantial value." It alleges that the board failed to live up to its duty of keeping tabs on Erpenbeck's financial condition.
Arnzen said Peoples has already held itself accountable for its mistakes. The bank set aside $16.8 million to cover unpaid Erpenbeck mortgages last July. It then went out of business by selling its branches and accounts to The Bank of Kentucky.
"We admitted we screwed up, and we took care of it by paying off the checks," Arnzen said.
In the taped conversation, Finnan said U.S. Bank was bracing for a $13 million shortfall from its Erpenbeck loans. Erpenbeck said he was aware of the gravity of the bank's problem from Roger Watson, U.S. Bank's former executive vice president.
"I talk to Roger Watson the other day, and ... he thinks it is very important to keep it quiet because he said it's a huge embarrassment for their company," Erpenbeck said.
Watson left the bank in August 2002, U.S. Bank spokesman Steve Dale said. Dale would not comment on the transcript.
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