Dive Brief:
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KeyCorp uncovered potential fraud that could cost the company up to $90 million, it warned the Securities and Exchange Commission (SEC) in a filing Tuesday. KeyBank National Association, a KeyCorp subsidiary, filed a lawsuit last week in federal court in Ohio, claiming a client, payroll processing company Interlogic Outsourcing Inc., made a $122 million overdraft even as the company’s CEO, Najeeb Khan, knew there wasn’t enough money to cover the wire transfers. Interlogic, based in Elkhart, Indiana, has not repaid the money.
- Khan issued checks through Lake City Bank from a pair of related companies, TimePlus and IOI Payroll, to Interlogic on July 3 and July 5, the lawsuit shows, according to the South Bend Tribune. He then ordered wire transfers July 8 from Interlogic to Berkshire Bank, Wells Fargo and JPMorgan Chase totaling $122 million. KeyBank received a notice from Lake City Bank after the wire transfers were processed that the checks were being returned because of insufficient funds, court documents show.
- KeyCorp is scheduled to report its second-quarter earnings on Tuesday, but this case won't affect earnings since the transfers happened after June 30. "The ultimate financial impact could be lower [than $90 million] and will depend, in part, on the Company’s success in its efforts to recover the funds," KeyCorp said in the SEC filing.
Dive Insight:
Restraining orders have been issued to freeze Khan's personal assets and direct Berkshire, Wells Fargo and JPMorgan Chase to set aside the money transferred to them, except for amounts that are "specifically identifiable and traceable to transfers from Interlogic's customers … and earmarked for payroll services," legal documents say, according to the Tribune.
References to Khan and Robert O'Brien, the treasurer for Interlogic Outsourcing, were no longer visible on the company's website as of Monday. Another page, which detailed the company's history and founding by Khan, was also removed. Khan is also a member of the board of directors for 1st Source Bank.
Tuesday’s loss reduces the company’s market cap by $213 million, to about $17.52 billion, according to CNBC. KeyCorp has $142 billion in assets, making KeyBank the nation’s 27th-largest bank.
The bank "may be limited in what information it can disclose" because it is working with law enforcement, it said in the SEC filing. It said it "plans to pursue all available sources of recovery and other means to mitigate the potential loss."
