Failed Bank’s Shareholders Win Big in Crypto Embezzlement Case

When tiny Heartland Tri-State Bank in Elkhart, Kansas, failed in 2023, shareholders appeared to have lost everything. Now, in a stunning development, they’ve recovered the lion’s share of their investment back. The Federal Deposit Insurance Corp., which typically comes out ahead of shareholders in the distribution of failed bank assets, came up empty-handed.

Heartland Tri-State collapsed in July 2023 after CEO Shan Hanes embezzled $47.1 million over six weeks to cover personal losses suffered in a crypto scam that federal investigators say originated in southeast Asia. The failure roiled Elkhart, a remote farming town of 1,900 in southwest Kansas, but was especially devastating for 33 local shareholders — a collection of farmers, teachers, former bank employees and community leaders — who saw about $13 million in capital on the $139 million bank’s books abruptly vanish.

Late in 2024, the FBI found $8.1 million of the embezzled funds in a Tether account that was never delivered to the crypto scammers. A federal district court judge in Wichita, Kansas subsequently awarded the shareholders of Elkhart Financial Corp., the bank’s holding company, all of that money. In August, after months of uncertainty, the shareholders got their payoff.

A Feel Good Story
It’s a feel good story for a town that lost its only bank and took a heavy financial blow after being betrayed by a trusted local leader. (Hanes was found guilty in a criminal trial and is now doing time at the federal correctional institute in Leavenworth, Kansas, scheduled for release in 2044.)

Shareholders, many of whom counted the bank as a core investment holding, initially saw their finances devastated by the failure. Some were forced to sell their homes or change retirement plans and elder care arrangements; a few suffered health problems. The effects rippled through the community.

The jubilation following the judge’s November 2024 restitution award was replaced by angst as procedural hurdles delayed the money’s release. Some worried that the decision would be appealed or overturned. There were testy conversations with court officials, Zoom calls with the Department of Justice, and lots of confusion and frustration. “I feel we have been, and are being further, victimized by the process,” former board member and shareholder Jim Tucker wrote in a June text.

On a mid-August weekend, the payments finally arrived. The amounts, ranging from about $3,000 to more than $700,000 depending on ownership stakes, were roughly equal to the cost basis of shareholders’ initial investments when the holding company started in 2011. “It was quite a ride all the way to the end,” Tucker, who declined an interview request, texted in September.

The FDIC Gets Shut Out
Some legal experts wonder how the FDIC, which is required by law to minimize losses to the industry-funded Deposit Insurance Fund, lost out to shareholders who in theory are supposed to be last on the recovery totem pole when a bank — or any company — goes bust. Shareholders of the three regional banks that failed in 2023, including Santa Clara, California-based Silicon Valley Bank, received nothing in the aftermath of their 2023 failures.

“It’s unusual to see shareholders get something back, but much about this failure is unusual,” says John Geiringer, a partner with the Barack Ferrazzano Kirschbaum & Nagelberg law firm in Chicago, who was not involved in the case.

History suggested the agency would get its way. A memorandum of understanding with the Department of Justice, signed in 2007, states that under banking law the agency is “entitled to receive all restitution due to that institution resulting from the conviction of crimes committed” against a bank for which it is a receiver.

Importantly, the MOU states that as a receiver legally stepping into the bank’s shoes, the agency should be considered a victim and not the “United States” in restitution cases, which elevates its standing on the priority list.

Attorneys say the MOU was likely meant to encourage a judge to use banking statutes, which favor the agency, instead of criminal statutes. “I don’t think you would likely see the same decision by a court that has more familiarity with the FDIC and its role,” says Brendan Clegg, a partner with Luse Gorman in Washington, D.C.

The Judge’s Rationale
In this case, the FDIC did something attorneys say is relatively rare, acknowledging that the shareholders also were victims, and asserted in filings that it was entitled to a pro-rata share of the proceeds: The agency’s $47.1 million loss was 85% of the $55.5 million in losses claimed by the agency and shareholders combined; in a plea agreement, the FDIC proposed that it receive 85% of the found money, or $6.86 million, while shareholders divided the remaining $1.21 million.

U.S. District Court Judge John Broomes, who had listened to anguished victim testimony through the trial and sentencing hearing, didn’t follow that suggestion or accept the MOU. Citing federal criminal statutes, he ruled that the agency was the “United States,” which puts it lower on the priority list than individuals.

“If the FDIC is an agency, then it is the United States for purposes of restitution,” he explained, according to transcripts from the restitution hearing. With that interpretation, under U.S. criminal code, “I am instructed to pay the shareholder victims before I pay the [FDIC],” he added.

While conceding that his rationale might be wrong, Broomes noted that, in part because the FDIC acknowledged multiple victims, he also was “entitled to use my discretion” to create a payment schedule based on individual victim circumstances. “There might be circumstances where the shareholders of a failed institution are wealthy operations, investment funds, Wall Street institutions dripping with money,” he said, which could merit putting the government on more equal footing with shareholders.

“In this case the evidence is clear that this was a local banking operation funded by members of the community who, to varying degrees, invested a substantial part of their life savings in this operation and lost a lot of that as a result of the crimes committed by the defendant in this case,” Broomes said. “Their economic circumstances as a class, to me, justifies seeing that they’re paid first.”

The FDIC is still entitled to restitution of $47.1 million, the judge added, but only “after the other victims have been paid.”

The Reaction
Does Broomes’ ruling mean anything for other failed bank resolutions, or is it merely a one-off driven by unusual circumstances? Regulatory attorneys interviewed for this story cannot recall another instance where assets were available after a failure and the FDIC didn’t prevail.

Some question the agency’s acknowledgment of multiple victims. “Once you admit there’s more than one party, you leave yourself open to what happened here,” says one attorney who asked not to be identified.

Others think it’s odd that the agency didn’t appeal the ruling. Clegg, who was not involved in the case, speculates that because the dollar amounts were relatively small the agency might have concluded that it wasn’t worth the risk of setting a new precedent. While another judge could still cite Broomes’ ruling as persuasive, precedents are set at the appellate court level. “If the appellate court rules against you, it could affect more significant cases down the road,” he says.

It’s also possible, attorneys say, that with the CEO already in prison, a big federal agency decided it wasn’t worth challenging a group of sympathetic farmers in the present political climate.

For the time being, everyone seems content to let the matter rest. The FDIC would not comment on the record for this story, and the U.S. Attorney’s office in Wichita, which represented the agency in court, declined to comment. Shareholders, too, have gone quiet: They got what they wanted and don’t want to risk somehow losing it.

That doesn’t necessarily mean the board members, all of whom owned shares, are out of the woods. The FDIC has been known to sue directors up to five years after a failure if it finds evidence of negligence, poor controls or lax oversight. “It wouldn’t surprise me if they at least looked at that angle,” Clegg says. Former directors might be celebrating now, but the waiting could continue.