Citizens Banking Corp. of Flint, Mich., said it has uncovered a check-kiting scheme that could cost it $3.9 million this quarter.
The $4.8 billion-asset company said it will take charge in that amount as a result of the scheme, which it says was orchestrated by a Wisconsin car dealer. Citizens, which earned $15 million, or 54 cents per share, in the second quarter, said the one-time after-tax charge would reduce third-quarter earnings by about 14 cents per share.
Citizens has filed suit in a Madison, Wis., court to recover at least some of the funds. But in a statement this week, the company said it is "presently unable to quantify the ultimate amount of any recoveries." The charge could be reduced when the bank determines its exact losses.
The FBI confirmed that it has opened a criminal investigation into the matter.
In the suit, filed late last month in U.S. District Court in Madison, Citizens alleged that Stokes Chevrolet Inc. of Waterloo, Wis., and two of the car dealer's officers coordinated the scheme using the dealership's account at Capitol Bank of Madison along with a business partner's account at Citizens.
The suit alleges that Stokes drew checks against its account to pay JoMeg Inc., a Flushing, Mich., business -- and Citizens customer -- that buys and sells automobiles at wholesale. But Stokes' account contained insufficient funds to cover the checks, the suit says.
JoMeg would deposit the checks anyway into its Citizens' account, according to the suit. To conceal the shortfall in the Stokes account, the suit says, JoMeg paid Stokes an equal or larger amount from its own account.
However, JoMeg's own account lacked funds to cover these checks, because the bogus checks drawn from Stokes' account only created the illusion of a large bank balance, according to the bank's lawsuit.
JoMeg is not named as a defendant, but the suit calls the business a co-conspirator.
Capitol Bank discovered the scheme on Aug. 10, the suit says.
Though Citizens says the scam may prove to have cost it nearly $4 million, the loss may be as small as $75,000 -- the amount for which it is now suing Stokes Chevrolet; the dealer's president, Frederick Stokes; and another of the dealer's officers, Claudia Imrie of Waterloo.
Capitol Bank is not planning a suit. "We don't believe at this time that we've sustained any losses," said Jim Dolister, Capitol's president. "We're cooperating with authorities to help them as much as we can."
Calls to Stokes Chevrolet were not returned.
It is common for a bank to take multimillion-dollar charges in connection with check-kiting even when known losses are as little as $75,000. Because "checks are flying left and right" in kiting schemes, it can be hard to determine the total deficit, said Michael Moran, an analyst with Roney & Co. in Detroit.
"It's often compared to musical chairs," Mr. Moran said. "When the music stops, the one left without a chair has the problem. Well, the music stopped, and Citizens had no place to sit down."
Citizens' general counsel, Tom Gallagher, said that to offset the potential check-kiting loss it will give only $25,000 to $75,000 to a charitable trust instead of the $4 million to $4.5 million planned.