Hundreds of community banks are scrambling to size up losses after a New York company that securitizes leases declared bankruptcy.

Syracuse-based Bennett Funding Group filed Monday for Chapter 11 bankruptcy protection after federal authorities charged its chief financial officer with securities fraud and perjury.

The company leases office equipment to government agencies, and then packages the leases for sale to banks, thrifts, pension funds, and individual investors. Under the investment agreements, Bennett Funding continues to service the loans, funneling payments to investors.

The bankruptcy filing, however, suspended all payments.

"We thought that purchasing these lease transactions was basically a bullet-proof investment, provided it wasn't a Ponzi scheme," said Mark Osborne, chairman of Hibernia Bancshares, a Quincy, Mass., thrift. "The one thing that could have happened happened. This thing is huge."

The U.S. Attorney's Office in Manhattan is accusing Patrick Bennett, the company's chief financial officer and son of the company's founder, of selling bogus lease agreements to pay off investors in bona fide leases. Prosecutors allege he paid himself more than $10 million from lease proceeds. He turned himself in Friday and was released on $500,000 bond. A preliminary hearing is scheduled for April 29.

Officials at the $439 million-asset company did not return phone calls .

While it is unclear how many of the outstanding Bennett Funding leases are phony, bankers and analysts are estimating hundreds of institutions will be affected.

So far, no institutions have disclosed problems with leases bought from Bennett Funding, and there's no indication the banks' investments were part of the alleged scheme.

Still, Hibernia added $1 million to its reserves Tuesday as a precaution. "We decided to deal with our exposure to Bennett in a surgical fashion by writing it off," Mr. Osborne said.

"The fact that Bennett filed for bankruptcy would probably force others to take charges, too," said Frank J. Barkocy, senior vice president at Josephthal Lyon & Ross Inc., an investment banking firm in New York.

Other community banks acknowledging involvement include Amsterdam, N.Y.- based Ambanc Holding, with a $3.6 million loan collateralized by Bennett Funding leases, and Lafayette, Ind.-based LSB Financial Corp., with a $2.4 million investment exposure. LSB officials, however, said they expect any losses to be covered by their insurer.

While most Bennett Funding investors are community banks, many with less than $1 billion in assets, at least two large companies also have worked with Bennett Funding.

In particular, sources said, Dutch-based ING Bank bought about $50 million in Bennett Funding securities. And officials at Metropolitan Life Insurance Co. confirmed that the insurance giant purchased about $35 million in April 1995 from "an entity" they believe was independent of Bennett Funding. Officials say they don't think MetLife has any exposure to the bankruptcy, however.

Most of the leases purchased by banks and thrifts were sold by Crawford & Associates, a Fayetteville, N.Y.-based institutional broker. Officials from that firm refused to discuss the situation.

Meanwhile, in response to the charges against Mr. Bennett and the company's bankruptcy filing, many of the institutions with investments are hastily trying to ensure the leases they bought are in fact valid.

That requires a lot of effort, because they include hundreds of small equipment leases, such as leases for photocopiers and fax machines - often for $5,000 or less.

"We think we're in pretty good shape, but who knows," said William E. Swan, president and chief executive of $986 million-asset Lockport (N.Y.) Savings Bank, one of the largest community banks to invest in Bennett Funding's leases. He declined to divulge the mutual's exposure.

Bankers interviewed said the alleged Ponzi scheme caught them completely by surprise. All said they had conducted extensive due diligence before entering any contracts with Bennett Funding, even contacting other bank investors to find out how the leases had performed. None had any indications of problems either with the company or its CFO.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.