Keybank sues firm, alleging $122M fraud loss

Keybank of Cleveland is suing an Indiana company it says fraudulently deposited checks that were no good and then requested wire transfers against the checks totaling $220 million.

The lawsuit in U.S. District Court in Cleveland accuses Interlogic Outsourcing Inc. and its owner and CEO, Najeeb Khan, of “willful breaches and fraudulent conduct.” The suit was filed and then amended last week.

The potential loss appears to be connected to Key’s filing with the U.S. Securities and Exchange Commission this week that it could lose $90 million because of fraud by a business customer. The filing, which served as a heads-up for shareholders and analysts, says the fraud in question was discovered July 9; that’s the day the initial suit was filed in court.

“The ultimate financial impact could be lower and will depend, in part, on the company’s success in its efforts to recover the funds,” the filing said. “The company plans to pursue all available sources of recovery and other means of mitigating the potential loss. The company is working with the appropriate law enforcement authorities in connection with this matter.”

Key maintains in the suit that it faces losing $122 million to $220 million, depending on how the case plays out.

The suit also names three banks where Key says the money was wired to: Jpmorgan Chase, Berkshire Bank and Wells Fargo. Key requested that the banks be ordered to hold the money until the matter is resolved and Key could get its money returned. Key is suing Khan and Interlogic for all compensatory, statutory and related damages, as well as punitive damages and attorneys fees.

Interlogic is a payroll processor in Elkhart, Indiana. Khan does not appear on the company’s list of key people on its website; the site lists only two vice presidents. The Better Business Bureau file says that Interlogic has been in business since 2003. The company has an A-plus BBB rating.

Key and Interlogic have been doing business together since 2008, according to the suit. Key provided various cash management services to Interlogic, which had several company accounts and routinely made deposits and transfers involving those accounts. Khan owns two other companies, Timeplus Systems and IOI Payroll Services, the suit says.

During the first week of July, Khan issued a series of checks from Timeplus and IOI Payroll payable to Interlogic, the suit said. The checks totaled about $250 million and were written on accounts at Lake City Bank in Warsaw, Indiana. Khan and Interlogic then requested numerous wire transfers to accounts at three other banks on July 5 and July 8, the suit said, noting that each wire transfer was between $1 million and $3 million. The total of the wire transfers exceeded $200 million. But the original checks from Timeplus and IOI Payroll were no good; the accounts they were written on had insufficient funds. Key alleges that Khan “knew that there were insufficient funds.”

Key noted that such large deposits from Interlogic were consistent with the company’s history with Key.

A Key spokesman declined to comment on the matter. A receptionist at Interlogic said Khan wasn’t available Wednesday; his assistant didn’t immediately return a phone call.