Crypto fraud ruins bank in Kansas and sends CEO to jail

The former CEO of a small Kansas bank has been sentenced to more than 24 years in prison for looting the bank of $47 million by transferring the money to cryptocurrency wallets controlled by scammers who lured him into a “pig slaughter” scheme that appealed to his greed, federal prosecutors said.

Former CEO Shan Hanes' massive embezzlement of a series of electronic transfers over just eight weeks last year led to the collapse and FDIC takeover of Heartland Tri-State Bank in Elkhart, one of only five U.S. banks to fail in 2023.

Hanes, 53, also stole funds from a local church and investment club, as well as from his daughter's college savings account, to allegedly buy cryptocurrencies because the scammers insisted they needed more money to unlock the alleged returns on his investments, according to U.S. District Court records in Wichita, Kansas.

But Hanes made no profit and lost all the stolen money through the fraud.

Judge John Broomes sentenced Hanes on Monday to 293 months in prison – 29 months more than prosecutors had asked for after he pleaded guilty in May to one count of embezzlement by a bank employee.

During the sentencing, “I called his actions 'pure evil,'” said Brian Mitchell, who was Hanes' neighbor for years in Elkhart, a city of about 2,000 people in southwest Kansas, north of the Oklahoma Panhandle.

Mitchell, whose farm and movie theater chains had bank accounts with Heartland Tri-State, said about 30 of the bank's shareholders attended Hanes' sentencing hearing, more than a year after their stock value was wiped out by the bankruptcy.

“There were people who lost 70, 80 percent of their retirement savings” as a result of Hanes' actions, Mitchell said in a phone interview with CNBC on Wednesday.

One local woman is “struggling to finance a nursing home for her 93-year-old mother,” while another woman is currently “unable to retire” because of crime, Mitchell said.

Mitchell, who was not a shareholder but was part of the investment club aggrieved by the CEO, said Hanes showed little to no remorse for his actions despite hearing victims tell the judge about the consequences of his crime.

“Shan stood facing the judge, looked briefly over his left shoulder, avoided eye contact and said, 'Excuse me,'” Mitchell recalled, describing the scene in the courtroom.

“And that was it.”

But Hanes' face showed “absolute shock” when Broomes imposed the harsh sentence and ordered the former bank boss's immediate detention, Mitchell said.

Mitchell said he had viewed Hanes for years as a “good guy” who, like other people in Elkhart, helped others in the small community when they needed help and preached at his local church. Hanes also testified several times before Congress about community banking.

But prosecutors and banking regulators said Hanes, who has three daughters with his wife, a teacher, began stealing after becoming the victim of a hog slaughter plot in late 2022.

This scheme was described in a court filing as follows: “A fraudster convinces a victim (a pig) to invest in supposedly legitimate virtual currency investment opportunities and then steals the victim's money – slaughtering the pig.”

Hanes, who served on the board of the American Bankers Association and was chairman of the Kansas Bankers Association, began making cryptocurrency purchase transactions in December 2022 that “appeared to be triggered by communications with an unidentified co-conspirator via the e-messaging app 'WhatsApp,'” prosecutors wrote in a court document.

“To this day, the true identity of the co-conspirator(s) remains unknown,” the file states.

Hanes initially purchased cryptocurrencies with his own funds, but in early 2023 he stole $40,000 from the Elkhart Church of Christ and $10,000 from the Santa Fe Investment Club, according to prosecutors and a defense filing.

He also used $60,000 from a daughter's college fund and nearly $1 million worth of Elkhart Financial Corporation stock, his lawyer said in a filing.

In May 2023, he began making electronic transfers from Heartland Tri-State Bank to accounts controlled by fraudsters, initially in the amount of $5,000.

Two weeks later, on May 30, Hanes wired $1.5 million and a day later he sent another wire for the same amount, records show.

Three days later, he ordered two electronic transfers totaling $6.7 million to be sent from the bank to the crypto wallet, followed by a whopping $10 million less than two weeks later, and another $3.3 million a few days after that.

Hanes solicited bank employees to make the transfers and “made numerous false statements to various individuals” to gain access to the funds so they could be transferred, prosecutors wrote. Heartland Tri-State employees bypassed the bank's wire transfer policies and daily limits to approve Hanes' transfers, according to a report from the Office of the Inspector General of the Board of Governors of the Federal Reserve System.

“We believe that the CEO's dominant role in the bank and his prominent role in the community contributed to Heartland employees' hesitation to question or report the suspected fraudulent activities earlier,” the report said.

Prosecutors wrote that the series of 11 electronic transfers from Hanes to the fraudster illustrated “a common pattern” in hog slaughter schemes.

“First, there is an initial 'investment,' followed by another transaction required to secure or guarantee those funds,” prosecutors wrote. “Further 'investments' may be made, but always require another need for funds to guarantee or release the earlier transfers. This pattern is clearly evident in the defendant's embezzlement.”

Mitchell confirmed this to CNBC, saying he received a call from Hanes at 7:40 a.m. on July 5, 2023.

“He said, 'Brian, I need your help and you're the only one who can help me,'” Mitchell said.

Mitchell, who survived prostate cancer two decades ago, said he thought Hanes was calling him to tell him he had the same type of cancer.

But when Mitchell showed up at Heartland Tri-State to meet Hanes before the bank officially opened to customers that morning, the CEO told him something very different — and stranger.

“The first thing he says is, 'Brian, I need to borrow $12 million for ten days, and I'll give you $1 million to lend it to me,'” Mitchell recalls. “I'm sitting there wondering if I'm in a bank in Elkhart, Kansas, or in an alley with a loan shark in Chicago.”

When he asked Hanes what he wanted the money for, “Hanes pulled out his phone and pretended to log in, and he showed me this account with $40, $42 million in it,” Mitchell said. “He said, 'Brian, I have this money and it's in cryptocurrency, and I need $12 million to verify the funds.'”

Hanes then claimed he had been in contact with a banker in Denver named “Jim” and “another guy in Oklahoma” and they had invested in cryptocurrencies in Coinbase accounts, making them a lot of money, Mitchell said.

“I told him, 'You're involved in a scam, dude. You're involved in a scam,'” Mitchell said. “I interrupted him and asked, 'Is that bank money you're playing with?' And he said, 'No, Brian.'”

Hanes repeatedly told him that he needed the $12 million to “activate” the funds he had already transferred to the crypto account, which he said was located in Hong Kong, Mitchell recalled.

“I said, 'Get on a plane, go to Hong Kong, hire an interpreter and get a cashier's check'” for the funds allegedly stored there, Mitchell said. “Then I said, 'I'm not going to lend you the money.' I said, 'You're involved in a fraud, go away.'”

But that same day, after Mitchell rejected his requests, Hanes had bank employees transfer $8 million into the fraudsters' accounts, prosecutors said in a court document.

Two days later, Hanes employees instructed the scammers to wire another $4.4 million.

Meanwhile, Mitchell, who was unaware of these transfers at the time, said that after meeting with the CEO, he was concerned that Hanes might gain access to customer deposits at the bank and transfer the $12 million he had requested.

“We have been constantly reviewing our credit lines,” Mitchell said.

“The next week I was at the bank and one of the employees caught me. She looked so stressed,” Mitchell said. The woman told him that Hanes had transferred money from the bank.

“I said, 'Don't say another word to me … I need to talk to a board member,'” Mitchell said.

“And I talked to a board member that night, and he went to talk to a lawyer that same night,” Mitchell recalled.

Hanes was fired within a few days.

Approximately two weeks later, on July 28, 2023, Heartland Tri-State was closed by the Kansas Office of the State Bank Commissioner and acquired by the Federal Deposit Insurance Corp.

The shareholders were wiped out, but the depositors did not lose any money because Dream First Bank, National Association of Syracuse, Kansas, took over all deposits.

Heartland Tri-State had total assets of nearly $140 million and total deposits of $130 million as of last March.

Word quickly spread that fraud had led to the bank's bankruptcy, but Hanes' involvement did not come to light until months later.

No charges were filed against Hanes until last February, when federal prosecutors charged him with embezzlement. He was charged separately in state court in Morton County, Kansas, in a 28-count indictment related to the looting of the bank.

Hanes remained under house arrest until his sentencing in federal court this week.

“I talked to him last month while he was out mowing his lawn,” Mitchell said.

Hanes, who once traveled as far as Perth, Australia, to recover funds he had transferred during a fraud attempt, told Mitchell that until his arrest he believed there was a way to get the money back.