How a businessman took over KeyBank and others in a $180 million scam

CLEVELAND, Ohio – Najeeb Khan loved classic cars. He has bought more than 250 of them, including the 2006 Ford GT Heritage of hockey great Wayne Gretzky, the Aston Martin DB-5, the model that made James Bond famous, and the 1920 Locomobile that appeared in Chaplin’s movie With Actor Robert Downey Jr.

Khan amassed a multimillion-dollar collection by running an illegal, high-stakes game with his payroll processing company, moving large sums of money from account to account to make it appear he had more than he did.

After the scheme collapsed in spectacular fashion, with a $142 million KeyBank overdraft, he betrayed his cars. On Thursday, he will lose his freedom.

Khan faces 10 to 12 years in prison when he stands before US District Judge Pamela Parker in Cleveland. He pleaded guilty in January to bank fraud and attempted tax evasion in a paper check scheme that left three banks on the hook for about $150 million and 175 or so companies out of about $30 million.

As criminal and civil investigations continued, a bankruptcy trustee wrote in court records that Khan organized “what may be the largest and longest-running securities screening scheme in the history of the United States.”

Khan’s defense attorneys, Paul Flannery and Jesse Barrett, husband of US Supreme Court Justice Amy Coney Barrett, did not respond to messages seeking comment.

But in a 51-page memo on Thursday, Khan’s lawyers said he should be sentenced to 18 to 24 months in prison, saying anything longer than five years could amount to the death penalty. For the 70-year-old businessman from Michigan.

They pointed to the years he spent donating time and money to dozens of charities. More than 100 people wrote letters on Khan’s behalf, including doctors, police officers, lawyers, some victims and John Breslow, Nebraska’s state auditor elected from 1991 to 1998.

Khan’s lawyers wrote that although greed was a major factor in the crime, Khan also showed genuine remorse by devoting approximately 1,800 hours to helping his victims recover lost money.

He “lived a life of remarkably good faith, resulting in great good for many people,” the lawyers’ filing said.

From floppy disks to 6,000 clients

Khan, of Edwardsburg, Michigan, was a successful businessman before his downfall. He grew up in Pakistan, where he and his father restored old cars, which sparked his love of classic cars.

Khan immigrated to the United States in 1974 and worked his way through Grand Valley State University in Michigan by working in a furniture factory and as a suit salesman for J.C. Penney. He later worked his way up the career ladder at Midwest Bank of Commerce, where he became Vice President.

He started his company in 1988, then called Interlogic Systems Inc., in Elkhart, Indiana, with 10 employees. At that time, the company was using floppy disks to store information.

Khan sold the company in 1998 to Chicago-based CNA Insurance. About four years later, CNA closed the company’s payroll processing arm. Khan restarted his old company and called it Interlogic Outsourcing, creating about 100 jobs.

Khan marketed his company to help businesses large and small with payroll processing, specifically touting its ability to help nonprofits, charities, and faith-based organizations.

The company has grown into one of the largest of its kind in the country, with about 6,000 customers in all 50 states and some in Canada.

Its long list of clients included the Archdiocese of New Orleans and four other Catholic dioceses, the Boy Scouts of America and the Lansing Lognotes, a High-A minor league baseball affiliate of the Oakland A’s.

The company also had a large number Small and medium-sized businesses as clients include dentists, chiropractors, construction companies, nursing homes, a homeless shelter and a chain of family-owned restaurants in Philadelphia.

Those who have used his company have had few complaints.

“The business itself has been good,” said Shannon Runyon, chief financial officer for Precision Wall Systems, an Indiana construction company. “The people who worked there were very responsive and responsible. We never had a problem with them.”

Khan over time became a fixture in the business community. He has been part of the boards of the Studebaker Museum, College of the Holy Cross, public television station WNIT, and others. He also served on the board of directors of First Source Bank of South Bend.

Country clubs, planes and boats

As his business grew, so did his lavish lifestyle. He and his wife, a former accountant, had memberships in several country clubs.

Khan purchased eight planes, three hangars, 10 boats, mansions in Michigan and Arizona and a 64-foot yacht that came with a 12-foot motorboat that was docked at the Catawba Island Club in Port Clinton.

He also owned commercial properties in Florida, Indiana and Arizona and seven agricultural properties in Iowa, among other homes and vacant lots from Michigan to Montana.

But his prized possessions were cars. He has shown them all over the United States and Europe.

The collection included rare sports cars, such as the 1952 Ferrari 225 S Berlinetta, which is one of only 21 cars, the 1953 Fiat 8V Supersonic, which is one of only 15 cars, and the 1955 Cooper-Jaguar T38 Mk II, which is one of the few. Only three cars in the world.

He also bought race cars driven by NASCAR greats Jeff Gordon and Dale Earnhardt Jr., a 1981 DeLorean made famous by the movie Back to the Future, a 1948 Happy Wagon ice cream truck, and race cars built as early as 1917. The year is 1936. The Glacier National Park tour bus is made in Cleveland and used for tours of Yellowstone National Park.

Few wondered how he earned so much money. Senior executives at Interlogic Outsourcing and even Khan’s wife said in court filings that they had no idea. Most customers would ignore it, if they knew about it.

“Everyone in Indiana used Interlogic,” said Andrew Jones, a client of the company and a lawyer who later sued Khan. “I thought he had other investments or something. He was spending money like Bill Gates. Nothing was quite right, but it was cheap, and everyone seemed to trust it. It was out of sight, out of mind.”

Scheme

Kite verification schemes are relatively common. It works as follows: Checks written with insufficient funds are rotated across several banks and returned to the original bank, taking advantage of the time between transfers.

This inflates account balances to make it appear that people have more money than they actually do.

These schemes take time, effort, and precision in placing the right amount of money in the right banks at the right times.

What makes Khan’s scheme unique is how long it took. The scheme was launched in 2011, according to bankruptcy records. Federal prosecutors accused him of starting the order in 2014, due to a statute of limitations.

Khan took money from his clients’ accounts and sent it through a loop at Lake City Bank, KeyBank and Berkshire Bank. The money he embezzled from the scheme often went into his accounts at 1st Source.

Each day, Khan created a spreadsheet that he sent to employees with specific instructions on where and when to send more than 200 checks or wire transfers. Employees drop off bags of checks every day in Lake City, sometimes as much as $100 million in a single day.

In the end, the amount of money he stole far exceeded the company’s net profits, which ranged from about $1.2 million to $2.3 million from 2014 to 2016, according to bankruptcy records.

In 2011, he earned $315,000. That jumped to $4.1 million in 2014. By July 2019, when the scheme stopped, he had received about $73 million.

Collision

Over time, Lake City became wary of the large number of daily transactions. If the checks stop, the bank will be on the hook for millions of dollars.

In early July 2019, Khan sent about $250 million through his regular banking cycle.

On July 8 of that year, Lake City finally had enough. It declined to cover checks transferred from its accounts to KeyBank and notify the Cleveland-based regional banking giant.

KeyBank got $142 million, according to bankruptcy court filings.

Khan himself reported the scam to federal regulators and the FBI. KeyBank sued Khan and Interlogic the next day. The file stated that the bank had no reason to believe that the checks were invalid, especially since it had been dealing with Khan’s business for years.

KeyBank officials declined to comment for this story.

‘nightmare’

For years, Jim Mroz said, there was no sign anything was wrong with Interlogic until the collapse.

Mroz owns Precision Wall Systems, a South Bend construction company with about 75 employees and has used Interlogic Outsourcing for years to handle Payroll is particularly complex.

Like many companies that have used Khan’s business, it began with a letter from the IRS warning that the company had failed to pay its quarterly taxes. At first, he thought it was just a flash. Interlogic told its CFO, Runyon, that it would fix it, no problem.

Then another message came. And another. Then news of KeyBank’s lawsuit arrived in 2019.

Mroz and Runyon had to scramble. They walked away with about $60,000. They had to save money to pay the IRS or risk penalties, and they had to figure out how to pay their employees. They delayed paychecks for a few days until they found out.

“It was chaos for two weeks,” Mroz said.

“It was a nightmare,” Runyon said.

Mroz said it took about five months before the company got back on its feet.

“For us, this was a lesson learned,” Mroz said. “When it became painfully clear that there was a massive fraud going on, when his assets were listed, it was astonishing. The signs were there, but no one picked up on them.”

Robert Franz, owner of Franz Nursery — a Hamilton, Indiana, plant nursery and landscaper — said the first letter he received from the IRS scared him.

Franz’s company is smaller, with about 20 employees. His family has owned it for nearly six decades, and he took over in 2009. He struggled through tough times and said the company was just starting to hit its stride when he had to raise about $25,000 to pay taxes that Interlogic had already received. From the company’s account.

Getting the money in six weeks was a “huge blow for us,” Franz said.

Others lost much more. Loyola Academy, a private school near Chicago, lost about $301,000. Sawyer Nursery, a major supplier of perennials to large retail stores in the Great Lakes region, lost about $203,000.

Franz and Mroz both signed on to a lawsuit filed by Jones, a South Bend attorney whose law firm lost about $7,000 because of Khan’s scheme.

Jones said many of his clients were small businesses. One of Jones’ clients, who owns restaurants, ended up borrowing money against his permanent life insurance policy.

“The amount of pain and anguish he has caused people is almost immeasurable,” Jones said.

Auction

The repercussions have continued for years. Jones filed his lawsuit. Khan’s wife filed for divorce and the two separated.

Interlogic, once worth about $70 million, was sold for $3.5 million in 2019, and then again recently for $30 million, court records say.

The lawsuit against Lake City, which is ongoing, accuses the bank of ignoring glaring warning signs, including more than 3,200 alerts about paper checks in the bank’s internal fraud detection system. She also said that a member of the bank’s board of directors had an inappropriate financial relationship with Khan. Lake City officials did not respond to messages seeking comment.

Khan also declared bankruptcy, forcing him to sell his homes ($2.2 million for one in Arizona) and his boats ($1.1 million for his yacht).

And cars.

During the September 2020 auction held by Sotheby’s, a 1952 Ferrari sold for $2.5 million, a Fiat 53 sold for $1.8 million, and a 55 Jaguar sold for $1.6 million. Another 15 cars were sold for between $400,000 and $1.1 million each.

In total, the 281 cars and motorcycles were sold for about $40 million, more than half of what Khan is accused of embezzling.

“I think it was a very blatant case of extreme greed, with no awareness of how it affected everyone else,” said Franz, the nursery owner. “My opinion is that 10 to 12 years is not enough. To me it was more sinister than just stealing people’s money. Everyone thought they made their payments to the IRS. They did. I don’t have a lot of sympathy for him.”

Adam Ferris covers the federal courts in cleveland.com And the ordinary trader. You can find his work here.