(Bloomberg) -- The former chief executive officer of a Kansas bank was charged with embezzling $47.1 million from the lender to buy cryptocurrency, as the tale of tiny Heartland Tri-State Bank and its failure unfolds.

Shan Hanes, who led the bank before it was shuttered in July, also took money from a local church, according to a filing by prosecutors Friday in federal court in Wichita. 

The closure rocked the tight-knit community of Elkhart, a far-flung city of about 1,800 where regulators and investigators descended last year, and where residents who invested in the bank face losses.  

Bloomberg was first to report on the details of the bank’s failure. 

Read More: Bank Failure That Hit Tiny Kansas Town Began With Crypto Scam

Hanes, 52, who previously held leadership roles at the Kansas Bankers Association, was a champion of community banks, testifying several times before Congress about their importance. 

He didn’t immediately respond to emails and calls seeking comment on the charges.

‘Pig Butchering’

The brief filing, known as a criminal information, is short on details. But Brian Mitchell, a 59-year-old local businessman, farmer and client of the bank, believes Hanes may have been the victim of a scam himself. 

Mitchell, who played a key role in uncovering the alleged embezzlement, says he grew suspicious when Hanes asked him for a loan to help him get his money out of a crypto investment. In a scheme called “pig butchering,” victims are lured into giving ever more money, like pigs fattened for slaughter. 

It isn’t clear if Hanes met that fate, but it isn’t uncommon. Victims of these and other virtual-currency investment frauds have lost billions of dollars in the US alone, according to estimates from law enforcement cited by the US Treasury Department’s Financial Crimes Enforcement Network.

Mitchell, whose family owns a Midwestern movie theater chain, said Elkhart needed the facts to come out in order to move forward. 

‘Huge Step’

“This is a huge step,” he said of the charges.  

In the end, depositors weren’t harmed by the bank’s closure. The Syracuse, Kansas-based Dream First Bank acquired Heartland. Mitchell isn’t an investor in the bank.

It all began when Hanes started “ostensibly” buying cryptocurrency in 2022 with his own money, according to Friday’s filing. By early 2023, he had embezzled funds from the church and an investment club in Elkhart, prosecutors allege. Then he turned to the bank, they claim.

The alleged scheme began to unravel last summer, when Mitchell says Hanes approached him and asked if he would lend him $12 million so Hanes could get his money out of the crypto investment, Bloomberg News reported in September. Hanes promised he’d pay him back 10 days later, offering $1 million in interest, Mitchell said.

More and More Money

As Mitchell recounts it, Hanes said he knew someone who was helping him invest in crypto. But there was an issue with wire payments, the story went, and he needed to put more money in. Mitchell said he asked whether it was the bank’s money and that Hanes assured him it wasn’t. 

About a week later, after learning from a bank employee that Hanes had wired the $12 million, Mitchell went to a member of Heartland’s board. He told the director about his meeting with Hanes and asked if the bank might have exposure. A bank representative then went to regulators.

On July 28, the Kansas Office of the State Bank Commissioner declared Heartland insolvent and shut it. David Herndon, the state banking commissioner, told the Financial Times in August that the bank had fallen victim to a “scam.” 

Ultimately Hanes embezzled funds through at least 11 wire transfers of bank funds from May through July, the US alleges. The loss of the $47.1 million ultimately caused the bank to close, and the FDIC was appointed receiver. A spokesperson for the FDIC declined to comment on the charges, referring Bloomberg News to law enforcement.

Speaking Up

Mitchell said he hopes the charges will raise awareness about crypto fraud. He said he is now speaking publicly about his role in alerting regulators to Hanes’s alleged scheme, not wanting to interfere with the investigation before charges were brought. 

He said he is both disappointed in Hanes, whom he considered a friend, and angry on behalf of the bank’s investors because of the losses they have incurred. He said he hopes the community can begin to heal.

“Until the truth came out, there was no way to get past it,” Mitchell said. 

--With assistance from Zeke Faux.

©2024 Bloomberg L.P.