Lawsuit: Millions in 16th Section school funds lost to fraudulent transactions
WAYNESBORO, Miss. (WDAM) - The Wayne County School District filed a lawsuit against its investment advisor and a Waynesboro bank Tuesday after the loss of more than $6.3 million in 16th Section funds through fraudulent transactions.
In the lawsuit filed in Wayne County Circuit Court, the school district accuses GIO Fixed Income Strategies in Birmingham, Alabama, its registered agent George I. O’Rear and the First State Bank of being in a position to prevent the fraud and failing to do so.
The school district maintains control of 16th Section land within its district and is able to invest funds gained from the land. The district maintained a 16th Section investment funds account at First State Bank.
In July 2015, the district hired GIO to manage the school’s 16th Section investments. GIO would advise the district on the purchase or sale of bonds to be approved by the district, then GIO would instruct First State Bank to transfer the money.
According to the lawsuit, criminal actors gained access to GIO’s electronic mailing system sometime prior to June 24, 2020. The criminal actors then monitored GIO’s emails to learn of imminent transactions recommended by GIO and approved by the district.
On four separate occasions from June 24 to July 3, criminal actors sent emails from O’Rear’s account to First State Bank instructing the bank to transfer millions from the district’s investment account to accounts controlled by the fraudsters, according to the lawsuit.
The emails were made to appear as though the funds were for the purchase or settlement of securities that the district had consented to.
The district alleges that First State Bank executed the wires without verifying the payment instructions with GIO or using “commercially-reasonable security procedures.”
The fraud was discovered on July 3 when a GIO account instructed the bank to transfer more funds than were contained in the district’s investment account.
First State Bank then contacted the district for the first time to confirm the wire transfer request, according to the lawsuit. The district questioned the request and asked the bank to confirm it with GIO.
The bank contacted O’Rear by telephone and the fraud was uncovered, according to the district.
First State Bank then notified the Federal Bureau of Investigation.
The FBI was able to recover $3,475,200 before it was distributed from one of the accounts, but current losses remain at $6,337,361.54.
The district accuses GIO of failing to maintain proper security protocols to protect its electronic mailing system and the district’s financial information from criminal actors, which allowed the fraudulent transactions to occur.
First State Bank is accused of not utilizing Federal Financial Institutions Examination Council guidelines on wire transfers and failing to properly authorize the fraudulent wire transactions.
The lawsuit alleges breach of contract by GIO, breach of fiduciary duty by GIO, First State Bank liability, breach of banking regulations by First State Bank, conversion by First State Bank and negligence by both GIO and First State Bank.
The school district seeks a jury trial and a judgement in the sum of the more than $6.3 million in losses plus interest and costs from the legal action.
WDAM has reached out to First State Bank for comment.
Copyright 2020 WDAM. All rights reserved.