Foul things are rising in Keystone, W.Va., including litigation fees, the corporate arrest rate, and enough buried First National bank documents to fill 370 boxes, according to the FBI agents who raided bank Senior Vice President Terry L. Church's ranch on Oct. 15.

That's where the missing documents were found, stashed in a 10-foot deep, 100-foot long ditch, that was later filled and seeded for grass.

Following the raid and seizure, Church, along with bank accountant Michael H. Graham, were charged and arrested for obstruction.

Graham, a First National official who in the past has faced charges of tax evasion and accounting fraud, was released from jail last week after posting $25,000 bail. Church's bail was set at $2.5 million.

First National Bank of Keystone, with supposed assets totaling $1.1 billion, was closed down on Sept. 1 by the Office of the Comptroller of the Currency, when an estimated $515 million securitization went missing from the bank's books.

Big Losses

The fiasco may cause the FDIC to lose up to $850 million, according to David Barre, an agency spokesman. Barre said the agency is considering whether to sue other organizations involved with Keystone.

"We have sued accountants who performed [auditing] in the past for bank failures," said Barre. "We have sued law firms who have provided advice and counsel to a financial institution if we feel that advice was attorney malpractice. And we've also sued officers and directors of the banks for their actions."

The Missing Money

According to a source close to the situation, one theory is that the bulk of the missing money went to cover losses in First National's securitized loan portfolio, so the residuals wouldn't erode.

"To cover losses they used loans that had been securitized, and funded them with FDIC insured deposits, through CD brokers," the source said.

Because of the nature of the loans, where interest rates were 14%, and pre-payment rates were 30%, they needed to create more and more loans to pay monthly amortization.

Recently, two of the three employees who signed an affidavit that attempted to explain why the bank appeared to be accepting brokered deposits after regulators had forbidden the bank from doing so, renounced their claims as false, along with the documents that accompanied it.

"Whether they understood the economics of what was happening? Perhaps not," the source said. "But you don't have to be a genius to understand that you're not supposed to phony the books."

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