(FORTUNE Magazine) – IN SO MANY WAYS he was like the Great Gatsby: handsome, neatly dressed, hair smartly parted and trimmed, surrounded by ostentatious wealth. And like Gatsby, Stephen L. Smith had a dark secret. Smith's was that he had started a phony oil-drilling business in his hometown of Winter Haven, Florida, and within ten years had drawn childhood friends, their parents, and many of the good people of Winter Haven into his scam. Smith was so smooth, so beyond reproach, that even wary investors dropped their guard to partake of the big profits. By the time state investigators shut down SH Oil & Gas Exploration in December 1987, then-36-year-old Smith was worth $74 million and had defrauded some 700 investors in a $130 million scheme. His operation was simple. He didn't advertise or distribute prospectuses. SH Oil was supposed to be an exclusive club. But the grapevine around Winter Haven hummed with reports of a steady 60% return from Smith's oil ventures. When prospects came to his modest office, Smith sat them in a sturdy leather armchair, spoke in some detail about oil, displayed a few wall maps speckled with pushpins. The people came, listened to the nice young man, and left their money behind. Smith took checks from grandmothers and pensioners; from the people who took him swimming as a child, who double-dated with him at Winter Haven High. He defrauded citrus managers, bankers, small-business executives, wealthy retirees, dentists, lawyers, an Episcopal priest, and an otolaryngologist. ''I do remember he took us into another room and showed us some maps,'' an investor later testified. ''I had no idea what I was looking at at the time and still don't know what I was looking at.''

''What did Smith tell you about the map?'' the man was asked. ''I don't remember. That it supposedly represented some kind of a formation, underground formation. That's really all I can tell you about it.'' Smith apparently owned no oil wells. He simply recycled money from new investors into monthly dividends for existing ones -- with a fat cut for himself. When the truth was revealed, investors couldn't believe it. But after Smith pleaded guilty last year to 98 felonies -- including two counts of organized fraud and 96 counts of securities violations -- and was packed off to prison on a 15-year sentence, reality sank in. Said Chester Melvin, an investor: ''If it had been a truthful thing, it would have been a really fine thing. But it wasn't, and, hell, that's all.'' But that isn't all. The SH Oil scandal has taken an unexpected turn: Two investor groups are suing Barnett Banks Inc., Florida's largest bank holding company and No. 23 in the nation, and one of its subsidiaries, Barnett Bank of Polk County. The charges are startling: that the bank was aware -- or should have been -- that Smith was running a fraud, yet continued to lend him millions to finance his ''business.'' The two lawsuits are similar, charging that the bank was making too much money from SH Oil to worry about whether it was legitimate. The first suit alleges that ''Barnett actually knew but disregarded the fact that SH Oil was the registered owner of no wells,'' and that bank officials promoted SH Oil as an investment so that they could make loans to investors. The suit says Barnett Bank of Polk County, the subsidiary Smith dealt with, declined to confirm that the oil reserves really existed ''out of fear of antagonizing its largest customer'' -- namely Stephen L. Smith. Thus, ''Barnett was at the hub of the wheel in the sense that it realized that it was functioning as a money machine for both Smith . . . and the many customers who borrowed from it to buy SH Oil securities.'' Dr. Maurice F. McCarthy Jr., a practicing physician, and other investors brought the first suit, demanding some $10 million in compensatory damages plus punitive damages. Edward J. Rooney, through whose Rooney Investments several people bought into SH Oil, brought the second suit with other investors. Both demand trials by jury. In a series of motions and countersuits, Barnett asserts that it didn't know that SH Oil was a fraud or that Smith was involved in anything illegal. But, Barnett says, several plaintiffs did know -- and, rather than blowing the whistle, chose to keep getting those knockout returns. Besides, says the bank, neither it nor the holding company ''owed plaintiffs a duty of investigation or disclosure . . .'' Barnett says that it didn't solicit anyone to invest and that depositions by Smith and others refute the claim that the bank knew what Smith was up to. The bank claims that many of the plaintiffs have suffered no damages because they made a profit from SH Oil. In June, Barnett filed motions with the U.S. district court in Tampa asking for summary judgment dismissing many of the claims in the McCarthy suit. The court has not yet ruled on the motions. WERE BARNETT officials ''victims'' of the duplicitous Smith, as they claim? Were they grossly negligent in helping finance his scam? Or were they knowingly involved in the fraud? Are the plaintiffs going after the bank because it has the only deep pockets within striking distance? More than a dozen lawyers are preparing for dramatic courtroom confrontations this fall to answer those questions. In the meantime thousands of pages of depositions and evidence are mounting. The story is still incomplete, but what has emerged offers a riveting inside glimpse of what can happen when managers and investors don't look hard at what's in front of them. The ''S'' in SH Oil & Gas Exploration stood for Steve; the ''H'' for his wife, Heather. Smith had graduated from Winter Haven High in 1969, then received a business degree from nearby Stetson University and an MBA from the University of Georgia. A few months of working around wells in Texas taught him the lingo of the oil fields. A brief job with Merrill Lynch taught him about securities. And in 1979 he learned a lesson in fraud: Smith was swindled out of about $40,000 when he tried to obtain an $18 million loan with which to buy citrus properties in Florida and California and an interest in existing oil wells. The loan, from a Netherlands Antilles company, was bogus. The Smith family was established and respected in Winter Haven. Stephen Smith's grandfather had helped pioneer the prosperous citrus industry in the central Florida town. So folks weren't surprised when Stephen married a local girl in 1973. Barnett Bank of Polk County was also a pillar of the community, and it was only natural that Smith would take his custom there. Like other businessmen in town, he soon got to know John N. Dunn Jr., an affable former Chemical Bank employee from New York City who became vice president of Barnett Bank of Polk County and manager of the bank's Winter Haven branch. In his company's early years Smith took out small loans with Barnett. Then, in February 1983 -- with business at SH Oil apparently booming -- he asked John Dunn for much more, an unsecured loan of $1 million. Dunn was obviously impressed by what he knew, or thought he knew, of Smith. In his report to Barnett's loan committee, Dunn wrote: ''Smith has been extremely successful in the exploration and drilling of oil and natural gas. At the present time he has dug 165 wells with only seven dry holes.'' The loan committee included John T. Cannon III, president of Barnett Bank of Polk County and a seasoned banker, with 33 years at Barnett. He and the rest of the committee reviewed Smith's request and unanimously approved it, with an important provision: ''that the line ((of credit)) be granted on condition that the oil reserves are confirmed . . .'' What happened next is not completely clear. But according to depositions, bankers Dunn and Cannon met with Smith and his attorney, Peter Kalogridis, to ''confirm'' the oil reserves. Kalogridis has an intriguing double role in this saga: He was not only Smith's lawyer but also a longtime director of the Polk County bank. At a meeting Smith allegedly produced cardboard boxes of documents that he said proved the extent of his oil and gas holdings. According to the suits, Dunn and Cannon spent about an hour looking through the documents. Shortly after that, Smith received his $1 million loan. As the criminal investigation would later prove, Smith probably never drilled a single well, let alone 165. The bank renewed Smith's line of credit a year later -- still, say the plaintiffs, without an independently audited financial statement or authentic proof of oil reserves. About this time folks in town began to remark that Smith was increasingly private, perhaps a bit removed. But business was phenomenal. Working with a secretary as his only employee, Smith had boosted his net worth from a few hundred thousand dollars in 1977 to about $45 million by 1984. He had also become the largest depositor at Barnett Bank of Polk County. SH Oil was attracting scads of new investors, including a couple of notable ones. Peter Kalogridis would eventually put in more than $2 million. And John Dunn, Smith's account officer at the bank, would invest more than $70,000. Both lost money. According to the suits, Dunn kept silent about his investment for several months but finally notified his boss, John Cannon. In a note to Cannon, Dunn said he had invested in SH Oil and asked that this information be kept ''purely confidential, and I see no reason for it to be shared with any state examiners or other bank officials.'' Apparently nothing more was said. If the accounts of investors are to be believed, Dunn became an effective spokesman for SH Oil. They say he told customers he was an investor and assured them that Barnett had investigated the company. According to a plaintiff, Dunn said that Barnett had commissioned a team of geologists to verify the existence of the wells. Another alleged in a deposition, ''He ((Dunn)) said that the bank had spent over $10,000, that they had done a thorough investigation, both of Steve personally and of his company SH Oil, and that both of them came up squeaky clean. He then proceeded to tell me that Barnett would loan money, 100% of the money to invest in SH Oil. And the last thing he said to me when I stood up to leave was, 'We may or may not lend you the money for consolidation of debt, but if you're interested in investing in SH Oil, we will loan you money for that purpose.' '' IN THE FALL OF 1984 the entire fabrication nearly unraveled. An investor and CPA named Ron Brown heard through clients in Texas that no oil wells there were registered to Steve Smith or SH Oil. Brown later testified that he took his concerns to Kalogridis, who told him that it was quite common for such interests to be held in nominee names. The matter apparently ended there. Soon Steve Smith was back in touch with Dunn, seeking more money. Dunn realized that another large loan to Smith would exceed the branch's lending limit, according to court documents, so he invited an affiliate, Barnett Bank of Tampa, to participate. But the Tampa bank insisted that ''an experienced energy lender'' also be brought in. When none was, Tampa backed out. Undeterred, Smith asked Dunn to push the loan through with the help of senior Barnett officers. Bank records show that Smith met with C. Royce Hough III, executive vice president of banking for the holding company, along with Dunn and Cannon. What transpired is not entirely clear, but at one point Smith allegedly got angry at Hough. Dunn said in an affidavit that ''Smith refused to disclose . . . information to Hough (with the exception of IRS tax returns) . . .'' In a later deposition Dunn elaborated: ''I was eating lunch and looking out the window and I heard Smith say 'No! And I'll take my business elsewhere.' '' Dunn said that when he looked at Smith, his face was bright red. Hough, in a deposition, said he doesn't recall that exchange. Smith got his second unsecured $1 million, still without providing an independently audited financial statement. Even stranger things were happening. Just before Christmas in 1984, the Winter Haven Garden Club was having a party at Steve and Heather's home. Smith walked in drunk. For once his guard was down, and he wasn't the reserved businessman the locals thought they knew. According to depositions, Smith argued with several guests and in a fit of temper hurled a Christmas tree -- decorated with roses -- through a window in front of 30 of them. Smith later said he was angry because his wife had let the people into his home. Among those in the house was Dr. Deane Briggs, an ear, nose, and throat specialist and an investor in SH Oil. Briggs grew worried by Smith's erratic behavior and later phoned his father, Colver Briggs, a retired Ford Motor executive living in Connecticut, and told him about his concerns. The elder Briggs called an experienced land assessor named Fred Mayer, asking him to locate Smith's wells. Mayer wrote back that after an extensive search he could find nothing. Mayer added, ''I don't wish to alarm you, but I must confess that all the information with which you have supplied me has served largely to arouse my suspicions. The absence of records, the secrecy enjoined on you, the vagueness of the assignment, the questionable nature of the objective formation -- and SH's track record: only six dry holes out of the last 120. Nobody has such a record unless he is drilling up an already proven field.'' When Deane Briggs heard the report from his father, he contacted Dunn, telling him he feared that SH was a ''sham.'' Said Briggs in a deposition: ''It was a remarkably brief conversation. He ((Dunn)) reassured me not to worry, that everything is listed in some other entity . . .'' Briggs also alleges that Dunn told him that geologists had studied the wells and the reserves were valued at about $50 million. About this same time, Ed Rooney came to Dunn with similar news. Rooney, whose Rooney Investments eventually put $5 million into SH Oil, had checked with authorities in Pennsylvania and been told that Smith and SH Oil were not registered there. Dunn said: ''I was very upset at this information. I asked Rooney to go back to his office and wait for my phone call.'' Dunn said he had a Barnett employee call Pennsylvania authorities, who confirmed Rooney's report. Then, said Dunn, he called Kalogridis: ''I asked him specifically, as a member of the board of directors of Barnett, if he would investigate these concerns.'' Kalogridis, in a deposition, said he doesn't recall the phone call. But Dunn says he remembers Kalogridis telling him that Smith kept his holdings in dummy corporations and blind trusts to protect his privacy. After the conversation with Kalogridis, said Dunn, he called Rooney and told him that ''Barnett was comfortable with the source and would continue doing business with SH Oil, Smith, and the creditworthy investors.'' Dunn added, ''I personally continued to invest in SH Oil.'' BUT THE BANK, in a countersuit against Rooney and the other plaintiffs, has a different story: that Rooney knew about the letter that land assessor Fred Mayer had written to Colver Briggs but didn't fully disclose the contents to Barnett. Rather, says the bank's suit, ''Rooney believed, as did Dr. Briggs and other SH Oil investors, that although SH Oil might not own any meaningful oil and gas leases, he would continue to receive lucrative returns because SH Oil was engaged in drug dealing and/or drug money laundering operations. This belief was never communicated to Barnett Bank . . .'' Barnett has also produced a note from Colver Briggs describing a phone conversation with his son. The elder Briggs wrote, ''He ((the son)) thought it wise to let the whole thing keep itself going just as long as possible . . . in case the whole thing blows up . . .'' BUT NOTHING BLEW. Smith sailed on. By 1985 his net worth had reached $55.7 million. The Smiths lived opulently: Heather wrapped herself in white mink and bought nearly $1 million of diamonds, emeralds, and pearls. Move over, Imelda -- her closet held some 140 pairs of shoes. The garages housed several Mercedes-Benzes, a Range Rover, a Cadillac, and Steve's special toys, four Aston Martins. Then an alarm apparently went off at Barnett headquarters. On May 17, 1985, an auditing officer noted in a file memo that the bank was concerned about the Winter Haven branch lending money to customers for investing in SH Oil. Might not that imply an endorsement? And might not those customers come after the bank if SH Oil failed? According to the memo, Cannon said he would look into it. Nothing was done, and the loans continued, say the plaintiffs. But about this same time, officials at the holding company became aware that Dunn had invested in SH Oil. By June they agreed that this constituted a serious conflict of interest, and Dunn was fired. His replacement was senior vice president Harry Hazelwood, an experienced Barnett banker. In an interview with the FBI shortly after SH Oil collapsed, Hazelwood said that soon after he arrived in Winter Haven, bank president Cannon had taken him to lunch to meet Smith. ''Cannon advised that Smith was to be Hazelwood's personal account,'' the FBI agent wrote in a report. ''Smith was further introduced as one of the bank's most valued customers.'' The report added that Cannon told Hazelwood that his duties would include ''getting to know Smith, offering all of the bank's potential services to him, and above all, not to lose Smith's business to competitors.'' Barnett renewed Smith's $2 million credit line. Said Hazelwood: ''We continue to be favorably impressed with Mr. Smith's business acumen in light of falling oil and gas prices.'' But in another memo Hazelwood added, ''None of his financial information has been audited by an outside accounting firm and it may be well to invest the time to visit several of his exploration sites . . .'' And so Hazelwood journeyed to Smith's gas properties, or thought he did. The first trip was to Ohio, where Smith showed Hazelwood wells and other facilities that he represented as his own. It was a persuasive show: Production workers addressed Smith by name. ''A very informative call,'' said Hazelwood in a memo. The following year, 1987, Smith loaded Hazelwood, Cannon, and Kalogridis into a helicopter and flew them around Pennsylvania's oil fields. In an FBI interview, Hazelwood noted that the helicopter never landed at any of the sites. Instead, he said, ''Smith would keep referring to maps in the helicopter and telling the pilot to take certain headings and then telling the passengers that they would be seeing certain numbers of wells on the ground that belonged to him.'' Smith was now worth some $74 million. He bought Heather a new Rolls-Royce for Christmas. For himself there was a Sabreliner twin-engine jet. And he bought more property: a horse farm in Ocala, Florida, a half-million-dollar seaside home in Georgia, and a building lot at an exclusive South Carolina club. Stephen Smith was apparently moving up into a higher orbit, one that offered more money and opportunity. Hazelwood -- noting in a memo that ''we have visited two of his major locations . . . and believe that Mr. Smith's integrity continues to be of the highest regard'' -- suggested offering Smith what Smith himself hadn't requested: another million dollars in unsecured credit. ''Mr. Smith has indicated a dissatisfaction with the NCNB Bank and I believe this is a good opportunity to close out that other local competing bank,'' wrote Hazelwood. Smith took the loan -- and asked Barnett for another $10 million. He had dinner at the posh River Club in Jacksonville with the vice chairmen of the Barnett Banks holding company in July 1987. Earlier that day he had met briefly with Barnett CEO Charles E. Rice. ''It was a pleasure to meet you yesterday and I look forward to expanding my business with Barnett Banks Inc.,'' Smith wrote Rice. ''Your staff was very helpful . . .'' But the SH scam was about to collapse. On August 27, 1987, the Florida controller's office received an anonymous letter alleging that SH Oil was a fraud. On October 12 an investigator contacted Smith, who denied any wrongdoing. With Kalogridis present as his attorney, he later showed the investigator documents purporting to prove the company's revenues. But when the investigator added up the fractional interest Smith had accumulated in a few real oil ventures, he found SH Oil had monthly revenue of some $6,000 -- yet it was distributing $5 million each month in dividends. Where was the rest? Smith had told the investigator that SH Oil had a secret agreement with Amoco for the remainder, eventually handing over three checks, allegedly from Amoco, showing payments to SH Oil of about $11.5 million. Checking out the checks took only a few phone calls. Wrote the investigator: ''Amoco has no ongoing relation with SH Oil or Stephen Smith.'' The checks had been altered using correction fluid and an office typewriter. On December 30, 1987, Florida controller's agents closed SH Oil, seized its records, and froze its assets. For the next year Smith swore his innocence and promised investors reimbursement. But within hours of going to trial on March 2, 1989, he pleaded guilty to 98 felony counts. He later did the same to four federal bank fraud charges. THE BANK FORCED Hazelwood to resign, though it later cleared him, says his attorney. Cannon took early retirement. Hough remains with Barnett in Jacksonville. Barnett removed Kalogridis from the Polk County bank's board, and he maintains his law practice in Winter Haven. None of the individuals referred to in the suits against Barnett have been charged with wrongdoing, but most are being asked for evidence and have retained lawyers. Barnett is providing legal services for Dunn, Hazelwood, Hough, and Cannon. All have stated that, like many people, they were misled by Smith and didn't know that SH Oil was a fraud. As for Smith, he is serving his time in a minimum-security facility, a former Air Force officers' barracks, in northern Florida, with a good chance of parole in four or five years. Lawyers speculate that the cases he spawned could continue at least as long.