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Taylor Bean Unit Files Bankruptcy, Seeks Subpoenas

Freddie, FHFA target of subpoenas

July 11, 2012

By staff

Taylor, Bean & Whitaker Mortgage Corp.'s conduit funding facility has filed bankruptcy nearly three years after the lender, itself, collapsed and filed bankruptcy. The subsidiary claims that the Federal Home Loan Mortgage Corp. allowed Taylor Bean to continue a fraudulent scheme for more than a year after a news reporter alerted Freddie Mac's regulator about the crime -- allegedly costing the subsidiary more than $0.8 billion. Subpoenas are sought for the government-controlled enterprise and its regulator.

On Tuesday, Ocala Funding LLC filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in U.S. Bankruptcy Court for the Middle District of Florida.

The filing indicated that there were more than $1 billion in assets and in excess of $1 billion in liabilities. Among the fewer than 50 creditors listed were Bank of America, N.A.; various Deutsche Bank affiliates; and the Federal Deposit Insurance Corp.

The petition was signed by Ocala Chief Restructuring Officer Neil F. Luria.

Ocala was a conduit funding facility founded by Taylor Bean in 2005. It secured funding through the sale of asset-backed commercial paper.

Not long after Ocala was established, Taylor Bean executives began siphoning off its assets to cover Taylor Bean's losses and defrauded commercial paper investors, including Deutsche Bank and BNP Paribas Bank. The amount of the "hole" at Ocala exceeded $1.5 billion at the time of Taylor Bean's collapse.

Federal law enforcement agents raided Taylor Bean, Ocala and Taylor Bean's bank, Colonial Bank, on Aug. 3, 2009. Taylor Bean was suspended by the Department of Housing and Urban Development and terminated by Ginnie Mae and Freddie Mac the following day.

Taylor Bean collapsed in early August 2009 and filed for relief under Chapter 11 of the U.S. Bankruptcy Code in U.S. Bankruptcy Court in Jacksonville, Fla.
Colonial Bank, failed later that same year.

Farkas was found guilty in April 2011 of six counts of bank fraud, four counts of wire fraud and three counts of securities fraud and sentenced two months later to 30 years in prison. Farkas was unsuccessful in his appeal of the decision, and the U.S. Court of Appeals, Fourth Circuit, affirmed the trial court decision on June 20 of this year.

Including Farkas, eight people have been sentenced in the Taylor Bean debacle.

Accompanying Ocala's bankruptcy petition was a motion for entry of an order authorizing and directing the examination of the Federal Housing Finance Agency and Freddie and the issuance of subpoenas to force the regulator and secondary lender to produce documents.

The filing indicates that Freddie received around $805 million from Ocala From September 2008 through August 2009.

"These transfers of Ocala's assets provided no benefit to Ocala and were executed with the intent of hindering, delaying and defrauding Ocala's creditors, and in any event were made at a time when the debtor was insolvent or was rendered insolvent as a result of such transfers," the filing stated.

Freddie should have identified misconduct at Taylor Bean through an inquiry by June 2008 when its then regulator, the Office of Federal Housing Enterprise Oversight was advised of the fraudulent scheme by an investigative reporter who cited a former Taylor Bean employee as his source, according to the filing. But nothing happened for more than a year -- during which time Freddie received the $805 million at the discretion of Farkas.

"The debtor believes that it has valuable claims and causes of action against, among others, Freddie Mac, based on, among other things, the debtor's pre-petition transactions with and transfers to Freddie Mac," the filing states. "The purpose of this motion is for the debtor to obtain authority to examine its transactions and past relationship with Freddie Mac to determine the exact nature and extent of any claims and causes of action it holds or may hold against Freddie Mac and the validity of any defenses that Freddie Mac might assert."

Ocala Funding says that it is confident that it has legitimate causes of action against Freddie but needs to obtain documents from the secondary lender and its regulator before it can make a full determination.

In re: Ocala Funding, LLC.
Case 3:12-bk-04524-JAF, July 10, 2012 (U.S. Bankruptcy Court for the Middle District of Florida).

In Re: Taylor Bean & Whitaker Mortgage Corp. REO Specialists, LLC and Home America Mortgage, Inc.
Case No.: 3:09-bk-7047-JAF, Aug. 1, 2009 (U.S. Bankruptcy Court for the Middle District of Florida, Jacksonville).

UNITED STATES OF AMERICA, Plaintiff-Appellee, v. LEE BENTLEY FARKAS, Defendant-Appellant.
Case No. 11-4714, argued May 16, 2012, decided June 20, 2012 (U.S. Court of Appeals, Fourth Circuit).

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