| The former chairman of Taylor, Bean and Whitaker Mortgage Corp. was indicted, has been arrested and faces a civil lawsuit by the government. Through the defunct lender, he allegedly used $400 million in warehouse financing to fund fake loans.
Following a 16-count indictment filed in U.S. District Court for the Middle District of Florida, Lee Bentley Farkas was arrested, according to the U.S. Department of Justice. Among other agencies joining in the announcement were the Financial Fraud Enforcement Task Force, the Special Inspector General for the Troubled Asset Relief Program and the Inspector General of the U.S. Department of Housing and Urban Development. The arrest happened last night in Ocala, Fla. Farkas is charged with one count of conspiracy to commit bank, wire and securities fraud; six counts of bank fraud; six counts of wire fraud; and three counts of securities fraud, the statement said. The government claims that Farkas and other parties conspired to misappropriate more than $0.4 billion from Colonial Bank’s warehouse lending division in Orlando, Fla. |
mugshot of Lee Farkas from Marion County Sheriff’s Office |
He was motivated, according to the government, because of the need to cover Taylor Bean’s operating losses.
“Today’s indictment describes an unprecedented scheme by executives at two large financial institutions to steal more than $550 million from the American taxpayer,” Special TARP Inspector General Neil Barofsky said in the statement.
As it began to run short on cash in 2002, Taylor Bean allegedly began running overdrafts at the rate of $15 million a day in its accounts at Colonial. Under pressure from Farkas, a Colonial officer allegedly transferred funds between accounts to hide the overdrafts. Debits to Taylor Bean’s warehouse line-of-credit weren’t entered until the following day’s credits were entered.
“After the overdrafts grew to tens of millions of dollars, Farkas and his co-conspirators allegedly covered up the overdrafts and operating losses by causing Colonial Bank to purchase from Taylor Bean and Whitaker more than $400 million in what amounted to fake mortgage loan assets, including loans that Taylor Bean and Whitaker had already sold to other investors and fake interests in pools of loans,” the government said.
Colonial was deceived through fictitious loan information provided by Taylor Bean. By the end of 2007, fake home loans had grown to $500 million, and severely impaired residential mortgage loans and securities had grown to $1 billion.
Wire and securities fraud was allegedly committed with the attempt to obtain funds for Colonial Bank from TARP. Colonial Bank parent The Colonial BancGroup Inc. applied for $570 in funds from TARP’s Capital Purchase Program in the fall of 2008. But the application included “materially false information related to mortgage loan and securities assets held” as a result of the fraud by Taylor Bean. In addition, Colonial filed materially false financial data with the Securities and Exchange Commission.
Colonial was approved for TARP funds as long as it raised $300 million. Farkas and his co-conspirators allegedly informed Colonial that an investor group with $300 million had been lined up. They placed $30 million in escrow that was purportedly collected from the investors, though $25 million of the funds were actually diverted from Ocala Funding — a mortgage lending facility controlled by Taylor Bean.
Farkas is accused of attempting to misappropriate around $1.5 billion from Ocala Funding. The unit sold asset-backed commercial paper to financial institution investors such as Deutsche Bank and BNP Paribas Bank. But because cash was diverted to Taylor Bean, significant deficits developed in the collateral it used to back the commercial paper. To cover up the alleged fraud, the institutions were given false information.
Deutsche and BNP held around $1.7 billion in Ocala Funding commercial paper that allegedly had just $150 million in cash and mortgage loans collateralizing it. When Taylor Bean failed in August 2009, the two institutions had to sell at less than full value.
Colonial Bank was seized by the Alabama State Banking Department in August 2009 and picked up by Branch Banking and Trust at a projected cost of nearly $3 billion to the Deposit Insurance Fund. Parent Colonial BancGroup filed for bankruptcy in August 2009.
Ginnie Mae was allegedly defrauded by Farkas because Taylor Bean’s financial statements didn’t reflect the fake loans.
“The fraud scheme contributed to the failures of Colonial Bank and Taylor, Bean &Â Whitaker,” the news release stated.
Farkas, himself, is accused of diverting $20 million to personal accounts. The indictment seeks a forfeiture of approximately $22 million from Farkas.
In addition to the criminal case, Farkas was sued by the SEC in U.S. District Court for the Eastern District of Virginia over allegedly false public filings.
“Lee B. Farkas through his company Taylor, Bean & Whitaker Mortgage Corp. sold more than $1.5 billion worth of fabricated or impaired mortgage loans and securities to Colonial Bank,” the SECÂ said.
Securities and Exchange Commission, Plaintiff, v. Lee. B. Farkas, Defendant.
Civil Action File No. 1:10cv667, June 16, 2010 (U.S. District Court for the Eastern District of Virginia).
