Former TBW Chairman Charged in $2bn Fraud Scheme
The former chairman of failed mortgage lender Taylor, Bean & Whitaker (TBW) was arrested last night and charged for his alleged role in a nearly $2bn scheme that ultimately led to the failure of TBW and Colonial Bank in August 2009. The Department of Justice (DOJ) said Lee Bentley Farkas was taken into custody on June 15 in Ocala, Fla. on a 16-count indictment. Charges include 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 indictment also seeks approximately $22m in forfeiture from Farkas, the DOJ said in a press statement. The indictment was unsealed in the US District Court for the Eastern District of Virginia. In a related action, the Securities and Exchange Commission (SEC) filed an enforcement action against Farkas in the Eastern District of Virginia. The most recent parts of the fraud scheme allegedly occurred in the months leading up to the failure of TBW and Colonial, when Farkas allegedly used a bogus equity investment into Colonial Bank to defraud the Troubled Asset Relief Program (TARP) of $550m. But the indictment claims Farkas and his co-conspirators began using its relationship with Colonial Bank to cover up TBW losses as early as 2002. "This alleged fraud scheme is an example of the damaging and destabilizing impact financial crimes can have on our nation’s financial institutions. Individuals and companies that violate the law in a reckless pursuit of profits must be held accountable for their crimes," said assistant attorney general Lanny Breuer. Farkas is accused of overdrafting TBW accounts at Colonial Bank to cover TBW cash shortfalls, which were covered up by transferring money between different Colonial Bank accounts. These overdrafts reached as high as tens of millions of dollars, the DOJ said. At that point, Colonial gave TBW more than $400m to purchase what the DOJ asserts were fake mortgage loan assets, including loans that TBW had already sold to other investors and fake interests in pools of loans. While Colonial held the assets on its books at face value, in reality, they were worthless, the indictment contends. A series of sham transactions were also allegedly used to hide impaired-value loans that TBW couldn't sell on Colonial Bank’s books, sometimes for a period of multiple years. Other alleged misappropriation of funds occurred with Ocala Funding, a TBW-controlled asset-backed commercial paper (ABCP) program that served as a conduit to provide warehouse funding to originate residential mortgages. According to the indictment, Ocala Funding sold ABCP to financial institution investors, including Deutsche Bank and BNP Paribas Bank, but did not maintain the proper collateral levels, which were required to be cash and/or mortgage loans at least equal to the value of outstanding commercial paper. Instead, cash from Ocala Funding was used to cover TBW operating losses, creating significant deficits in the amount of collateral Ocala Funding possessed to back the outstanding commercial paper, which was itself allegedly covered up by leading the investors to falsely believe that they had sufficient collateral backing the commercial paper they had purchased, the DOJ said. By August 2009, Deutsche Bank and BNP Paribas Bank held approximately $1.68bn in Ocala Funding commercial paper that had only approximately $150m in cash and mortgage loans collateralizing it. When TBW failed, the banks were unable to redeem their commercial paper for full value. To perpetrate the fraud, Farkus and his co-conspirators caused Colonial Bank's parent company, Colonial BancGroup, to file materially false financial data with the SEC in its quarterly and annual reports, the SEC claimed in its action. Those false disclosures included overstating the value of mortgage assets. The SEC also claims TBW submitted false information to Ginnie Mae in order to extend its ability to issue Ginnie Mae mortgage-backed securities (MBS). In addition to those allegations, the DOJ said Farkas also attempted to convince the federal government to give Colonial Bank $550m in TARP funds. The indictment claims Colonial BancGroup applied for TARP funds using false information related to mortgage loan and securities assets it claimed Colonial Bank held. Based on that information the Treasury Department approved the disbursement of TARP funds, on the condition that Colonial BancGroup raise $300m in private capital. To make it seem that Colonial BancGroup had fulfilled this requirement, Farkas and his co-conspirators placed $30m in escrow, claiming it was investor payments, when in reality, the DOJ said, Farkas and another co-conspirator allegedly diverted $25m of the escrow amount from Ocala Funding. In addition, the bank issued a press release claiming it was going to receive the TARP funds, sending its stock price up 54% in two hours, the largest one-day price increase for the stock since 1983. But ultimately, Colonial BancGroup never received the TARP funds, the DoJ said. "Today’s indictment describes an unprecedented scheme by executives at two large financial institutions to steal more than $550 million from the American taxpayer," said Neil Barofsky, special inspector general for the TARP (SIGTARP). "This scheme was stopped dead in its tracks, taxpayers were protected, and Lee Farkas has joined the growing list of financial industry executives who have been charged with TARP-related frauds." The first arrest and indictment of a person accused of TARP fraud came in March, when Charles Antonucci, Sr. was arrested just days after The Park Avenue Bank, where he was once president, failed. In addition, Farkas is accused of personally misappropriated more than $20m from TBW and Colonial Bank. The charges carry a maximum prison sentence of 30 years for the conspiracy charge and for each count of bank fraud. The maximum prison sentence for each count of wire fraud related to TARP is 20 years and for each count of wire fraud affecting a financial institution is 30 years. Farkas also faces a maximum sentence of 25 years in prison for each securities fraud count. The investigation and indictment are the result of collaboration of the multi-agency Financial Fraud Enforcement Task Force convened by President Obama. Before their respective failures, TBW was one of the largest privately held mortgage lenders in the country and Colonial was one of the 50 largest banks in the country. The combined failure of the two entities has a wide-reaching impact, including a court ruling that set new standards for how much power the Federal Deposit Insurance Corp. (FDIC) has to dispose of failed bank assets. Attempts to reach Farkas' lawyer were unsuccessful. Write to Austin Kilgore.