Former Taylor, Bean and Whitaker CEO Lee Farkas was convicted in April for orchestrating a $3 billion bank fraud scheme that lasted nearly a decade. But investigators said in a report this week they only caught on to him when he went after federal bailout money. Ocala, Fla. – based TBW originated, serviced and sold mortgages in pools to Freddie Mac and leaned on various financing vehicles, usually with Colonial Bank and Ocala Funding, to fund the loans. According to U.S. prosecutors, Farkas and co-conspirators at Colonial Bank devised a scheme in early 2002 to cover up cash flow problems. The scheme led to the bankruptcy of TBW and the closing of Colonial, one of the most complicated and disastrous bank failures in U.S. history. Teams at the Special Inspector General for the Troubled Asset Relief Program originally identified the massive scheme – one of the largest and longest-running ever – when Farkas reached into the bailouts sent to Colonial. The bank applied for $570 million in bailouts through TARP’s Capital Purchase Program. The Treasury Department launched CPP in 2008 to provide funding to troubled banks by purchasing preferred stock in these firms. Colonial was approved for $553 million in CPP funding, as long as $300 million in private capital could be raised. But when SIGTARP looked into it, investigators found Farkas and his co-conspirators caused Colonial to falsely claim it secured the private cash. “SIGTARP quickly determined that the private capital supposedly raised by Colonial Bank, by and through Farkas and his co-conspirators, did not originate from private investors but instead appeared to be money that the co-conspirators had improperly diverted from Ocala Funding, a mortgage lending facility controlled by TBW,” according to the report. Paul Allen, another former CEO of TBW pled guilty to the conspiracy charges as well in April. Allen admitted he kept Farkas informed of the inadequate assets backing Ocala Funding’s commercial paper, which he referred to as “a hole.” Farkas told him the “hole” had been moved to Colonial and directed Allen to secure funding from a private-equity investor to meet the TARP requirements. When Allen couldn’t, Farkas took over and claimed the investor had put up enough cash for Colonial to report the requirement met. But the only money that moved was $5 million Farkas diverted from Ocala to that private-equity investor, unnamed in the report. The Department of Justice, the FBI, the U.S. Attorney’s Office and others soon  joined the pursuit. According to evidence presented at Farkas’ trial, Colonial submitted false information in its financial data and filings related to mortgages and securities held by the bank as a result of the scheme. Senior executives at both companies concealed TBW’s overdrawn account “through a pattern of sweeping overnight money from one TBW account to another,” according to the report. Conspirators also made fictitious sales of mortgages to Colonial, knowing the loans either didn’t exist or that TBW had already sold them to someone else. SIGTARP said, in the end, because the program dealt with already toxic mortgage products, it was unsurprising to find some executives who approved the loans in the first place to be found committing fraud in unloading them – even onto taxpayers. “This is the most significant criminal prosecution to date rising out of the financial crisis,” SIGTARP said in the report. “The convictions in this case are a result of the dedicated and selfless work of the staff of SIGTARP and its law enforcement partners.” Write to Jon Prior. Follow him on Twitter @JonAPrior.

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