ALEXANDRIA, Va. – Lee Farkas, former CEO of private mortgage lending company Taylor, Bean & Whitaker, was arrested Tuesday night in Ocala, Fla., and charged with a $1.9 billion fraud that contributed to the failures of Colonial Bank, one of the 50 largest banks in the United States in 2009, as well as TBW, one of the largest privately held mortgage lending companies.
A federal indictment unsealed yesterday claims Farkas engineered to defraud more than $400 million from Colonial Bank’s Mortgage Warehouse Lending Division in Orlando, Fla., and approximately $1.5 billion from Ocala Funding, a mortgage lending facility controlled by TBW.
In a scenario reminiscent of the massive fraud at U.S. Mortgage/CU National Mortgage, Farkas and his co-conspirators allegedly misappropriated this money to cover TBW’s operating losses.
A new angle on this case is allegations that Farkas tried to buy then-failing Colonial Bank to access hundreds of millions of dollars of funds from the Troubled Asset Relief Program, or TARP.
Taylor, Bean was a warehouse lender for small banks and credit unions and claimed more than 1,000 institutional clients when it was shut down last year.
The scheme began in 2002, when Farkas and his co-conspirators ran overdrafts in TBW bank accounts at Colonial Bank in order to cover TBW’s cash shortfalls, according to court records. Farkas and his co-conspirators at TBW and Colonial Bank allegedly transferred money between accounts at Colonial Bank to hide the overdrafts. 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 TBW more than $400 million in what amounted to fake mortgage loan assets, including loans that TBW had already sold to other investors and fake interests in pools of loans. Farkas and his co-conspirators allegedly caused Colonial Bank to hold these purported assets on its books at their face value when in fact the mortgage loan assets were worthless.
Farkas and co-conspirators caused TBW to hide impaired-value mortgage loans that it was unable to sell, according to the indictment. Through a series of sham transactions, the conspirators allegedly hid impaired-value loans on Colonial Bank’s books for a period of years in some cases.
According to court documents, Farkas and his co-conspirators at TBW also misappropriated hundreds of millions of dollars from Ocala Funding. Ocala Funding sold asset-backed commercial paper to financial institution investors, including Deutsche Bank and BNP Paribas Bank. Ocala Funding, in turn, was required to maintain collateral in the form of cash and/or mortgage loans at least equal to the value of outstanding commercial paper.
The court documents allege that Farkas and his co-conspirators diverted cash from Ocala Funding to TBW to cover its operating losses, and as a result, created significant deficits in the amount of collateral Ocala Funding possessed to back the outstanding commercial paper. To cover up the diversions, the conspirators allegedly sent false information to Deutsche Bank, BNP Paribas Bank and other financial institution investors to lead them to falsely believe that they had sufficient collateral backing the commercial paper they had purchased. According to court documents, in or about August 2009, Deutsche Bank and BNP Paribas Bank held approximately $1.68 billion in Ocala Funding commercial paper that had only approximately $150 million in cash and mortgage loans collateralizing it. When TBW failed in August 2009, the banks were unable to redeem their commercial paper for full value.
Treasury conditionally approved Colonial BancGroup’s TARP application contingent on the bank raising $300 million in private capital. Farkas and his co-conspirators allegedly led an effort to raise the $300 million. On or about March 31, 2009, the conspirators falsely informed Colonial BancGroup that they had identified sufficient investors to satisfy the TARP contingency. Farkas and his co-conspirators allegedly caused $30 million to be placed in escrow, falsely claiming it represented payments by investors, when in fact Farkas and another co-conspirator had diverted $25 million of the escrow amount from Ocala Funding. The indictment alleges that Farkas and his co-conspirators committed wire and securities fraud in connection with these misrepresentations. Ultimately, Colonial BancGroup did not receive any TARP funds.
