Feds Charge Mortgage Company Boss With Multi-Billion Dollar Bailout Fraud

WASHINGTON, June 16, 2010 -- Federal regulators today charged the former chairman of a major mortgage lender with a multi-billion dollar fraud scheme involving the government's massive Wall Street bailout program. The scheme resulted in the collapse of Colonial Bank last year.

The total losses for the Federal Deposit Insurance Corp. that stemmed from fall of Colonial, one of the country's 50 largest banks in 2009, could exceed $3 billion, Washington officials said.

Lee Farkas, chairman of Taylor, Bean and Whitaker Mortgage Corp., allegedly defrauded Colonial by selling it more than $1.5 billion in fake or fraudulent mortgage loans. Farkas was indicted in a 16-count indictment for overseeing a seven-year fraud that hid massive accounting losses at Taylor, Bean and Whitaker.

Prosecutors allege that in 2002, Taylor Bean began to incur significant overdrafts in its master bank account at Colonial Bank, triggered by its operating expenses.

According to the indictment and related court papers, Farkas and co-conspirators at Taylor Bean and Colonial began to cover up the overdrafts by "sweeping" money into accounts through the sale of fake mortgage loan assets and pools of securities.

According to a detention memorandum filed in federal court in Florida, prosecutors uncovered an e-mail from July 2004 in which one unidentified co-conspirator wrote to Farkas about moving funds to hide their tracks and potential losses. "You need to wire money into this account on the OD [overdraft] report. It does not look good to have a T&I [tax and insurance] account in the OD report."

Farkas wrote back, "When I get an adjoining suite with martha stewart [sic], it will be worse. I never should have used that money in the first place."

Justice Department officials also alleged that Farkas and other uncharged conspirators used PIN messages in their BlackBerry's to circumvent company computer servers to carry out the fraud and avoid an electronic trail.

As the years progressed, Taylor Bean allegedly set up more complex ways to move money and hide losses, using a vehicle they called "Plan B." Neil McBride, a U.S. attorney for the Eastern District of Virginia, said, "Plan B was an effort to sell fake assets to Colonial in exchange for tens of millions of dollars."