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.
Hiding Tracks and Potential Losses, Circumventing Company Servers
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."
'Crap' Mortgage Assets
Prosecutors alleged the scheme also used fake "assignment of trade" facilities and one pool of mortgage assets Farkas and other co-conspirators internally called "crap."
When the financial crisis developed in 2007 and 2008, Farkas was responsible for Colonial misrepresenting its assets in an attempt to get $550 million from the government's $700 billion Troubled Asset Relief Program.
When Colonial issued a press release saying it had obtained preliminary approval to receive the bailout funds, its stock price soared 54 percent in two hours of trading, the stock's largest single-day price jump in 25 years.
Ultimately, Colonial never received the bailout money, and the bank failed in August 2009. That same month Taylor Bean and Whitaker filed for bankruptcy.
Farkas is now charged with conspiracy, bank fraud, wire fraud and security fraud. Shawn Henry, an FBI assistant director in charge of the Washington field office, said at a Justice Department press conference Wednesday that federal agents had arrested FarkasTuesday night as he left a Florida gym he owned.
At the press conference, Neil Barofsky, the special inspector general for TARP, described the scheme as "unprecedented" and an attempt to "steal more than $550 million from the American taxpayer."
Lanny Breuer, the assistant attorney general at the Justice Department, said, "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."
The Justice Department is now seeking the forfeiture of Farkas' properties in Florida and numerous luxury cars, including a 1963 Rolls Royce, a 1929 Ford Model A and a 1961 Porsche 356.