The owner and former chairman of a private mortgage lending company, Taylor Bean & Whitaker, has been convicted in a $2.9 billion fraud scheme that contributed to the failures of Colonial Bank, one of the 25 largest banks in the United States in 2009, and TBW, one of the nation’s largest privately-held mortgage lending companies, the Justice Department said.
The conviction of Lee Bentley Farkas, 58, of Ocala, Fla., in U.S. District Court in Alexandria was announced late Tuesday by Assistant Attorney General Lanny A. Breuer, who heads the Justice Department’s Criminal Division, and U.S. Attorney Neil H. MacBride in the Eastern District of Virginia.
The case was one of the government’s largest in the wake of a crisis that nearly collapsed the nation s financial system.
“Lee Farkas … masterminded one of the largest bank fraud schemes in history,” Mr. Breuer said. “His shockingly brazen scheme poured fuel on the fire of the financial crisis. … Mr. Farkas may have thought he could steal nearly $3 billion from investors and taxpayers and sail into the sunset. But now a jury has told him otherwise, and he must face the severe consequences.”
The guilty verdict was handed down by a federal jury after a 10-day trial. It found Farkas guilty on 14 counts of conspiracy and bank, wire and securities fraud. At sentencing, scheduled for July 1, he faces 20 to 30 years in prison on each count.
According to court documents and evidence presented at trial, Farkas personally misappropriated more than $20 million from TBW and Colonial Bank to finance his lifestyle, including purchasing multiple homes, scores of cars, a jet and sea plane, and restaurants and bars.
Prosecutors said Farkas engaged in a scheme that misappropriated $1.4 billion from Colonial Bank’s Mortgage Warehouse Lending Division in Orlando, Fla., and $1.5 billion from Ocala Funding, a mortgage lending facility controlled by TBW. They said he misappropriated the money to, among other things, cover TBW’s operating expenses.
Six persons have pleaded guilty for their roles in the scheme, including Paul Allen, former TBW chief executive officer; Raymond Bowman, former TBW president; Desiree Brown, former TBW treasurer; Catherine Kissick, former senior vice president at Colonial Bank; Teresa Kelly, former operations supervisor at Colonial; and Sean Ragland, a former TBW senior financial analyst.
Prosecutors said the scheme began in 2002 when Farkas ran overdrafts in TBW bank accounts at Colonial Bank to cover its cash shortfalls. They said Farkas transferred money between accounts at Colonial Bank to hide the overdrafts.
Evidence presented at trial showed that after the overdrafts grew to more than $100 million, Farkas covered up the overdrafts and operating losses by causing Colonial Bank to purchase from TBW more than $1.5 billion in worthless mortgage loan assets, including loans that TBW had already sold to other investors.
Prosecutors said Farkas caused Colonial Bank to report these assets on its books at face value when the mortgage loan assets were worthless. By August 2009, they said $500 million in fake pools of loans remained on Colonial Bank’s books.
They said Farkas also misappropriated $1.5 billion from Ocala Funding, which 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 mortgage loans at least equal to the value of outstanding commercial paper.
Prosecutors said Farkas diverted cash from Ocala to TBW to cover its operating losses, creating deficits in the amount of collateral Ocala possessed to back the outstanding commercial paper. To cover up the diversions, they said Farkas sent false information to Deutsche Bank, BNP Paribas Bank and other financial institutions and led them to falsely believe they had sufficient collateral backing the commercial paper they had purchased.
The case was prosecuted by Deputy Chief Patrick Stokes and Trial Attorney Robert Zink of the Criminal Division’s Fraud Section and Assistant U.S. Attorneys Charles Connolly and Paul Nathanson of the Eastern District of Virginia. In closing arguments, Mr. Connolly said Farkas led a conspiracy and fraud scheme of “staggering proportions and boldness.”