On Tuesday, April 19, 2011, in one of the first criminal trials arising out of the market crisis, a federal jury in Alexandria, Virginia convicted Lee Farkas of: one count of conspiracy to commit bank, wire and securities fraud; six counts of bank fraud; four counts of wire fraud; and three counts of securities fraud. The charges arose from Mr. Farkas’ role in a $2.9 billion fraud scheme that led to the failure of Colonial Bank (which was one of the 25 largest banks in the United States in 2009), and Mr. Farkas’ company, Taylor Bean & Whitaker ("TBW"), one of the largest privately held mortgage lending companies in 2009.
The Department of Justice asserted that Mr. Farkas, the former Chairman of TBW, and his co-conspirators engaged in a scheme that misappropriated more than $1.4 billion 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. Specifically, the Government argued that:
• in 2002, Mr. Farkas and his co-conspirators began to run overdrafts in TBW bank accounts at Colonial Bank in order to cover TBW’s cash shortfalls and then transferred money between accounts at Colonial Bank to hide the overdrafts;
• after the overdrafts grew to more than $100 million, the conspirators 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 and fake pools of loans supposedly being formed into mortgage-backed securities (which were then recorded on Colonial Bank’s books at face value;
• the 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 certain outstanding commercial paper which had been sold to financial institution investors, including Deutsche Bank and BNP Paribas Bank (and the conspirators sent false information to those investors and led them to falsely believe that they had sufficient collateral backing the commercial paper they had purchased);
• the conspirators caused approximately $900 million in loans to be held on Colonial Bank’s books when in fact the loans had already been sold to Freddie Mac and other investors;
• when applying for over $500 million in taxpayer funding through a sub-program of the U.S. Treasury Department’s Troubled Asset Relief Program ("TARP"), Colonial Bank’s holding company, Colonial BancGroup Inc., submitted financial data and filings that included materially false information related to mortgage loans and securities held by Colonial Bank as a result of the fraudulent scheme perpetrated by the conspirators;
• the conspirators caused Colonial BancGroup to file false and misleading financial data and press releases with the SEC; and
• Mr. Farkas also personally misappropriated more than $20 million from TBW and Colonial Bank to finance his lifestyle.
Following the verdict, Assistant Attorney General Lenny Breuer stated that Mr. Farkas’ scheme "poured fuel on the fire of the financial crisis. It not only led to the downfall of TBW, one of the largest private mortgage lending companies in the United States, but also contributed to the failure of one of the country’s largest commercial banks."
Six other individuals have already pled guilty for their roles in the fraud scheme. Following the verdict, Mr. Farkas was remanded into custody. He is scheduled to be sentenced on July 1, 2011 and faces a maximum prison term of 30 years for the conspiracy charge and for each count of bank fraud, 20 years for each count of wire fraud related to TARP, 30 years for each count of wire fraud affecting a financial institution and 25 years for each securities fraud count.
The Department of Justice’s Press Release announcing the conviction is available here.