Lee Farkas Indictment Details Seven Year Billion Dollar Fraud Scheme

Allison Tussey —  June 16, 2010 — 1 Comment

Lee Bentley Farkas, 57, former chairman of Taylor, Bean & Whittaker Mortgage Corporation was indicted in the Eastern District of Virginia, Alexandria Division, and charged with one count of conspiracy, 6 counts of bank fraud, 6 counts of wire fraud and 3 counts of securities fraud.  The indictment also seeks forfeiture of cash, real property and vehicles including a 1963 Rolls Royce, a 1929 Ford Model A, a 1958 Mercedes Benz Cabriolet 220 and a 1961 Porsche CV.  The indictment was handed down by the grand jury on June 15, 2010.

The indictment alleges a long lived complicated scheme dating back to 2002 that began with financial difficulties and ended in rubble.  It is difficult to understand how TBW was able to sustain its growth and eventually rank as the third largest FHA mortgage lender in the country while juggling overdrafts and deficits nearing a billion dollars.

The indictment alleges that TBW began to experience significant cash flow problems in early 2002 that interfered with its ability to cover its operating expenses.  Initially they sought to cover millions in overdrafts by frequently transferring money between numerous accounts (a practice known as “kiting.”)  By December of 2003, the deficit as a result of the overdrafts had reached into the tens of millions of dollars.  They then transferred the deficit to a mortgage loan purchase facility where Colonial Bank purchased interests in individual residential mortgage loans originated by TBW pending resale of the loans to third party investors.  The loans were supposed to be sold off the line within 90 days.  Farkas and his co-conspirators are alleged to have provided false mortgage loan data to Colonial Bank under the pretense that it was selling the bank an interest in mortgage loans.  The data, however, included data on loans that TBW had already committed or sold to other third party investors or that did not exist.  In essence, according to the indictment, Farkas and his co-conspirators sold tens of millions of dollars of fake assets to Colonial Bank.  In order to avoid scrutiny, they “recycled” the loans – essentially by sending new data to Colonial Bank that made it appear that the loans had been sold to investors and that new loans had taken their place.

In mid-2005, according to the indictment, the deficit on the mortgage facility was moved to an Assignment of Trade facility that was designed for the purchase of interests in pools of loans that were in the process of being securitized or sold to third party investors.  This was done, in part, because Colonial Bank didn’t track loan level data in these accounts, making detection of the scheme less likely.  These purchase transactions were referred to as “trades” and Colonial Bank would purchase the trades and provide the proceeds to TBW while TBW sought to finalize sale of the trades to investors.  TBW could then use these proceeds to continue to fund new loans.  Colonial Bank would get its money back when the trades were sold to investors.  The trades that Colonial Bank was funding for TBW had no collateral backing them.

Even after moving the deficit to the Assignment of Trade facility, TBW continued to experience significant operating losses.  From mid-2005 through 2009, TBW continued to sell hundreds of millions of dollars in fictitious trades which were either not backed by collateral or backed by impaired value loans to Colonial Bank through the Assignment of Trade facility (some of these “loans” had already been foreclosed and the properties were REO which is not a proper subject of a mortgage backed security).  To support these fictitious trades, TBW sent Colonial Bank false schedules of loans with false pricing information and fabricated commitment agreements.  As with the mortgage facility, TBW recycled the trades on the Assignment of Trade facility.  According to the indictment, as of July 28, 2009, Colonial Bank’s accounting records identified approximately 120 trades with a value of approximately $1.47 billion held for resale on the Assignment of Trade facility.  Nearly all of the trades were recycled, reused information for trades that TBW had previously sold to other banks and  had fabricated agreements showing commitments to purchase the trades by investors.

Regulators and the U.S. Treasury reviewed Colonial BancGroup’s financial data and filings as a result of its application for $570M in TARP funds. Treasury conditionally approved $533M in TARP funding but required Colonial BancGroup to raise $300M in private capital.  Farkas represented that TBW would invest $150M and that two other investors would contribute $50M each, the rest being raised from others.  Colonial BancGroup filed a Form 8-K with the SEC representing that definitive commitments for the $300M had been obtained and an escrow account had been opened.  The 25M in the escrow account had actually been diverted from Ocala Funding. Colonial Bank did not receive TARP funding.

Farkas is also accused of having diverted money from a subsidiary, Ocala Funding, and of having caused Ocala Funding to sell loans owned by Colonial Bank to Freddie Mac without paying Colonial Bank for the loans. In addition, the indictment alleges that Farkas caused Colonial BancGroup to file materially false financial data with the SEC and TBW to file false information with Ginnie Mae.  

Click here to read a copy of the full indictment.


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Allison Tussey

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One response to Lee Farkas Indictment Details Seven Year Billion Dollar Fraud Scheme

  1. May he rot in hell as I am stil waiting for escrow money nearly 2 years later

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