June 16, 2010 / 1:53 PM / 9 years ago

Ex-U.S. mortgage executive charged with huge fraud

WASHINGTON (Reuters) - The former head of the now bankrupt mortgage lender Taylor, Bean & Whitaker Mortgage Corp has been charged in a fraud scheme that led to multibillion-dollar losses and targeted the 2008 federal bank bailout program, U.S. prosecutors said on Wednesday.

Lee Farkas, 57, served as chairman of TBW, one of the largest privately held U.S. mortgage lenders, and was charged with 16 counts including conspiracy, securities fraud and bank fraud, according to an indictment unsealed in U.S. District Court for the Eastern District of Virginia.

Prosecutors accused Farkas and unnamed co-conspirators of orchestrating an eight-year scheme that also contributed to the downfall of Colonial Bank, a unit of now-bankrupt Colonial BancGroup, one of the 50 largest banks at the time.

Farkas was arrested on Tuesday evening by the FBI as he left a gym he owned in Florida, which is where the firm was based. The Securities and Exchange Commission also filed its own charges against Farkas for his alleged role in the scheme.

“The fraud alleged here is truly stunning in its scale and complexity,” said Lanny Breuer, assistant attorney general for the Justice Department’s criminal division. “This arrest and these charges send a strong message to corporations and corporate executives alike that financial fraud will be found, and it will be prosecuted.”

He said Farkas lived a life of luxury during the fraud and that prosecutors are seeking forfeiture of $22 million from Farkas, including nine vehicles such as a 1929 Ford “Model A” car as well as five homes.

Breuer told a news conference that the investigation was continuing and that others could be charged. He said the alleged co-conspirators were employed at both TBW and Colonial Bank, which had $19 billion in deposits before it collapsed.

A lawyer for Farkas, Anthony Cochran, said his client will “enter a plea of absolutely not guilty, will vigorously defend against the charges, and looks forward to having his day in court to clear his name.”

The Obama administration has been under pressure to hold accountable top corporate executives for any wrongdoing that contributed to the collapse of the U.S. housing market, which led to a global financial crisis.


The indictment said Farkas and the co-conspirators tried to misappropriate money from multiple sources, including a lending facility controlled by TBW known as Ocala Funding, which had received funding from Deutsche Bank and BNP Paribas Bank.

The alleged scheme also could result in some $3 billion in losses for the Federal Housing Administration and government mortgage guarantor Ginnie Mae, the largest ever for those agencies, said Kenneth Donohue, the Housing and Urban Development Department’s inspector general.

The investigation began after authorities became suspicious about a statement by Colonial Bank that it had raised $300 million, which would enable it to reap more than $550 million from the bailout program known as the Troubled Asset Relief Program.

The $700 billion TARP program was established at the height of the financial crisis in 2008 to help the financial sector.

While officials said that more than $1 billion was misappropriated in the schemes by Farkas and others, they were unable to obtain any TARP funds, said Neil Barofsky, special inspector general for the program.

TBW, which made money in part by servicing mortgage loans it sold to Freddie Mac, began experiencing cash flow problems in early 2002, which led the firm to try to raise funds from Colonial BancGroup and other sources, the indictment said.

Initially, TBW ran up tens of millions of dollars in overdrafts at the bank, according to court papers.

Farkas and the unnamed co-conspirators then shifted to selling to the bank fake mortgage loans, home loans that had been sold to others already, or impaired assets, which led to the misappropriation of more than $400 million, prosecutors said.

They also misappropriated some $1.5 billion from Ocala Funding, in part to cover TBW losses, according to court documents. Farkas and the unnamed co-conspirators also tried to buy a major stake in Colonial BancGroup, they said.

With that stake, they had hoped to gain access to the $550 million Colonial BancGroup had sought from TARP — but the money was never disbursed, according to the indictment. TBW and Colonial BancGroup filed for bankruptcy in August 2009.

If convicted, Farkas could face life in prison.

Reporting by Jeremy Pelofsky, editing by John Wallace, Tim Dobbyn and Matthew Lewis

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