Jury convicts exec in $3B mortgage fraud case

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One down, ? more to go. I'm not generally amused by the downfall of others, but this story did put a smile on my face.

ALEXANDRIA, Va. — A jury on Tuesday convicted the majority owner of what had been one of the nation's largest mortgage companies on all 14 counts in a $2.9 billion fraud trial that officials have said is one of the most significant prosecutions to arise from the nation's financial crisis.

Prosecutors said Lee Farkas led a fraud scheme of staggering proportions for roughly eight years as chairman of Florida-based Taylor Bean & Whitaker. The fraud not only caused the company's 2009 collapse and put its 2,000 employees out of work, but also contributed to the collapse of Alabama-based Colonial Bank, the sixth-largest bank failure in U.S. history.

The jury returned its verdict late Tuesday after more than a full day of deliberations.

Colonial and two other major banks - Deutsche Bank and BNP Paribas - were collectively cheated out of nearly $3 billion, prosecutors estimated. Farkas and his cohorts - six of whom entered guilty pleas to related charges and testified against him at the two-week trial in U.S. District Court - also tried to fraudulently obtain more than $500 million in taxpayer-funded relief from the government's bank bailout program, the Troubled Asset Relief Program (TARP).

While TARP at one point gave conditional approval to a payment of roughly $550 million, ultimately neither Taylor Bean nor Colonial received any TARP money, and investigators from that office, along with the FBI and other agencies, helped uncover the fraud.

Neil Barofsky, who recently resigned as TARP's special inspector general, has called the Farkas case "the most significant criminal prosecution to date rising out of the financial crisis."

In a conference call Tuesday evening with reporters, the Justice Department's criminal division chief, Lanny Breuer, said Farkas was "one of the masterminds in one of the largest bank frauds in history" and that his misconduct "poured fuel on the fire of the financial crisis."

"TBW was a major, major player in this industry," perhaps the second largest in the country depending on how it is measured, Breuer said.

Farkas testified in his own defense at the trial and claimed he did nothing wrong. He claimed he was unfamiliar with details or knowledge of many aspects of the various fraud schemes, testimony prosecutors derided as incredible in their closing arguments.

Farkas' lawyer, Bruce Rogow, said the six executives at Colonial and Taylor Bean who struck plea deals skewed their testimony to bolster the government's case in the hope of receiving lighter prison sentences for their cooperation. Rogow said Farkas and everyone else at Taylor Bean was working honestly and ethically to get control of its finances and perhaps could have done the job if the government hadn't essentially shut the company down when it raided company headquarters in 2009.

Rogow said late Tuesday he was disappointed in the verdict and plans to appeal.

"I had hoped the jury would have accepted our argument that the six people who pled guilty did so not because they felt they were guilty but because they wanted to minimize the sentences that the government threatened them with," Rogow said.

U.S. District Judge Leonie Brinkema ordered marshals to take Farkas into custody immediately following the verdict, a relatively unusual step since most defendants are allowed to remain free until they are formally sentenced. Farkas will be sentenced July 1 and potentially could spend the rest of his life in prison.

According to prosecutors, the fraud began in 2002, when Taylor Bean overdrew its main account with Colonial by several million dollars. Mid-level executives at Colonial agreed to transfer money into Taylor Bean's accounts at the end of each day to avoid generating overdraft notices, a process known as "sweeping."

As the hole grew to well over $100 million, Taylor Bean and a handful of Colonial executives concocted a scheme in which Taylor Bean sold hundreds of millions in worthless mortgages to Colonial, mortgages that had already been sold to other investors. More than $1 billion in such phony mortgages were eventually sold to Colonial, which listed them on its books and on its quarterly reports as legitimate assets, prosecutors alleged.

In a related scheme, Taylor Bean created a subsidiary called Ocala Funding that sold commercial paper - essentially glorified IOUs - to banks including Deutsche Bank and BNP Paribas. But prosecutors said the collateral that supposedly backed that commercial paper was worthless, and when Taylor Bean collapsed in 2009, the two banks lost roughly $1.5 billion.

Prosecutors said Farkas was motivated by greed and a lavish lifestyle that included a private jet, a seaplane, numerous houses including a home on Key West that he paid servants to hand wash with a sponge to prevent salt damage, a collection of several dozen classic cars and an executive dining room at company headquarters that served pheasant and caviar.

Farkas, 58, was charged with 14 counts of bank fraud, wire fraud, securities fraud and conspiracy.

Trial testimony revealed that the bankers at Colonial who worked with Farkas felt trapped as the hole in Taylor Bean's accounts grew exponentially. Cathie Kissick, a vice president at Colonial who did not tell her superiors about the vast majority of Taylor Bean's problems, testified that she had little leverage over Farkas because of the trouble she would be in if the size of the hole in Taylor Bean's accounts was discovered.

Farkas exploited that leverage, telling a colleague: "If I owe you $100, I have a problem. If I owe you $1 million, you have a problem."

http://www.thenewstribune.com/2011/04/1 ... z1K5NWsNTA

Interesting case. Thanks for sharing.

He would have been caught sooner if not for the people at the SEC watching porn instead of doing their jobs.

Well, perhaps if they were allowed to watch porn at their homes, this wouldn't have happened.

It wouldn't surprise me if they were watching porn at home too. Fact remains it wasn't a lack of regulation that was the issue, it was the people that were supposed to enforce the regulations that are the issue.

So what we need, is more porn regulation.

What we need is some people at the SEC being fired.

and casinos on the moon.

You would have enjoyed (maybe not the right term ) a CPE class I took last December that walked through the SEC audits of Bernie Madoff. The problem wasn't a lack of trying, it was a complete and utter lack of understanding of the material they were auditing. So many simple missed opportunities to bring the whole thing down, it is scary how incompetent it all was. Lawyers trying to audit; just a misfit on so many levels. Quite a tale of caution for someone in my profession.

I haven't studied the case in the first post so I don't know how many missed opportunties there were, or whose job it should have been to catch it, but it is interesting to see how easily regulation can fail if there are not properly trained professionals working to enforce it.

pr0n!! ! *Vigilans lifts his fists into the air while the camera pans dramatically*

(Star Trek II: The Wrath of Khan reference... )

Putting my serious hat back on, that was an interesting read, thanks number5

Lock away the vile and despicable criminals and throw away the key!! ! (The slackers watching porn of course, not the guy who stole $3B)

I'm not saying the guy that stole the money shouldn't go to prison, I'm saying that we need to hold the people at the SEC accountable for their negligence.

That depends on exactly how they were negligent. If you ask an artist to perform an audit, and they do their best, are they negligent for failing to do it effectively? I would suggest not; the person who assigned them to the job is the one at fault.

It would be interesting to hear the facts.

In the Madoff case, that I referred to studying above, I actually felt sorry for the SEC team. They were under pressure from so many angles, and so completely unsuitable for the task, that it was difficult to fault them for blowing it so badly. The case brought to light what are really huge structural issues within the SEC with respect to hiring, training, case assignment, and more. Not easy things to solve.