SEC ALLEGES MORTGAGE AND TARP FRAUD OF 1.5 BILLION DOLLARS

The SEC has found yet another head of a Mortgage company that not only committed mortgage fraud but, decided to defraud the government out of tarp funds (Known commonly as bank bail-out money). Although financial professionals and politicians alike tout the case that no one in particular is to blame for the financial melt-down it would seem that, the SEC keeps finding a few of the people who are to blame and benefited greatly from the financial meltdown. What is interesting is that the same fraudsters who committed mortgage securities fraud turned right around to defraud the government out of bank bail-out money. The following is an excerpt from the SEC sites which gives the details of this case:

“The SEC alleges that Lee B. Farkas through his company Taylor, Bean & Whitaker Mortgage Corp. (TBW) sold more than $1.5 billion worth of fabricated or impaired mortgage loans and securities to Colonial Bank. Those loans and securities were falsely reported to the investing public as high-quality, liquid assets. Farkas also was responsible for a bogus equity investment that caused Colonial Bank to misrepresent that it had satisfied a prerequisite necessary to qualify for TARP funds. When Colonial Bank's parent company — Colonial BancGroup, Inc. — issued a press release announcing it had obtained preliminary approval to receive $550 million in TARP funds, its stock price jumped 54 percent in the remaining two hours of trading, representing its largest one-day price increase since 1983.

As the country's mortgage markets began to falter, Farkas arranged the sale of more than one billion dollars worth of mortgage loans and securities he knew to be fictitious or impaired," said Lorin Reisner, Deputy Director of the SEC's Division of Enforcement. "Farkas also lied about a sham equity investment he engineered to defraud U.S. taxpayers and the U.S. Treasury's Troubled Asset Relief Program."

According to the SEC's complaint, filed in U.S. District Court for the Eastern District of Virginia, Farkas executed the fraudulent scheme from March 2002 until August 2009, when TBW — a privately-held company headquartered in Ocala, Fla. — filed for bankruptcy. TBW was the largest customer of Colonial Bank's Mortgage Warehouse Lending Division (MWLD). Because TBW generally did not have sufficient capital to internally fund the mortgage loans it originated, it relied on financing arrangements primarily through Colonial Bank's MWLD to fund such mortgage loans.
According to the SEC's complaint, TBW began to experience liquidity problems and overdrew its then-limited warehouse line of credit with Colonial Bank by approximately $15 million each day. The SEC alleges that Farkas pressured an officer at Colonial Bank to assist in concealing TBW's overdraws through a pattern of "kiting" whereby certain debits to TBW's warehouse line of credit were not entered until after credits due to the warehouse line of credit for the following day were entered. As this kiting activity increased in scope, TBW was overdrawing its accounts with Colonial Bank by approximately $150 million per day.

The SEC alleges that in order to conceal this initial fraudulent conduct, Farkas devised a plan for TBW to create and submit fictitious loan information to Colonial Bank. Farkas also directed the creation of fictitious mortgage-backed securities assembled from the fraudulent loans. By the end of 2007, the scheme consisted of approximately $500 million in fake residential mortgage loans and approximately $1 billion in severely impaired residential mortgage loans and securities. As a direct result of Farkas's misconduct, these fictitious and impaired loans were misrepresented as high-quality assets on Colonial BancGroup's financial statements.

The SEC alleges that in addition to causing Colonial BancGroup to misrepresent its assets, Farkas caused BancGroup to misstate to investors and TARP officials that it had obtained commitments for a $300 million capital infusion, which would qualify Colonial Bank for TARP funding. Farkas falsely told BancGroup that a foreign-held investment bank had committed to financing TBW's equity investment in Colonial Bank. Contrary to his representations to BancGroup and the investing public, Farkas never secured financing or sufficient investors to fund the capital infusion. When BancGroup and TBW later mutually announced the termination of their stock purchase agreement, essentially signaling the end of Colonial Bank's pursuit of TARP funds, BancGroup's stock declined 20 percent.

The SEC's complaint charges Farkas with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties. The SEC also seeks an officer-and-director bar against Farkas as well as an equitable order prohibiting him from serving in a senior management or control position at any mortgage-related company or other financial institution and from holding any position involving financial reporting or disclosure at a public company.”

The department of justice and FBI along with other government agencies has been noted to be involved with this case as members of the Financial Fraud Enforcement Task Force. Too often these cases result at best in just destroying the criminal careers of fraudsters by banning them from doing business in the securities markets. Financial crimes committed against the public seem to be the only crimes that have no personal consequences for the fraudsters. Perhaps Bernie Madoff would be spending his golden years living in the Cayman Islands had his son’s not turned him in for financial fraud. No doubt he is thinking that now as he sees how his peers are walking away very rich and very free as their criminals enterprises burn down behind them.