SEC CHARGES FORMER COLONIAL BANK EXECUTIVES WITH FRAUD IN TARP SCHEME

The following is an excerpt from the SEC web site:

On June 16, 2010 the Securities and Exchange Commission (SEC) charged Lee B. Farkas, the former chairman and majority owner of Taylor, Bean and Whitaker Mortgage Corp. (TBW), which was once the nation's largest non-depository mortgage lender, with orchestrating a large-scale securities fraud scheme and attempting to scam the U.S. Treasury's Troubled Asset Relief Program (TARP).
On February 24, 2011, the SEC charged Desiree E. Brown, TBW’s former treasurer, with aiding and abetting Farkas’ securities fraud and TARP related schemes.
On March 2, 2011, the SEC charged Catherine L. Kissick, a former vice president at Colonial Bank and the head of its mortgage warehouse lending division (MWLD) with being an active participant in Farkas’ securities fraud scheme.
On March 16, 2011, the SEC charged Teresa A. Kelly, a former operations supervisor at Colonial Bank’s MWLD with being an active participant in Farkas and Kissick’s securities fraud scheme.
In the comprehensive scheme, the SEC alleged that Farkas, Kissick, Brown and Kelly (collectively, Defendants) conspired together to sell more than $1.5 billion worth of fabricated or impaired mortgage loans and securities from TBW to Colonial Bank. Those loans and securities were falsely reported to the investing public as high-quality, liquid assets. Farkas and Brown were also 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 — The 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.
According to the SEC's complaints, each filed in U.S. District Court for the Eastern District of Virginia, Defendants executed the fraudulent scheme from March 2002 until August 2009, when TBW — a privately-held company headquartered in Ocala, Florida — filed for bankruptcy. TBW was the largest customer of Colonial Bank's 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 complaints, 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 Kissick and Kelly 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, Defendants jointly devised a plan for TBW to create and submit fictitious loan information to Colonial Bank. Defendants 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 Defendants' 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 and Brown caused BancGroup to misstate publicly 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. Farkas also issued a press release on behalf of TBW announcing that TBW had secured the necessary financing for BancGroup. Contrary to his representations to BancGroup and to 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 against Farkas charges him with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws, including Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Exchange Act of 1934 (Exchange Act) and Rules 10b-5 and 13b2-1 thereunder and aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties against Farkas. 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. On November 5, 2010, at the request of Farkas, the court stayed the SEC’s action against him pending resolution of the criminal case filed against him in the same district by the U.S. Department of Justice and the U.S. Attorney’s Office for the Eastern District of Virginia.
The SEC’s complaint against Kissick charges her with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. Without admitting or denying the SEC’s allegations, Kissick consented to the entry of a judgment permanently enjoining her from violation of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and from aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. Kissick also consented to an order barring her from acting as an officer or director of any public company that has securities registered with the SEC pursuant to Section 12 of the Exchange Act. Kissick also consented to an order prohibiting her from serving in a senior management or control position at any mortgage-related company or other financial institution or from holding any position involving financial reporting or disclosure at a public company. The proposed preliminary settlement, under which the SEC’s requests for financial penalties against Kissick would remain pending, is subject to court approval.
The SEC's complaint against Brown charges her with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. Without admitting or denying the SEC's allegations, Brown consented to the entry of a judgment permanently enjoining her from violation of Rule 13b2-1 of the Exchange Act and from aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The proposed preliminary settlement, under which the SEC's requests for financial penalties against Brown would remain pending, is subject to court approval.
The SEC’s complaint against Kelly charges her with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. Without admitting or denying the SEC's allegations, Brown consented to the entry of a judgment permanently enjoining her from violation of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and from aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The preliminary settlement, under which the SEC's requests for financial penalties against Brown remain pending, was entered by the court on May 4, 2011.
The SEC's investigation is ongoing. The SEC acknowledges the assistance of the Fraud Section of the U.S. Department of Justice's Criminal Division, the Federal Bureau of Investigation, the Office of the Special Inspector General for the TARP, the Federal Housing Finance Agency's Office of the Inspector General, the Federal Deposit Insurance Corporation's Office of the Inspector General, and the Office of the Inspector General for the U.S. Department of Housing and Urban Development.”