Reporting from Washington and Orange County —
Signaling a commitment to pursue fraud stemming from the housing market collapse, federal authorities Wednesday charged a former executive at a leading private mortgage company in connection with an alleged $1.9-billion scheme that helped topple a major bank and then sought a chunk of the government's bailout fund.
Lee Bentley Farkas, 57, the former chairman of Taylor, Bean & Whitaker Mortgage Corp. in Ocala, Fla., was arrested Tuesday night on a 16-count indictment charging him with bank, wire and securities fraud. It is one of the largest criminal cases to come from the mortgage meltdown.
The arrest came after a 15-month investigation by a dozen federal agencies triggered by the mortgage company's involvement in trying to secure $553 million for Alabama-based Colonial Bank from the government's $700-billion Troubled Asset Relief Program.
Colonial never got the TARP money and failed in August in one of the more spectacular collapses stemming from the mortgage meltdown. Colonial, the remains of which were acquired by BB&T Corp., was one of the 50 largest banks in the country, with $25 billion in assets and $20 billion in deposits when it was seized.
"The fraud alleged here is truly stunning in its scale and in its complexity," said Assistant U.S. Atty. Gen. Lanny A. Breuer, flanked by members of the Obama administration's Financial Fraud Enforcement Task Force.
The alleged fraud began in 2002 as Farkas and unnamed co-conspirators embarked on a series of elaborate schemes to cover cash shortfalls at Taylor Bean, authorities said. One scheme involved selling mortgage loans to Colonial Bank that did not exist, had little value or already had been sold by Taylor Bean.
Colonial Bank bought more than $400 million of what authorities called fake mortgage assets. Court documents said that Farkas then bilked Deutsche Bank and BNP Paribas Bank out of about $1.5 billion through a Taylor Bean subsidiary called Ocala Funding, which sold short-term loans known as commercial paper to financial institutions and investors.
The indictment said that Farkas and others diverted money from Ocala Funding to Taylor Bean to cover its losses and then sent false information to Deutsche Bank and BNP Paribas to support the firm's claim that Taylor Bean had enough collateral to back the commercial paper. When Taylor Bean filed for bankruptcy protection last year the banks were unable to redeem their commercial paper at full value.
Farkas also tried to defraud the taxpayer-funded TARP program, authorities said.
In 2008, Colonial Bank's parent company, Colonial BancGroup, applied for money from the program and received approval conditioned on its raising $300 million in private capital. In March 2009, Farkas and others falsely told Colonial BancGroup they had found investors to provide the money, authorities alleged.
Federal officials said the case was a warning to other mortgage "fraudsters" that the government was coming after them.
"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 and it will be pursued using every investigative tool at our disposal," Breuer said.
The financial fallout from the alleged fraud was widespread, federal officials said. The collapse of Colonial Bank alone is expected to cost the Federal Deposit Insurance Corp. $3.8 billion.
In addition, authorities said Taylor Bean's alleged mortgage fraud could lead to a total of more than $3 billion in losses at the Federal Housing Administration, which guarantees mortgages, and Ginnie Mae, which produces mortgage-backed securities based on those loans.
With so much economic damage caused by the subprime market meltdown, federal officials have made financial fraud a priority, and more cases should be coming, said Ellen S. Podgor, a Stetson University law professor and expert in white-collar crime. Fraud investigations are complicated and take time to develop before arrests can be made.
"When you're dealing with a white-collar case, very often you're dealing with documents. You need analysis. You need accountants," Podgor said.
Authorities continue to pursue criminal investigations of executives at the former Countrywide Financial Corp. in Calabasas and the failed IndyMac Bancorp in Pasadena, two of the biggest players in the subprime housing market.
Federal officials have focused on mortgage fraud since the housing market began collapsing in 2006.
Last year, Congress passed legislation giving authorities new anti-fraud powers and authorized $245 million annually for 2010 and 2011 to hire hundreds of agents, prosecutors and other officials to pursue financial fraud. In November, the Obama administration launched its Financial Fraud Enforcement Task Force with a promise to go after "unscrupulous executives, Ponzi scheme operators and common criminals."
Bert Ely, an independent banking consultant, predicted more high-profile arrests.
"We're going to see a lot of news and headlines and indictments, undoubtedly some trials and convictions" he said. "I question how many of the bad guys will end up going to jail because of the difficulty of putting these cases together."
Farkas' case demonstrated the complexity of mortgage fraud investigations. His arrest is part of a lengthy ongoing investigation that could result in additional arrests.
Neil Barofsky, special inspector general for the TARP program, said the government's break came when Farkas took aim at the TARP program.
Agents working for Barofsky's office had been looking at the relationship between Taylor Bean and Colonial Bank and found the proposed $300-million capital investment suspicious. They began investigating and notified the Treasury Department not to give any money to Colonial, then referred the case to the Department of Justice, Barofsky said.