Taylor Bean's former chairman charged with $1.5 billion securities fraud scheme, scamming TARP

By Jennifer Lanning Drey

Portland, Ore., June 16 - Taylor Bean & Whitaker Mortgage Corp.'s former chairman and majority owner has been charged with orchestrating a large-scale securities fraud scheme and attempting to scam the U.S. Treasury's Troubled Asset Relief Program, according to a Securities and Exchange Commission news release.

The SEC alleges that Lee B. Farkas sold more than $1.5 billion of fabricated or impaired mortgage loans and securities to Colonial Bank through his company Taylor Bean.

The loans and securities were falsely reported to the investing public as high-quality, liquid assets, according to the release.

In addition, it said Farkas 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.

According to the SEC's complaint filed in the U.S. District Court for the Eastern District of Virginia, Farkas executed the fraudulent scheme from March 2002 until August 2009, when Taylor Bean filed for bankruptcy.

The SEC's complaint charges Farkas with violations of the antifraud, reporting, books and records and internal controls provisions of federal securities laws.

The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains with the pre-judgment 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 financial institution and from holding any position involving financial reporting or disclosure at a public company.

The SEC said the investigation is continuing.

Overdrawn accounts

According to the SEC release, Taylor Bean was the largest customer of Colonial Bank's Mortgage Warehouse Lending Division.

Because Taylor Bean generally did not have sufficient capital to internally fund the mortgage loans it originated, it relied on financing arrangements primarily through Colonial Bank's Warehouse Lending Division to fund such mortgage loans.

Taylor Bean began to experience liquidity problems and overdrew its then-limited warehouse line of credit with Colonial Bank by approximately $15 million a day.

The SEC alleges Farkas pressured an officer at Colonial Bank to assist in concealing Taylor Bean's overdraws through a pattern of "kiting," whereby certain debits to Taylor Bean's warehouse line of credit were not entered until after credits due to the warehouse line of credit for the following day were entered.

Eventually, Taylor Bean was overdrawing its accounts with Colonial Bank by approximately $150 million per day, the SEC said.

Fictitious information

The commission further alleges that in order to conceal such fraudulent conduct, Farkas devised a plan for Taylor Bean 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, the SEC said.

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' misconduct, the 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 it 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.

Taylor Bean, an Ocala, Fla.-based mortgage banker, filed for bankruptcy on Aug. 24, 2009. Its Chapter 11 case number is 09-07047.

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