Former Colonial Bank officer Kissick pleads guilty in fraud scheme

By Caroline Salls

Pittsburgh, March 2 - Former Colonial Bank senior vice president and head of its Mortgage Warehouse Lending Division Catherine Kissick pleaded guilty Wednesday to conspiring to commit bank, wire and securities fraud for her role in a fraud scheme that contributed to the failures of Colonial Bank and Taylor, Bean & Whitaker, according to a Department of Justice news release.

The department said Kissick faces a maximum penalty of 30 years in prison. Sentencing is scheduled for June 17.

According to court documents, Kissick admitted that from 2002 through August 2009, she and her co-conspirators, including former Taylor Bean chairman Lee Farkas, schemed to defraud various entities and individuals, including Colonial Bank, Colonial BancGroup Inc., the Troubled Asset Relief Program (TARP) and the investing public.

Asset purchase

Kissick admitted that she knowingly and intentionally placed Colonial Bank and Colonial BancGroup at significant risk by causing them to purchase and hold more than $400 million in assets on their books that had no value, the release said.

The department said court documents state that in early 2002, Taylor Bean began running overdrafts in its master bank account at Colonial Bank because of its inability to meet its operating expenses, which included payroll, servicing payments owed to third-party purchasers of loans and/or mortgage-backed securities and other obligations.

Kissick and her co-conspirators engaged in a series of fraudulent actions to cover up the overdrafts, first by sweeping overnight money from one Taylor Bean account with excess funds into another, and later through the fictitious sales of mortgage loans to Colonial Bank.

The department said the conspirators accomplished this by sending mortgage data to Colonial Bank for loans that did not exist or that Taylor Bean had already committed or sold to other third-party investors.

Fictitious trades

According to court documents, Kissick and her conspirators also caused Taylor Bean to sell fictitious trades to Colonial Bank that had no collateral backing them and had no value.

Kissick or another co-conspirator at Colonial Bank were the points of contact for conspirators at Taylor Bean when the mortgage company needed an advance from the bank, the release said, and Kissick would generally discuss new advances with Farkas before releasing the funds to Taylor Ban.

The department said conspirators at Taylor Bean would wire a request that included false documentation purporting to represent the sale of the trades to Colonial Bank to support the release of the funds, and Kissick and others caused the false information to be entered into Colonial Bank's books and records, giving the appearance that Colonial Bank owned a 99% interest in legitimate securities.

TARP application

In the fall of 2008, the department said Colonial BancGroup submitted an application to obtain $570 million in taxpayer funding through the Capital Purchase Program, a sub-program of the U.S. Treasury Department's TARP program.

Court documents indicate that Colonial BancGroup submitted financial data and filings in connection with the application that included false information related to mortgage loan and securities assets held by Colonial Bank as a result of the fraudulent scheme perpetrated by Kissick and her co-conspirators.

Colonial BancGroup never received the TARP funding, and Kissick admitted that she deleted and instructed members of her staff to delete electronic communications on their Blackberry PDAs to evade subpoenas for documents from the Special Inspector General for TARP, according to the release.

As previously reported, Colonial Bank regulator the Alabama State Banking Department seized the bank in August 2009 and appointed the Federal Deposit Insurance Corp. as receiver. Colonial BancGroup filed for bankruptcy in August 2009.

In June 2010, Farkas was arrested and charged in a 16-count indictment for his role in the fraud scheme. His trial is scheduled to begin in April.

In addition, former Taylor Bean treasurer Desiree Brown pleaded guilty on Feb. 24 for her role in the fraud scheme.

SEC enforcement action

In a related action, the Securities and Exchange Commission filed an enforcement action against Kissick in the Eastern District of Virginia.

According to an SEC news release, the agency charged Kissick with conducting a $1.5 billion securities fraud scheme, alleging that she enabled the sale of fictitious and impaired mortgage loans and securities from Taylor Bean to Colonial Bank.

The SEC alleged that Kissick caused these securities to be falsely reported to the investing public as high-quality, liquid assets.

The SEC said it previously charged Farkas in June 2010, and charged Brown last week.

"For more than seven years, Kissick betrayed her duties to Colonial Bank and its investors by working with Farkas to defraud the bank of $1.5 billion," SEC enforcement division deputy director Lorin L. Reisner said in the release.

Because Taylor Bean generally did not have enough capital to internally fund the mortgage loans it originated, the SEC said it relied on financing arrangements primarily through Colonial Bank's mortgage warehouse lending division to fund the mortgage loans.

The SEC alleged that when Taylor Bean began to experience liquidity problems and overdrew its then-limited warehouse line of credit with Colonial Bank by approximately $15 million each day, Kissick, Farkas and Brown concealed the overdraws through a pattern of "kiting" in which some debits were not entered until after credits due for the following day were entered.

By the end of 2007, the agency said the scheme consisted of roughly $500 million in fake residential mortgage loans and about $1 billion in severely impaired residential mortgage loans and securities.

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

Injunction consent

Without admitting or denying the SEC's allegations, Kissick consented to the entry of a judgment permanently enjoining her from violation of the Securities Act and from aiding and abetting Exchange Act violations.

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 and 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 said its investigation is ongoing.

Colonial BancGroup is the Montgomery, Ala.-based holding company for Colonial Bank. The company filed for bankruptcy on Aug. 25, 2009 in the U.S. Bankruptcy Court for the Middle District of Alabama. Its Chapter 11 case number is 09-32303.

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