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Man Charged in $1.9B Scheme Tied to Colonial Bank Downfall

Source: Washington Post

Posted on 17 Jun 2010

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The former chairman of a large mortgage lending company has been charged in a $1.9 billion fraud scheme that contributed to the failure of Colonial Bank, one of the nation's 50 largest banks before it was seized by regulators last year, the Justice Department announced Wednesday.

Lee Bentley Farkas, who led Florida-based Taylor, Bean & Whitaker, was arrested Tuesday in Ocala, Fla., after being indicted by a federal grand jury in Alexandria on bank fraud and other charges. Taylor Bean was one of the nation's largest privately held mortgage lending companies before it filed for bankruptcy protection last year, and officials said the fraud scheme precipitated its collapse as well.

Court documents said Farkas and co-conspirators at both companies misappropriated more than $400 million from Colonial and about $1.5 billion from a Taylor Bean-owned firm to cover Taylor Bean's operating losses. Farkas, 57, is also charged with trying to defraud the government out of $553 million in Troubled Asset Relief Program bank bailout funds as the losses mounted. Officials said the scheme involved creating false documents and moving hundreds of millions of dollars between Taylor Bean, Colonial and other entities.

"The fraud alleged here is truly stunning in its scale and in its complexity,'' Assistant Attorney General Lanny A. Breuer of the Criminal Division said at a news conference. He said Farkas's arrest "sends a strong message to corporations and corporate executives alike that financial fraud will be found and it will be prosecuted." The Justice Department has made such fraud a top priority, and the case was brought in conjunction with the Obama administration's Financial Fraud Enforcement Task Force.

Farkas faces a likely sentence of life in prison under federal sentencing guidelines if convicted, according to a motion the government filed to detain him in Florida until his trial in Alexandria. The government motion accuses Farkas of trying to destroy evidence to cover up the scheme and says he used about $20 million in Taylor Bean funds for personal items such as payments on a private jet and three Florida properties.

A lawyer for Farkas, Anthony Cochran, said Farkas will plead not guilty and will "vigorously defend against the charges. He looks forward to having his day in court to clear his name.'' Farkas is scheduled to appear in federal court in Florida on Thursday.

Neil H. MacBride, the U.S. attorney in Alexandria, said the case was brought there because some investors who were victims of the scheme live in Northern Virginia and because Freddie Mac, the government-backed mortgage finance giant that did business with Taylor Bean and Colonial, is based in McLean. Freddie Mac has said it is trying to minimize losses on more than $1 billion in assets at risk because of the collapse of both companies, but it is unclear what the price tag for Freddie Mac will be.

"Taxpayers have paid a hefty price for crimes related to the current financial crisis,'' said MacBride, who added that investors in Colonial and Ocala Funding -- the Taylor Bean-owned firm that was allegedly defrauded out of about $1.5 billion -- "were among those directly affected by this conspiracy.''

Court documents said the fraud scheme began in 2002 when Farkas and his unidentified co-conspirators began running overdrafts in Taylor Bean's bank account at Colonial because of Taylor Bean's inability to meet operating expenses. They are accused of then covering up the tens of millions in overdrafts by causing Colonial to purchase from Taylor Bean more than $400 million in what amounted to fake mortgage assets, including loans that Taylor Bean had already sold to other investors.

Prosecutors said the scheme escalated from there and was eventually discovered when Neil Barofsky, the special inspector general for the TARP program, began investigating last year after Colonial's parent company made inaccurate statements in its request for TARP money. No TARP funds were disbursed, investigators said.

Shawn Henry, assistant director in charge of the FBI's Washington Field Office, said Farkas was arrested Tuesday night in his car after working out at a gym he owns. He did not resist, Henry said.


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