Lee Farkas, the former chairman of Taylor, Bean & Whitaker Mortgage Corp. on trial for allegedly masterminding a $1.9 billion fraud scheme, testified that he didn’t commit any crimes.
Farkas told jurors today in federal court in Alexandria, Virginia, that his company constantly had cash problems as would be expected at a growing company funding hundreds of new mortgages a day. Farkas said the government’s evidence of wrongdoing amounted to paperwork mishaps or transactions that investigators misunderstood.
“I didn’t believe at the time I committed any crimes and I don’t believe now that I committed any crimes,” Farkas said.
Farkas, 58, is charged with orchestrating a fraud involving fake mortgage assets that duped some of the country’s largest financial institutions, targeted the federal bank bailout program and contributed to the failure of Montgomery, Alabama- based Colonial Bank.
He is charged with 14 counts of conspiracy and wire, bank and securities fraud. If convicted of the single conspiracy charge, Farkas faces as many as 30 years in prison.
Prosecutors concluded their case against Farkas yesterday after eight days of testimony by almost two dozen witnesses, including officials at Freddie Mac, Bank of America Corp. (BAC) and Deutsche Bank AG. (DBK)
Six of those who testified were former colleagues or associates of Farkas who had pleaded guilty to conspiracy charges.
Closing arguments are scheduled for April 18.
Taylor Bean, based in Ocala, Florida, was servicing more than 500,000 mortgages including $51 billion of Freddie Mac loans when it collapsed in August 2009, according to court records.
Prosecutors allege the fraud began in 2002 when Farkas had trouble meeting operating expenses, such as payroll and mortgage-loan servicing payments owed to the government- sponsored Freddie Mac and Ginnie Mae.
With assistance from officials at Colonial Bank, at one time among the country’s 50 biggest, Farkas masked shortfalls of about $15 million a day by moving money from another Taylor Bean account into the company’s master account, then returning the money later in the day, according to a related lawsuit by the U.S. Securities and Exchange Commission.
By December 2003, Taylor Bean was overdrawing its account by about $150 million a day, the SEC said.
Farkas, in about four hours of testimony, denied ordering anyone to move money among the Taylor Bean accounts and said he and Taylor Bean officials didn’t have authority to do it.
“I can’t run an overdraft,” Farkas said. “I have no access to the master account.”
The government alleges that Farkas and other conspirators, in a scheme they called “Plan B,” began sending mortgage data to Colonial Bank for loans that didn’t exist or that Taylor Bean had already committed or sold to other investors.
By the end of 2007, the scheme consisted of about $500 million in fake residential mortgage loans and about $1 billion in unmarketable residential mortgage loans and securities, the SEC said in court papers.
Farkas said he and others at Taylor Bean and Colonial used “Plan B” to describe many things. He said it was also common to inadvertently sell loans that didn’t exist.
“It happens quite often,” Farkas said.
Farkas said many of the loans the government described as fake were legitimate, older loans that the company would find in its records.
Patrick Stokes, deputy chief of the U.S. Justice Department’s fraud section, asked Farkas about e-mail messages between him and alleged co-conspirators that identified wire transfers from Taylor Bean to pay for the company’s jet. The money was backed by notes for property that didn’t exist, Stokes said.
“These were simply notes,” Farkas said. “They were not fake loans, they were notes from myself to Taylor, Bean & Whitaker.”
Farkas admitted that the loan used to pay down a $15 million debt was backed by a trade assignment agreement that was “no good.”
“No investor was assigned to this trade assignment to Colonial?” Stokes asked.
“That could be,” Farkas said.
Farkas and the alleged co-conspirators diverted cash from Ocala Funding LLC, a financing vehicle used and controlled by Taylor Bean, to cover its losses, according to court papers.
Farkas testified he had little involvement in Ocala Funding, saying he didn’t understand well how it operated. Farkas said Ocala Funding was run by Paul Allen, Taylor Bean’s chief executive officer, who has pleaded guilty to conspiracy.
Farkas denied asking Taylor Bean’s treasurer, Desiree Brown, to divert funds from Ocala Funding. Brown pleaded guilty to conspiracy and testified for the government.
By August 2009, Ocala’s deficit had grown to $1.5 billion, according to Allen.
As Colonial Bank struggled to stay afloat, Allen and Farkas tried to raise $300 million from private investors to secure a cash infusion from the federal Troubled Asset Relief Program, according to Allen. Farkas is accused of falsely representing that he had commitments from investors for the money.
Stokes asked Farkas about the investor list, which Colonial Bank’s parent company used as the basis for a filing with the SEC.
“That was an interim investor list,” Farkas said. “The only one who misunderstood that was you.”
The case is U.S. v. Farkas, 10-cr-00200, U.S. District Court, Eastern District of Virginia (Alexandria).
To contact the editor responsible for this story: Michael Hytha at firstname.lastname@example.org.