Bank of America Corp. can’t sue to recover $1.75 billion in investor losses stemming from a mortgage-fraud scheme at failed lender Taylor, Bean & Whitaker Mortgage Corp., the Federal Deposit Insurance Corp. told a judge.
From 2002 through August 2009, Lee Farkas, while he was chairman of Taylor Bean, sold more than $1.5 billion in fake mortgage loans to Colonial Bank with the collusion of its employees and diverted more than $1.5 billion from Ocala Funding LLC, a financing vehicle Taylor Bean controlled.
Ocala issued asset-backed commercial paper to financial institutions including Deutsche Bank AG (DBK), Germany’s biggest bank, and Paris-based BNP Paribas. By August 2009, Orlando, Florida- based Ocala’s deficit had grown to $1.5 billion, according to prosecutors.
Bank of America was trustee of Ocala, which filed for bankruptcy on July 10 listing assets and debt of more than $1 billion. The bank sued FDIC as receiver of Montgomery, Alabama-based Colonial to recover the diverted assets on behalf of Ocala investors. The FDIC, in a filing today in federal court in Washington, said there are no assets in the Colonial estate to make any payments on general creditor clams.
“Even if BOA were to prevail against the FDIC-receiver in this action, it would remain an unsecured creditor of the Colonial Bank receivership and ‘would not be entitled to any recovery,’” the FDIC said in the filing, asking the court to dismiss the case.
Bank of America “alleges that Colonial actively concealed its own financial condition, as well as the financial condition of TBW and Ocala, and that these misrepresentations allowed the fraudulent scheme to continue undetected for at least seven years,” U.S. District Judge Barbara Rothstein said in a December ruling allowing Bank of America’s fraud claim on behalf of Deutsche Bank and BNP Paribas to proceed to discovery.
Farkas is serving a 30-year sentence after being convicted in April 2011 of 14 counts of conspiracy and bank, wire and securities fraud.
Thomas O’Brien, counsel to the FDIC, spoke at Farkas’s 2011 sentencing hearing. He said the collapse of Colonial was the sixth-largest bank failure in U.S. history and the third largest since “the 2007 financial crisis.”
Colonial’s failure cost the FDIC’s insurance fund about $4.2 billion, he said. Of that, $1.8 billion can be attributed to the Farkas conspiracy, he said.
The case is Bank of America v. FDIC, 10-cv-01681, U.S. District Court, District of Columbia (Washington).
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