Lee Farkas, the former chairman of Taylor, Bean & Whitaker Mortgage Corp., went on trial today as the accused mastermind of a $1.9 billion fraud conspiracy. Looming in the background was the company’s relationship with the bailed-out federal mortgage financier, Freddie Mac.
Farkas, 58, is charged with orchestrating a scheme involving fake mortgage assets that duped some of the country’s largest financial institutions, including Bank of America Corp., targeted the U.S. bank bailout program and contributed to the failure of Montgomery, Alabama-based Colonial Bank. Freddie Mac was the most important ingredient in Taylor Bean’s growth into the largest U.S. non-depository mortgage lender by 2008.
“This is a case about lying and stealing on a staggering scale,” Patrick Stokes, deputy chief of the U.S. Justice Department’s Fraud Section, said during opening statements today in Alexandria, Virginia, federal court.
Lawyers have said they expected the trial before U.S. Judge Leonie Brinkema to last about a month. Prosecutors have said they planned to call 35 witnesses and show the jury more than 950 exhibits, including e-mail, recordings of Farkas, property records and a photograph of Farkas’s jet.
Prosecutors described in court papers the loans sold to Freddie Mac during an alleged seven-year conspiracy as the “lifeblood” of Taylor Bean, once the 12th-largest U.S. mortgage lender. Six people have already pleaded guilty to conspiracy and are scheduled to testify against Farkas, who may spend the rest of his life in prison if convicted on 14 counts of wire, bank and securities fraud.
Farkas has denied any wrongdoing. His lawyer, Craig Kuglar of Atlanta, told the jury it was the federal government that created a “death spiral” for Colonial Bank and Taylor Bean when it raided the company’s headquarters in August 2009 relying on information from an auditor at Deloitte & Touche who didn’t understand Taylor Bean’s business arrangements.
“The evidence will show Mr. Farkas did not steal anything,” Kuglar said.
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.
Freddie Mac started picking up most of Taylor Bean’s business in 2002 after its government-sponsored competitor, Fannie Mae, stopped buying loans originated by the company in April of that year.
Didn’t Trust Information
Fannie Mae didn’t trust the accuracy of information it was getting from Taylor Bean and ordered the company to sell its portfolio of servicing rights, according to a prospectus filed by Credit Suisse First Boston Mortgage Securities Corp. with the U.S. Securities and Exchange Commission for sales of pools of Taylor Bean-originated loans.
A Fannie Mae spokeswoman, Amy Bonitatibus, declined to comment on the reason the company dropped Taylor Bean.
Freddie Mac sent auditors and executives to Florida in 2002 to review Taylor Bean’s books before deciding to accept the business that had previously gone to Fannie Mae, said a former Freddie Mac official who spoke on condition of anonymity because he said his comments could involve him in the case. The cutoff by Fannie Mae was viewed as a stigma, the person said.
Brad German, a Freddie Mac spokesman, declined to comment on the company’s relationship with Taylor Bean. He didn’t respond to an e-mail seeking comment on the evaluation of its books.
Clifford Rossi, a Freddie Mac official from 1996 to 2004 who said he wasn’t involved in dealing with Taylor Bean, said Freddie Mac and Fannie Mae competed fiercely for relationships with loan generators such as Taylor Bean.
Taylor Bean’s primary business was origination, acquisition, sale and servicing of residential mortgage loans that came from a network of small mortgage brokers and banks.
“The business reasons must have outweighed the risk exposure,” said Rossi, a former senior risk officer at Countrywide Financial Corp., Washington Mutual Inc. and Citigroup Inc.
Farkas maintained frequent contact with Freddie Mac, personally meeting with officials at its headquarters in McLean, Virginia, on seven occasions from 2006 to 2009, the U.S. has said. In 2003, he hired Paul R. Allen, a former senior executive at Freddie Mac, as Taylor Bean’s chief executive officer. Allen worked out of his home in Oakton, Virginia, to be closer to Freddie Mac headquarters, according to prosecutors.
“The senior executive’s location in northern Virginia was no coincidence,” prosecutors said in court papers. “He was a former senior executive at Freddie Mac, and Freddie Mac was critical to TBW’s business as a buyer of TBW-originated mortgage loans.”
Allen pleaded guilty on April 1 to conspiracy and to making false statements to federal auditors. He didn’t return e-mails and voice-mail messages seeking comment.
Freddie Mac-connected witnesses on the prosecution list include Raymond Romano, the executive vice president and chief credit officer at Freddie Mac, who the government claims had direct contact with Farkas. Philip Theis, a customer management director at Freddie Mac, may also be called, the U.S. said.
Also listed is Stephen Ledbetter, a senior vice president in Ginnie Mae’s Office of Mortgage Backed Securities. Ginnie Mae, a government entity that guarantees returns on securities backed by U.S. agencies such as the Veterans Administration, guaranteed many of the loans originated by Taylor Bean, according to a court filing by prosecutors.
Alisa Finelli, a spokeswoman for the Justice Department, and Peter Carr, a spokesman for U.S. Attorney Neil MacBride in Alexandria, declined to comment.
At the same time Fannie Mae dropped Taylor Bean, Farkas was having trouble coming up with cash for operating expenses, such as payroll and mortgage-loan servicing payments owed to Freddie Mac and Ginnie Mae, prosecutors said.
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 SEC lawsuit.
By December 2003, Taylor Bean was overdrawing its account by about $150 million a day, the SEC said.
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, according to the government.
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 and the conspirators diverted cash from Ocala Funding LLC, a financing vehicle used and controlled by Taylor Bean, to cover its losses, according to court papers.
Ocala Funding issued asset-backed commercial paper to financial institutions including Deutsche Bank AG, Germany’s biggest bank, and Paris-based BNP Paribas, according to court papers. By August 2009, Ocala’s deficit had grown to $1.5 billion, according to Allen’s plea agreement.
“Many of these loans had already been sold to Freddie Mac,” the SEC alleged in its lawsuit against Farkas, adding Freddie Mac, Colonial Bank, and investors “have competing claims to approximately $1 billion of mortgage loans originated by TBW.”
Taylor Bean accounted for about 2 percent of the mortgages for single-family homes by volume bought by Freddie Mac in 2009, according to a company filing. The firm said it filed a claim in Taylor Bean’s bankruptcy for $1.8 billion, with $440 million relating to funds deposited with Colonial Bank.
Farkas and other alleged conspirators also committed wire and securities fraud in an attempt to secure $553 million in funds from the Troubled Asset Relief Program for Colonial BancGroup, Colonial Bank’s parent, prosecutors said.
The application for funding included false information related to the mortgage loans and assets held by Colonial. Also, a purported plan to first inject capital into Colonial bank from a group including Taylor Bean and Farkas caused Colonial BancGroup to file a false report with the SEC, according to prosecutors.
Colonial never got the TARP funds, the U.S. said.
Prosecutors are seeking to seize five properties that Farkas owns in Florida and Georgia, as well as nine vehicles, including a 1929 Ford Model A and 1963 Rolls Royce.
Taylor Bean’s bankruptcy estate alleged in court papers that in addition to his salary, Farkas withdrew more than $50 million from the company for his personal benefit.
Alabama regulators seized Colonial Bank in 2009 and the Federal Deposit Insurance Corp. was appointed as receiver. Colonial BancGroup and Taylor Bean filed for bankruptcy in 2009.
The case is U.S. v. Farkas, 10-cr-00200, U.S. District Court, Eastern District of Virginia (Alexandria).