April 6 (Bloomberg) -- Taylor, Bean & Whitaker Mortgage Corp.’s former chairman, Lee Farkas, ordered data sent to Colonial Bank for nonexistent loans in an effort to cover up the company’s growing deficits, a company ex-president said.
Raymond Bowman, 45, testifying yesterday for the government in federal court in Alexandria, Virginia, said Farkas in 2003 explained that the sale of “dummy” loans, known as Plan B, were necessary to prevent Taylor Bean from going out of business.
“I told him I didn’t think it was a good idea,” said Bowman, who pleaded guilty last month to conspiracy and to making false statements. Bowman said he thought the plan was unethical and “possibly illegal.”
Farkas, 58, is charged with orchestrating a $1.9 billion fraud scheme involving fake mortgage assets that duped some of the country’s largest financial institutions, targeted the U.S. bank bailout program and contributed to the failure of Montgomery, Alabama-based Colonial Bank.
Bowman is one of six people who have admitted to the conspiracy and are scheduled to testify against Farkas, who is charged with 14 counts of wire, bank and securities fraud. If convicted of the single conspiracy charge, Farkas faces a prison term of as long as 30 years.
Bruce Rogow, a lawyer for Farkas, challenged Bowman’s testimony, noting the former executive admitted to lying to federal investigators probing Taylor Bean.
‘Were You Lying’
“You were a salesman for TBW, trying to get the outside world to have confidence in you,” Rogow said. “Were you lying to all those people?”
“If I was talking about the condition of Taylor Bean, then yes, I was lying,” Bowman said.
Bowman spent more than two hours on the witness stand describing how he and other executives at Taylor Bean and Colonial Bank were in a constant search for money.
He said the financial problems began as early as 2002, around the same time federal mortgage financier Fannie Mae said it would no longer buy loans from Taylor Bean because the company was considered to be an “operational risk.”
Fannie Mae, based in Washington, represented about 80 percent of the company’s business. He said the relationship ended because Fannie Mae found that six loans Taylor Bean had sold to it defaulted before a single payment had been made. The loans were in Farkas’s name and were loans that Fannie Mae had rejected once before, Bowman said.
“It was bad,” Bowman said.
“Did Taylor Bean lose any money from the termination?” Assistant U.S. Attorney Charles Connolly asked.
“The servicing rights we were supposed to sell did not trade well,” said Bowman, adding that potential buyers “assumed TBW was going to go out of business at that point.”
Bowman said officials from Freddie Mac, which in 2002 consisted of about 5 to 10 percent of Taylor Bean’s business, visited Ocala.
“We explained what happened and they decided to keep us,” Bowman said.
From that point, he said Taylor sold 100 percent of its conventional loan business to Freddie Mac and the McLean, Virginia-based government-backed mortgage financier accounted for 80 percent of the company’s overall business.
Taylor Bean 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 have said.
With assistance from officials at Colonial Bank, at one time among the 50 biggest in the U.S., 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.
Bowman was vice president and director of secondary marketing at Taylor Bean from October 1999 until 2002. That year, he was promoted to president and reported directly to Farkas.
Bowman, who is set to be sentenced on June 10, faces a maximum sentence of 10 years in prison, plus a fine of as much as $500,000 and full restitution to victims, according to prosecutors.
Bowman testified yesterday that he examined several loans and concluded that by retaining the servicing rights to the loans it originated, Taylor Bean was losing about $1,200 in capital per loan.
By December 2003, Taylor Bean was overdrawing its account by about $150 million a day, the SEC said.
Bowman said “Plan B” was put into place by Farkas and Catherine Kissick, head of Colonial Bank’s Mortgage Warehouse Lending Division.
“Lee said we had two options,” Bowman testified. “Not do it and shut the company down. Cathy would lose her job and probably go to jail. Or, borrow money through Plan B, pay her back, and move forward.”
Kissick pleaded guilty in March to conspiracy, admitting she helped Farkas and Taylor Bean hide overdrafts for more than seven years. Prosecutors said she will testify for the U.S. at the trial.
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 prosecutors.
Rogow asked Bowman about a $300,000 advance on his $440,000 salary for 2009 that Farkas approved in November 2008. Bowman said he needed some of that money to cover stock losses. He said he requested the advance after Barack Obama was elected president, saying he believed Obama would raise taxes for those earning more than $150,000.
“It was kind of a protest,” Bowman said. “I was a voting Republican at the time.”
The case is U.S. v. Farkas, 10-cr-00200, U.S. District Court, Eastern District of Virginia (Alexandria).
To contact the reporter on this story: Tom Schoenberg in Washington at firstname.lastname@example.org.
To contact the editor responsible for this story: Michael Hytha at email@example.com.