Taylor, Bean & Whitaker Mortgage Corp.’s former chief executive officer, Paul Allen, said the company’s chairman, Lee Farkas, drained funds from a unit in a bid to hide shortfalls at the mortgage lender.
Allen, testifying in Farkas’s criminal trial yesterday in federal court in Alexandria, Virginia, told the jury Taylor Bean-owned Ocala Funding LLC had a deficit of $681 million in April 2008. Some funds for the commercial paper facility were diverted to an account that Farkas set up without his knowledge, said Allen, a witness for the government.
“Where was this nearly $700 million going?” Assistant U.S. Attorney Charles Connolly asked.
“I don’t know,” Allen said.
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.
Allen, a former senior executive at bailed-out federal mortgage financier Freddie Mac, is one of six people who have admitted to the conspiracy and are scheduled to testify against Farkas, who’s accused of 14 counts of conspiracy and wire, bank and securities fraud. If convicted of the single conspiracy charge, Farkas faces a prison term of as long as 30 years.
Criminal Division Head
Assistant Attorney General Lanny Breuer, head of the Justice Department’s criminal division, attended the sixth day of the trial, which included testimony from Taylor Bean’s former treasurer Desiree Brown. Breuer remained as a spectator for almost all of Allen’s testimony in the morning session.
Breuer told the Senate Judiciary Committee in September that the Farkas case is an example of “our sustained efforts to reach and uncover fraud at every level.”
Allen, 55, pleaded guilty April 1 to one count of conspiracy to commit bank and wire fraud and one count of making false statements. Allen faces as long as 10 years in prison when he is sentenced on June 21.
Bruce Rogow, a lawyer for Farkas, asked Allen what he hoped his cooperation would get him.
“The shortest amount of time that I would have to spend away from my wife and children,” Allen said.
Allen joined Taylor Bean in 2003 as its CEO and reported directly to Farkas, working mostly from his home in Oakton, Virginia, he said. He was making $400,000 annually with a $200,000 target bonus, Allen said.
Described as Micromanager
Allen described Farkas as a micromanager who kept tight controls over access to information by employees.
Allen said he couldn’t get information on the company’s finances. Allen said that at the direction of Farkas, he wasn’t allowed to see the company’s cash forecast.
“I had never been precluded from talking with anyone before,” said Allen, who had previously held senior positions at Freddie Mac, Fannie Mae and North American Mortgage Corp.
In January 2005, Taylor Bean established Ocala Funding as a financing vehicle for mortgage loans. Ocala Funding had no employees and Allen was considered the “lead manager,” according to his statements in court.
Allen said he was alerted to a collateral deficit at Ocala Funding from Moody’s Corp. in September 2005. Allen said he didn’t think it was right and conducted his own investigation.
Growing Collateral Crunch
Allen said that he kept Farkas informed of the growing collateral crunch and that he was aware that cash from Ocala Funding was being used for other purposes.
Allen said Farkas promised to fix the deficit.
In January 2007, Allen said he learned that Farkas had moved $1 million in Ocala funds to an account that Allen didn’t know existed.
To cover up the growing deficit from investors and regulators, Allen said he and other Taylor Bean managers created “accounts receivable” due to Ocala Funding.
“Accounts receivable can be whatever it needed to be,” Allen said.
In 2008, Ocala Funding’s chief investors were 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.
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 Troubled Assets Relief Program, according to Allen. One of the potential investors was Emanuel Friedman, former chairman of investment bank Friedman, Billings, Ramsey Group Inc.
When Friedman responded that he couldn’t do it, Allen said Farkas told him to ask Friedman whether he would act as a straw investor using money actually provided by Taylor Bean.
Friedman balked at the scheme, he said. Farkas used his name anyway, Allen said.
The case is U.S. v. Farkas, 10-cr-00200, U.S. District Court, Eastern District of Virginia (Alexandria).