Lee Farkas, the ex-chairman of Taylor, Bean & Whitaker Mortgage Corp., was found guilty of 14 counts of conspiracy and bank, wire and securities fraud in what prosecutors said was a $3 billion scheme involving fake mortgage assets.
A federal jury in Alexandria, Virginia, yesterday returned the verdict after one day of deliberations. Farkas, who was free during the trial, was taken into custody. He faces a maximum sentence of 30 years on the conspiracy and bank-fraud charges and 20 years or more on the wire-fraud and securities-fraud counts when he’s sentenced on July 1.
Prosecutors said Farkas, 58, orchestrated one of the largest and longest-running bank frauds in the U.S. that duped some of the country’s largest financial institutions, targeted the federal bank bailout program and contributed to the failures of Taylor Bean and Montgomery, Alabama-based Colonial Bank.
Assistant Attorney General Lanny Breuer, head of the Justice Department’s criminal division, said Farkas’s fraud “poured fuel on the fire” of the financial crisis.
“The financial crisis has many faces and today Lee Farkas’s face is one of them,” Breuer, who attended part of the trial, said after the verdict in a conference call with reporters.
Breuer said the government’s investigation into the fraud scheme is “ongoing.” He declined to say whether additional people might be charged.
Prosecutors spent eight days laying out the allegations for jurors. The government called 23 witnesses, including officials at Freddie Mac, Bank of America Corp. and Deutsche Bank AG. Six of those who testified were former colleagues or associates of Farkas who had pleaded guilty to conspiracy charges.
Farkas used Taylor Bean as his own “personal piggy-bank” and stole more than $30 million from the company he built to buy homes, cars, airplanes, restaurants and other side businesses, said Assistant U.S. Attorney Charles Connolly during closing arguments.
Farkas, who denied any wrongdoing, testified on his own behalf and called two former Taylor Bean employees and a forensic accountant in his defense.
William Cummings, one of Farkas’s lawyers, said the defense team is disappointed with the verdict.
“We fought hard,” said Cummings, a former U.S. attorney in Virginia. “Getting six former colleagues to plead guilty and testify is a difficult obstacle to overcome.”
Cummings said he was surprised U.S. District Judge Leonie Brinkema ordered Farkas to be jailed, adding that the judge said she would hear arguments next week on whether he should be released while he awaits sentencing.
Prosecutors are seeking to seize 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, 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.
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 $900 million in unmarketable residential mortgage loans and securities, said Patrick Stokes, deputy chief of the U.S. Justice Department’s fraud section, during closing arguments.
Farkas and his co-conspirators diverted cash from Ocala Funding LLC, a financing vehicle used and controlled by Taylor Bean, to cover its losses, prosecutors said.
Ocala Funding issued asset-backed commercial paper to financial institutions including Deutsche Bank, 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.
As Colonial Bank struggled to stay afloat, Farkas tried to raise $300 million from private investors to secure a $550 million cash infusion from the federal Troubled Asset Relief Program, according to Paul Allen, the company’s former chief executive officer who pleaded guilty to the conspiracy. Farkas was convicted of falsely representing that he had commitments from investors for the money.
Colonial never got the TARP funds, the U.S. said.
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.
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).