Gov't: Mortgage co. owner Farkas led $3B fraud

AP News
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Posted: Apr 18, 2011 4:24 PM
Gov't: Mortgage co. owner Farkas led $3B fraud

Prosecutors told a jury Monday that the owner of what had been one of the nation's largest private mortgage companies ran one of the largest and longest running fraud schemes in the U.S., dismissing his assertion that he was unaware of the crimes that occurred around him.

A federal jury heard closing arguments in the case against Lee B. Farkas, the former chairman and majority owner of Ocala, Fla.-based Taylor Bean and Whitaker. Prosecutors said Farkas was the ringleader of a scheme that has already resulted in six guilty pleas to a fraud that totaled nearly $3 billion. Taylor Bean collapsed in 2009, causing its more than 2,000 employees to lose their jobs. Taylor Bean's primary banker, Alabama-based Colonial Bank, also collapsed in 2009 _ the sixth-largest bank collapse in U.S. history.

Federal officials have said the case against Farkas is the most significant to develop out of the nation's financial crisis.

Farkas' lawyer, Bruce Rogow, told jurors that the six executives at Taylor Bean and Colonial who struck plea deals and testified against Farkas skewed their testimony in hopes of receiving lighter prison sentences.

"Those six co-conspirators pled guilty to save themselves because they didn't have the courage that Mr. Farkas did" to go to trial and make the government prove its case, Rogow told the jury.

Farkas testified in his own defense Friday, telling the jury he believed he did nothing wrong as Taylor Bean waged a long-running campaign to get its finances in order. He testified that he was unaware and uninvolved in details of some of the largest, most significant aspects of the alleged fraud.

According to prosecutors, the fraud began in 2002, when Taylor Bean overdrew its main account with Colonial by several million dollars. Mid-level executives at Colonial agreed to transfer money into Taylor Bean's accounts at the end of each day to avoid generating overdraft notices, a process known as "sweeping."

As the hole grew to well over $100 million, Taylor Bean and a handful of Colonial executives concocted a scheme in which Taylor Bean sold hundreds of millions in worthless mortgages to Colonial, mortgages that had already been sold to other investors. More than $1 billion in such phony mortgages were eventually sold to Colonial, which listed them on its books and on its quarterly reports as legitimate assets, prosecutors alleged.

In a related scheme, Taylor Bean created a subsidiary called Ocala Funding that sold commercial paper _ essentially glorified IOUs _ to banks including Deutsche Bank and BNP Paribas. But prosecutors said the collateral that supposedly backed that commercial paper was worthless, and when Taylor Bean collapsed in 2009, the two banks lost roughly $1.5 billion.

Finally, Taylor Bean tried to use its cooked books to help Colonial secure more than $500 million in funding from the federal bank bailout program, called the Troubled Assets Relief program (TARP). At one point, TARP issued conditional approval for the funding, but neither Colonial nor Taylor Bean ultimately received any TARP funds, and investigators with TARP, along with the FBI and other agencies, eventually helped uncover the fraud.

Prosecutors said Farkas exploited the Colonial bankers who first agreed to cover up his overdrafts, knowing they would be in trouble with their bosses if their assistance was discovered. According to testimony, Farkas summed up the Colonial bankers' problem succinctly in a conversation with then-Taylor Bean President Raymond Bowman, telling him: "If I owe you $100, I have a problem. If I owe you $1 million, you have a problem."

"The defendant knew about the fraud scheme and knew it was wrong," prosecutor Charles Connolly told the jury, saying it was simply not credible to believe that the owner of a company with annual profits in the $25 million range would be unaware of a $3 billion hole, especially in light of more than 100 e-mails entered into evidence in which Farkas discussed various aspects of the alleged fraud.

Prosecutors said Farkas was motivated by greed and a lavish lifestyle that included a private jet, a seaplane, houses up and down the East Coast, a collection of several dozen classic cars and an executive dining room at company headquarters that served pheasant and caviar.

Rogow said the evidence of Farkas' extravagance was a red herring designed to inflame to the jury, "a populist kind of thing they were trying to foist on you."

The jury began deliberations Monday afternoon on 13 counts of bank fraud, wire fraud and securities fraud, and an additional conspiracy county. Farkas, 58, could face up to life in prison.