Fla. mortgage exec on trial for alleged $2B fraud

AP News
Posted: Apr 04, 2011 6:54 PM
Fla. mortgage exec on trial for alleged $2B fraud

Prosecutors on Monday accused the owner of what had been one of the nation's largest private mortgage companies of lying and stealing on a staggering scale at the outset of a trial involving the national housing crisis.

Lee B. Farkas, the former chairman and majority owner of Ocala, Fla.-based Taylor Bean & Whitaker, is charged with 14 counts of fraud for allegedly stealing roughly $2 billion from three different banks and trying to defraud the federal government out of more than $500 million from its bank bailout program, the Troubled Assets Relief Program (TARP).

Taylor Bean collapsed in 2009 as federal authorities investigated the company, putting 2,000 employees out of work. The fallout also contributed to the collapse of what had been the nation's largest regional bank, Alabama-based Colonial Bank. Its failure was the sixth largest in U.S. history.

In opening statements, defense lawyers argued that Farkas is innocent and the government does not understand the complex financial transactions between Taylor Bean and its lenders. Taylor Bean had collateral to back up all of its outstanding debts until the government stepped in to essentially revoke what had been the company's greatest asset, its $700 million mortgage servicing business, defense lawyer Craig Kuglar said.

"The government didn't do their homework," Kuglar told the jury. "They didn't take the time to understand before they shut down Mr. Farkas' company."

Prosecutor Patrick Stokes said many transactions at the heart of the government's case are complicated and technical, "but reduced to its essence this story is simple: TBW needed money and the defendant and his conspirators went out and stole it."

The fraud began back in 2002, Stokes said, when Taylor Bean was suffering from a cash crunch. It was overdrawing on its main account with Colonial Bank. Farkas convinced executives at Colonial to cover up the overdrafts and hide them from auditors and regulators.

The Colonial executives, who derived significant amounts of business from Taylor Bean, agreed at first because they believed Taylor Bean would turn the tide. But by the end of 2003, Taylor Bean's overdrafts totaled more than $100 million, and the Colonial bankers were now complicit in the scheme.

The Colonial bankers "were stuck. Taylor Bean and Whitaker had them over a barrel," Stokes said.

In subsequent years, the scheme grew and Taylor Bean found different ways to hide its growing debt to Colonial, the government alleged. Taylor Bean sold worthless mortgages to Colonial, some that had already been sold to other investors and some that were fictitious altogether. By 2009, Taylor Bean had sold more than $500 million in fake loans to Colonial, Stokes said.

Taylor Bean also created a subsidiary company called Ocala Funding that sold commercial paper _ essentially IOUs _ to some of the world's largest banks, including Deutsche Bank and BNP Paribas. Farkas and others drained more than $1.5 billion out of Ocala Funding, in part to pay back Colonial and in part to finance Farkas' lavish lifestyle, which included a private jet and a collection of classic automobiles, Stokes said. In the end, the commercial paper held by BNP Paribas and Deutsche bank was worthless.

Finally, Farkas and Colonial tried to close the hole in their finances by seeking relief from the government under TARP. The government initially gave conditional approval to providing more than $500 million to Taylor Bean and Colonial, but the money ultimately was never doled out. And investigators with the office of TARP's inspector general eventually helped uncover the alleged fraud.

Neil Barofsky, who recently resigned as TARP's special inspector general, has called the Farkas case "the most significant criminal prosecution to date rising out of the financial crisis." Roughly a half-dozen executives at Taylor Bean and Colonial have already pleaded guilty to their roles in the fraud and are expected to testify at Farkas' trial, which is expected to last about three weeks.

Farkas' lawyer, Kuglar, said Barofsky "put TBW into a death spiral" by launching a public investigation that caused other companies to stop doing business with Taylor Bean. Farkas' lawyers indicated they might call Barofsky as a witness.

Farkas' defense also said actor John Travolta might be called to testify, though they declined to comment on why. Travolta lives in the same town as Farkas.