U.S. government accuses former mortgage executive of multibillion-dollar scam
Thursday, June 17, 2010
The U.S. government accused the former chairman of one of the nation's largest mortgage firms of a multibillion-dollar scam Wednesday, unveiling what is to date the biggest criminal case related to the crisis that nearly brought down the financial system.
The Justice Department accused Lee Bentley Farkas of Taylor, Bean & Whitaker of committing a $1.9 billion fraud against investors and the federal government that led to the demise of his firm and one of the nation's largest regional banks, Colonial Bank in Alabama.
But beyond the indictment, federal officials described an even wider scheme, and they said the collateral damage to federal agencies has only begun to be tallied.
Taylor Bean allegedly hid how sick it had become, enabling the firm to fraudulently meet government conditions and become one of the largest business partners of the Federal Housing Administration and Ginnie Mae, federal agencies that cover losses suffered by mortgage lenders and their financiers. Federal officials said the scheme caused the two agencies' largest losses ever, totaling at least $3 billion. The officials warned that the final figure could be higher.
Taylor Bean's activities could also prove costly to Freddie Mac, which helps finance mortgage lending. Freddie Mac officials have said they could face losses on more than $1 billion in assets that are at risk because of the Taylor Bean and Colonial failures, but they have yet to clarify the ultimate cost. Meanwhile, the Federal Deposit Insurance Corp. paid out $4 billion from its insurance fund to cover the collapse of Colonial.
"The fraud alleged here is truly stunning in its scale and in its complexity,'' Assistant Attorney General Lanny A. Breuer said at a news conference. He said Farkas's arrest "sends a strong message to corporations and corporate executives alike that financial fraud will be found and it will be prosecuted."
Under pressure to bring more criminal cases related to the financial meltdown, the Justice Department has made such fraud a top priority.
Farkas was arrested in his car Tuesday night after working out at a gym he owns in Ocala, Fla. He was indicted by a federal grand jury in Alexandria on bank, wire and securities fraud and other charges.
An attorney for Farkas, Anthony Cochran, said his client will plead not guilty and will "vigorously defend against the charges. He looks forward to having his day in court to clear his name."
The court documents, in part, accuse Farkas of trying to destroy evidence to cover up the scheme and say he used about $20 million in Taylor Bean funds for personal expenses such as payments on a private jet and three Florida properties.
He is also charged with trying to defraud the Treasury Department of $553 million in a scheme that he and other conspirators dubbed "Project Squirrel," officials said. As Taylor Bean's losses mounted, he allegedly covered them with money from Colonial Bank and then tried to help Colonial by tapping into the emergency bailout program for the banking system, falsifying documents and shuffling hundreds of millions of dollars among firms in a bid to make the bank look healthier than it was. The scam was detected by a special inspector general at Treasury before the government paid out any money, officials said.
Taylor Bean primarily acted as a middleman between lenders and investors who provide financing by buying big bundles of home loans. Half its business was with the FHA. Last summer, the FHA and Ginnie Mae ended the relationship with Taylor Bean. Ginnie Mae took over $26.8 billion worth of the loans that Taylor Bean was servicing. The move forced Taylor Bean, once one of the nation's largest privately held mortgage companies, to file for bankruptcy protection.