By David Cho and Jerry Markon
Washington Post Staff Writer
Thursday, June 17, 2010; A01
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.
Taxpayers could end up paying for some of Farkas's alleged activities. The FHA, Ginnie Mae and the FDIC all maintain industry-financed funds to cover losses. But if those funds become depleted, further losses are covered by taxpayer money. Freddie Mac was seized in 2008 by the federal government and all its losses are covered by taxpayers.
The $3 billion loss at the FHA and Ginnie Mae was announced by the Department of Housing and Urban Development's inspector general. An FHA spokeswoman could not immediately verify that figure. She noted that since the Taylor Bean case came to light last summer, the agency has tightened standards and barred hundreds of partner firms. Ginnie Mae officials declined to comment publicly about the case.
Farkas faces a likely sentence of life in prison under federal sentencing guidelines if convicted, according to a motion the government filed to detain him in Florida until his trial in Alexandria. The Securities and Exchange Commission filed a separate civil complaint. Other government agencies could also seek relief if Farkas is found guilty.
Federal authorities said the investigation will continue, suggesting that other arrests could be made. Court documents refer to unidentified co-conspirators at Colonial who helped Taylor Bean run up tens of millions of dollars in overdrafts to cover its inability to meet operating expenses. Farkas and those others are accused of then hiding the overdrafts by having Colonial buy more than $400 million in fake mortgage assets from Taylor Bean, including loans that Taylor Bean had already sold to other investors.
Farkas and co-conspirators also misappropriated about $1.5 billion from a Taylor Bean-owned firm that Farkas used to cover his company's operating losses, authorities said.
Prosecutors said the scheme was discovered after Neil Barofsky, Treasury's special inspector general for the Troubled Assets Relief Program, began investigating last year inaccurate statements that Colonial's parent company made in its application for bailout funds.
"Taxpayers have paid a hefty price for crimes related to the current financial crisis,'' said Neil H. MacBride, the U.S. attorney in Alexandria. He said investors in Colonial and Ocala Funding -- the Taylor Bean-owned firm allegedly defrauded out of about $1.5 billion -- "were among those directly affected by this conspiracy.''
MacBride said the case was brought in Alexandria because some investors who were victims of the scheme live in Northern Virginia and because Freddie Mac is based in McLean.
Staff writer Dina ElBoghdady contributed to this report.