Securities Law Blog

The Securities and Exchange Commission (SEC) charged Lee B. Farkas on June 16, 2010 with piloting a large-scale securities fraud scheme and attempting to scam the U.S. Treasury’s Troubled Asset Relief Program (TARP). The former chairman and majority owner of Taylor, Bean & Whitaker Mortgage Corp. (TBW) was arrested on June 15, 2010 by U.S. authorities on similar charges.

From March 2002 until August 2009, Farkas allegedly sold $1.5 billion in fabricated or impaired mortgage loans and securities to Colonial Bank through TBW. The loans were reportedly misrepresented to the investing public as high-quality, liquid assets.

The SEC alleged that Farkas also caused Colonial Bank’s parent company Colonial BancGroup, Inc. to misrepresent its assets to TARP officials that it had obtained commitments for a $300 million capital infusion, which would qualify Colonial Bank for TARP funding. Colonial BancGroup then issued a press release announcing that it had obtained preliminary approval to receive $550 million in TARP funds, causing its stock price to jump 54 percent in two hours.

Since TBW did not have sufficient capital to internally fund the mortgage loans it originated, it relied on financing agreements mostly through Colonial Bank’s Mortgage Warehouse Lending Division (MWLD). According to the SEC complaint, when TBW began experiencing liquidity problems, it overdrew its limited warehouse line of credit by about $15 million per day. To conceal the overdraws, Farkas allegedly pressured a Colonial Bank officer into entering certain debits the following day after credits due were entered. As the cover-up increased in scope, TBW was purportedly overdrawing its accounts with Colonial by about $150 million per day.

In the complaint filed by the SEC in the U.S. District Court for the Eastern District of Virginia, Farkas is also charged with creating and submitting fictitious loan information to Colonial Bank, and that he allegedly directed the creation of fictitious mortgage-backed securities assembled from fraudulent loans.

According to the criminal indictment, the U.S. alleges that Farkas’ scheme has cost investors and the U.S. government over $2 billion. The Federal Housing Administration reportedly lost $3 billion because of TBW’s alleged misstatements about the health of loans it was servicing for the public housing agency.

The indictment claims that Farkas personally stole $20 million through the scheme to support his fondness of corporate jets and classic cars.

A lawyer for Farkas said that he would enter a plea of “absolutely not guilty, will vigorously defend against the charges and looks forward to having his day in court to clear his name.”

The SEC charges Farkas with violations of antifraud, reporting, books and records and internal controls provisions of the federal securities laws. The industry regulator seeks permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties. They will also seek an officer-and-director bar against Farkas as well as an equitable order prohibiting him from serving in a senior financial institution and from holding any position involving financial reporting or disclosure at a public company.

If found guilty on criminal charges, Farkas could face a maximum of 435 years in jail, $13.8 million in fines, and the forfeiture of $22 million, according to court papers.