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The collapse of Taylor, Bean & Whitaker, which
tumbled Colonial Bank into liquidation, is one of the few market crisis
investigations to yield multiple criminal indictments and SEC enforcement
actions. Taylor Bean was one of the largest privately held mortgage lending
companies in the country. Colonial Bank was one of the 25 largest banks in the
U.S. prior to its seizure by state banking authorities. To date seven
individuals have been criminally charged and/or named in SEC enforcement
actions: Lee Farkas, former chairman of Taylor Bean; Paul Allen, former CEO of
Taylor Bean; Raymond Bowman, former president of the mortgage company;
Catherine Kissick, former vice president of Colonial Bank; Teresa Kelly former
operations supervisor for Colonial Bank; and Sean Ragland, former senior
financial analyst at Taylor Bean. All pleaded guilty to criminal charges except
Mr. Farkas chose to present his case to a jury. Following
a ten day trial the jury found him guilty on one count of conspiracy to commit
bank, wire and securities fraud, six counts of bank fraud, four counts of wire
fraud, and three counts of securities fraud. Sentencing is scheduled for July
1, 2011. U.S. v. Farkas (E.D. Va.).
A billion dollar fraud was at the center of the collapse
of both entities. The fraud involved four overlapping schemes and the diversion
of millions of dollars to the personal use of Mr. Farkas. It traces to 2002.
The one-time lender was chronically short of cash. To cover those shortages
Mr. Farkas and his confederates engaged in what amounted to a check kiting
scheme. Money was shuffled among the Taylor Bean accounts at Colonial Bank in
an effort to conceal the lack of cash.
As the cash shortage ratcheted up toward $100 million
part two of the scam, which the conspirators called "Plan B," was unfolded.
Taylor Bean sold $1.5 billion of mortgage loan assets to Colonial Bank. Taylor
Bean got much needed cash. The bank got securities it carried as assets the
financial statements. The cash was not enough for Taylor Bean. The securities
were largely worthless or, in some instances, had been sold to others. Taylor
Bean was still short of cash. Now however Colonial was out the cash and had
false books. Its SEC filings were false.
A third part of the scheme involved a credit facility
known at Ocala funding. This facility sold asset-baked commercial paper to
financial institution investors such as Deutsche Bank and BNP Paribas Bank. The
facility was required to maintain collateral in the form of cash and/or
mortgage loans which at least equaled to the value of the outstanding commercial
paper. That cash was however diverted to Taylor Bean. The facility had what Mr.
Farkas and his associates called "the hole" or insufficient capital to cover
its obligations. That "hole" grew to about $1.5 billion. Holders of the
commercial paper such as Deutsche Bank and BNP Paribas were furnished with
financial information which concealed the hole and was thus false. Eventually
the facility collapsed and creditors could not be fully repaid.
In a final facet of the scheme false representations were
made to the government in an effort to obtain TARP funds for the bank. To
obtain those funds Colonial was required to have $300 million in private
capital. While at one point Mr. Farkas told the bank that the necessary funds
were available in fact the representation turned out to be false. The
application for the funds by the bank thus incorrectly stated that it had the
As these multiple schemes were executed Mr. Farkas
diverted $25 million to his personal use. The money was used to support his
life style which collapsed with the demise of his business and the filing of
criminal charges of which he has now been convicted.
For more cutting edge commentary on developing
securities issues, visit SEC Actions, a blog by Thomas
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