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The Taylor, Bean & Whitaker investigation spawned
guilty plea number five on Friday. Paul Allen, the former CEO of the collapsed
firm, pleaded guilty to conspiracy to commit bank and wire fraud and making
false statements. U.S. v. Allen (E.D. Va.). The SEC has also brought
cases based on the failure of the firm. The Taylor Bean investigation is among
the few to generate enforcement actions despite substantial investigative
efforts into the worst market crisis since the 1930s.
Mr. Allen admitted in his plea to participating in a key
facet of the Taylor Bean fraud. It involved Ocala Funding, a wholly owned
lending facility. That facility raised money by selling commercial paper to
financial institutions such as Deutsche bank and BNP Paribas. The funds were
used to purchase TBW mortgages.
Shortly after Ocalla was set up, Mr. Allen learned that
there was a "hole," that is the assets backing the paper were inadequate. He
participated in efforts to cover up the hole by preparing false reports. The
reports were sent to investors. The hole was moved to Colonial Bank. At the
time TBW ceased operations it was about $1.5 billion.
In March 2009 Mr. Allen approached private equity
investors to secure the $300 million private capital requirement of the U.S.
Treasury for Colonial Bank. Meeting the requirement meant that the bank would
be eligible for $553 million in TARP funds. Mr. Allan secured the financing but
Taylor Bean's former chairman diverted $5 million to an escrow account in an
investor's name. Nevertheless, Colonial Bank announced it has met the
requirement and sent a letter to the FDIC confirming the representation. The
announcement and the letter were false. The bank however never obtained the
TARP funding. Mr. Allen also admitted furnishing false information to the
government regarding TBW's audited financial statements for the fiscal year
ended on March 31, 2009.
The Taylor Bean investigation is one of dozens of market
crisis inquiries the Department of Justice and the SEC have conducted in the
years since the market crisis began. The SEC, for example, told congress in
2008 that it had multiple working groups conducting investigations of the
financial crisis. Undoubtedly DOJ and the FBI had similar working groups. Yet
the Taylor Bean investigation is one of the few to result in a series of cases.
This week a congressional committee is scheduled to hold hearings on this
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
more news involving securities issues, visit SEC Actions, a
blog by Thomas Gorman