Friday, February 25, 2011

More details of Colonial investigation emerge in plea agreement

As reported here yesterday, former Taylor Bean & Whitaker executive Desiree Brown agreed to plead guilty to federal fraud and securities charges in an Alexandria, Virginia court hearing. As a result of that plea deal and from news reports covering the hearing, some interesting new details are emerging.

From the Bloomberg story that hit yesterday afternoon, it is apparent that the scheme to defraud the US Troubled Asset Relief Program involved more people than just Lee Farkas and Brown, and Farkas himself has entertained offers for a deal.

Until today, Farkas, 58, was the only person charged in what the government said was a massive scheme to deceive financial firms and TARP by covering up shortfalls at Taylor, Bean, once the largest non-depository mortgage lender in the U.S., according to the SEC’s statement on the case. Farkas was indicted on 16 counts in June and faces the possibility of spending the rest of his life in prison, according to a Justice Department statement.

“Were there other people besides Mr. Farkas who were involved in this scheme,” U.S. District Judge Leonie M. Brinkema asked Brown at the plea hearing?

“Yes ma’am,” Brown answered.

In the criminal case, Brown admitted that from late 2003 through August 2009, she, Farkas and other unidentified individuals conspired to defraud Colonial Bank, Colonial BancGroup Inc., shareholders of Colonial BancGroup, TARP, and investors in Ocala Funding LLC, which included Deutsche Bank AG and BNP Paribas SA, according to Brown’s statements in court and a Justice Department statement.

One of the goals of the scheme was to obtain funding for Taylor, Bean to help cover expenses for operations and “servicing payments owed to third-party purchasers of loans and/or mortgage-backed securities,” the department said in the statement.

On June 15, 2010, after nearly a year of investigations, depositions and grand jury hearings, the Department of Justice indicted Lee Farkas, Chairman and CEO of Taylor, Bean & Whitaker Mortgage Corp, which at the time was one of, if not the largest originator of home mortgages in the country.  Farkas and Taylor Bean were one of Colonial's largest customers, using Colonial’s “warehouse” lending unit to finance the origination of mortgages which Taylor Bean then packaged and sold to Fannie Mae and Freddie Mac. 

imageIn the indictment and the accompanying SEC filings, the government contends that Farkas and an unnamed “Colonial Bank Officer” conspired and engaged in a complicated check kiting scheme to conceal Taylor Bean’s nefarious financial dealings.  Later, as things began to unravel during Spring 2009, court documents show that Farkas conspired with a “Senior BancGroup Officer” to conceal a fraudulent scheme to obtain TARP funding from the government.  It is not known who the “Colonial Bank Officer” was that helped Farkas conceal transactions from regulators.  The “Senior BancGroup Officer” is believed to be Bobby Lowder.

More from the Bloomberg story:

William Cummings, a lawyer for Farkas, attended today’s hearing. In an interview, he said he expected more guilty pleas before his client goes to trial. He said his client, who has pleaded not guilty, has had some settlement discussions with the government though “nothing has come out of it yet.”

Brown said in court that she has been talking with the government for the past six months. Brown was vice president of special projects at Taylor, Bean starting in October 2002. In 2004, she was named controller and then treasurer.

While it is still much too early to be certain, the details emerging from yesterday’s hearing indicate that the noose is tightening around the neck of the former CEO of Colonial BancGroup.  Brown acknowledges a broader conspiracy to defraud TARP and Farkas himself is considering copping to a plea deal.

It bears noting that as a non-depository mortgage company, Taylor Bean was not eligible to receive TARP funding. That money would necessarily have gone to Colonial, and Mr. Micromanager—who is known to make calls to political figures when their $50,000 loans are 15 days late—would absolutely been in near complete control of any plans to secure the hundreds of millions sought by Colonial.

Extra Point: What a Shakespearean tragedy is unfolding here.  Lowder, the micromanager, would surely be a key player in any NCAA and legal wrongdoing at Auburn University. After all, he is the Tiger of Trustees at the school, controlling the school’s finances and pumping millions into the Tigers Unlimited slush fund foundation. The micromanager was also key to Colonial’s rise and meteoric crash two years ago.  The man’s friends say he has had two great loves in his life: His banking empire and Auburn.

But his micromanaging—and some say his arrogance—may lead to the destruction of them both.

The bard himself would weep.

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