Lee Farkas was once chair of what was on paper the nation's largest non-bank mortgage lender.
But according to the Securities and Exchange Commission, Farkas' Taylor, Bean & Whitaker (TBW) Mortgage Corp. was largely a house of cards.
On Wednesday, the SEC said Farkas repeatedly engaged in fraud during the housing bubble years.
According to the SEC's complaint, Farkas' fraud involved the now defunct Colonial BancGroup which filed for bankruptcy protection last year.
The SEC alleges that Farkas was responsible for a few types of fraud. First, the agency accuses Farkas of essentially engaging in a form of check kiting with a willing accessory at a Colonial unit that provided his company with the money to make mortgages.
The agency also accuses Farkas of creating mortgage backed securities he knew were of dubious value and selling them to Colonial which used them in turn to satisfy federal requirements for money from the Troubled Asset Relief Program.
An excerpt from the SEC's press release:
According to the SEC's complaint, TBW began to experience liquidity problems and overdrew its then-limited warehouse line of credit with Colonial Bank by approximately $15 million each day. The SEC alleges that Farkas pressured an officer at Colonial Bank to assist in concealing TBW's overdraws through a pattern of "kiting" whereby certain debits to TBW's warehouse line of credit were not entered until after credits due to the warehouse line of credit for the following day were entered. As this kiting activity increased in scope, TBW was overdrawing its accounts with Colonial Bank by approximately $150 million per day.
The SEC alleges that in order to conceal this initial fraudulent conduct, Farkas devised a plan for TBW to create and submit fictitious loan information to Colonial Bank. Farkas also directed the creation of fictitious mortgage-backed securities assembled from the fraudulent loans. By the end of 2007, the scheme consisted of approximately $500 million in fake residential mortgage loans and approximately $1 billion in severely impaired residential mortgage loans and securities. As a direct result of Farkas's misconduct, these fictitious and impaired loans were misrepresented as high-quality assets on Colonial BancGroup's financial statements.
The SEC alleges that in addition to causing Colonial BancGroup to misrepresent its assets, Farkas caused BancGroup to misstate to investors and TARP officials that it had obtained commitments for a $300 million capital infusion, which would qualify Colonial Bank for TARP funding. Farkas falsely told BancGroup that a foreign-held investment bank had committed to financing TBW's equity investment in Colonial Bank. Contrary to his representations to BancGroup and the investing public, Farkas never secured financing or sufficient investors to fund the capital infusion. When BancGroup and TBW later mutually announced the termination of their stock purchase agreement, essentially signaling the end of Colonial Bank's pursuit of TARP funds, BancGroup's stock declined 20 percent.