FORMER TAYLOR BEAN CHAIRMAN FOUND GUILTY

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.

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. Tthe 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 necessary assets.

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.

A PONZI SCHEME CASE WITH A BETTER ENDING

Ponzi scheme cases are now a staple of SEC enforcement. Over the last year or more the Commission has brought dozens of these cases. Most have the same common elements. The promoter has a trading or investment system. The investment is safe potential investors are told. It also has good returns. A good history reassures investors. The returns are spectacular for some schemes while for others they are steady and reliable regardless of the market conditions. Above average returns holds their interest. The investors flock in. Millions of dollars flow to the promoter. In many cases investors are told about their good returns. Some investors are even paid part of the returns. Life is good, particularly for the promoter who is living large with part or all of the investor cash. The end is predictable. The scheme crashes and law enforcement cleans up the scam. By that date of course there is little to nothing left for the investors.

Prior to Madoff SEC and other law enforcement officials use to claim that these schemes were very difficult to detect. Few cases were brought. One of the early actions which now has a better ending for investors than most is SEC v. HKW Trading, LLC, Case No. 8:05-cv-10767 (M.D. Fla. Filed June 9, 2005).

The fraud differs little from most. Howard Waxenberg was alleged to have run a Ponzi scheme through his control of Downing & Associates Technical Analysis, Howard Waxenberg Trading, LLC and HKW Trading LLC. Over a fifteen year period beginning in 1990 Mr. Waxenberg and his controlled entities raised over $70 million from about 200 investors. The scheme Mr. Waxenberg sold investors was “day trading.” This trading technique yielded 20% returns according to Mr. Waxenberg. During its operation investors were sent account statements depicting their returns as promised by Mr. Waxenberg.

As with other similar schemes the account statements were false. The day trading was false. In fact the money was put in low return money market funds – at least in part. Mr. Waxenberg took over significant portions of the money for his personal use according to the complaint.

The Commission’s action started shortly after Mr. Waxenberg committed suicide. At that point the scheme crashed. The SEC filed suit and obtained a freeze order and the appointment of a receiver, Florida attorney Burton W. Wiand. Over the last several years Mr. Wiand and his firm have traced the assets and litigated clawback suits. Now, with recent court approval of the final report prepared by Wiand Guerra King P.L., investors will receive at least part of their money back. That is a far better result than in many similar cases.