by T. GormanPosted on Posted in SECActions

The Department of Justice and the SEC filed actions against Lee Farkas, former chairman of mortgage lender Taylor, Bean & Whitaker which center on the market crisis. U.S. v. Farkas (E.D. Va. Filed June 16, 2010); SEC v. Farkas, Civil Action No. 1:10cv667 (E.D. Va. Filed June 16 2010). The sixteen count indictment charges Mr. Farkas with conspiracy, bank fraud and securities fraud based on a $1.9 billion scheme which is alleged to have contributed to the failure of his company and Colonial Bank and efforts to defraud the Troubled Asset Relief Program. The SEC’s complaint alleges violations of the antifraud and reporting provisions of the federal securities laws.

Prior to its collapse, Taylor Bean was the largest non-depository mortgage lender in the country. The company was controlled by its majority owner and chairman Lee Farkas. Prior to its seizure by the Alabama State Banking Department, Colonial BancGroup, Inc., the parent of Colonial Bank, was one of the fifty largest banks in the U.S. The shares of the holding company were listed on the New York Stock Exchange.

Beginning in 2002, Taylor Bean suffered liquidity problems and had overdrafts in its accounts at Colonial Bank with whom it had a long standing relationship. In an effort to conceal the cash shortages and overdrafts, Mr. Farkas caused Taylor Bean to shuffle money between accounts at the bank. As the size of the overdrafts increased, Mr. Farkas had Taylor Bean sell a $400 million package of mortgages to Colonial Bank. Part of that package had been previously sold. The mortgages were essentially fake, according to the court papers. Colonial, however, carried the worthless assets on its books, according to the court papers.

Taylor Bean is also alleged to have carried millions of dollars worth of impaired value loans on its books. Mr. Farkas used a series of sham transactions to conceal the true value of these assets.

The indictment also claims that Mr. Farkas caused hundreds of millions of dollars to be misappropriated from Ocala Funding, a mortgage lending facility controlled by Taylor Bean. Ocala Funding sold commercial paper to banks. That paper was required to be backed by cash and/or mortgage loans equal to the outstanding paper. Documents furnished to the purchasers of the commercial paper represented that it was properly collateralized. Those claims were false. For example, in August 2009 Deutsche Bank and BNP Paribas Bank held about $1.68 billion in Ocala Funding commercial paper which was backed by only $150 million in cash and mortgage loans. When Taylor Bean failed in August 2009, the two banks could not redeem the commercial paper.

In the fall of 2008, Colonial Bank’s holding company applied for $570 million in taxpayer funding through a subsidiary of TARP. As part of the application, Colonial furnished financial information which was false because it listed the fraudulent assets acquired from Taylor Bean.

In connection with the funding application, the Treasury Department required that bank raise $300 million. Mr. Farkas, who lead the effort to meet this requirement, claimed to have raised an initial $30 million from investors. In fact, the cash was diverted from Ocala.

Mr. Farkas was arrested in Florida. The SEC’s investigation is continuing. These cases were brought in coordination with the Financial Fraud Enforcement Task Force.

by T. GormanPosted on Posted in SECActions

Christopher F. Finazzo, former Executive Vice President and Chief Merchandising Officer of Aeropostale, Inc., and Douglas Dey, owner of South Bay Apparel, Inc., were charged in a twenty-eight count indictment. The charges center on a claimed kickback scheme. The indictment contains counts of conspiracy, wire and mail fraud and money laundering as to both men and, in addition, charges Mr. Finazzo with making false statements to the SEC. U.S. v. Finazzo, Case No. 10 cr 00457 (E.D.N.Y. Filed, June 11, 2010). The indictment follows investigations by the U.S. Attorneys Office for the Eastern District of New York and the SEC and was brought in coordination with the President’s Financial Fraud Enforcement Task Force.

Aeropostale is third largest teen clothing company. South Bay Apparel sold clothing to Aeropostale. From August 1996 through November 2006, Aeropostale paid over $350 million to South Bay. In connection with those transactions, Mr. Dey agreed to pay about 50% of his firm’s profits to defendant Finazzo. Approximately $14 million of those profits were paid to a company controlled by Mr. Finazzo, C&D Retail Consultants, Inc. The balance was invested in joint ventures with Mr. Finazzo, according to the indictment.

The defendants concealed their transactions from Aeropostale and its employees as part of their fraudulent scheme. Mr. Finazzo is also alleged to have falsely stated in numerous company questionnaires that he was not engaged in any related party transactions. That resulted in the company falsely reporting in filings made with the SEC that it did not engage in related party transactions.

In a November 2006 filing, Aeropostale disclosed that it fired Mr. Finazzo after it discovered he had concealed personal ownership interests in entities affiliated with South Bay. Those interests violated the company’s code of business ethics and Mr. Finazzo’s employment agreement, according to the filing.

Subsequently, the SEC issued a formal order of investigation focused on the events surrounding the termination. Mr. Finazzo then sued the SEC claiming that it breached his attorney-client privilege by obtaining an e-mail he sent to his attorney discussing the undisclosed relationships. The e-mail had been discovered by Aeropostale. The suit against the Commission was subsequently dismissed.

The criminal charges are in litigation.