Bloomberg | February 24, 2011
By Tom Schoenberg

The former treasurer of Taylor, Bean & Whitaker Mortgage Corp., once the 12th largest mortgage lender in the U.S., admitted helping run a $1.9 billion fraud scheme that targeted the government’s Troubled Asset Relief Program and contributed to the failure of Colonial Bank.

Desiree Brown, 45, pleaded guilty in federal court in Alexandria, Virginia, to conspiring to commit wire fraud, securities fraud and bank fraud, and agreed to cooperate with prosecutors bringing Lee Farkas, former chairman of Taylor, Bean, to trial on April 4. Brown also settled civil charges with the Securities and Exchange Commission, the SEC said.

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.

Brown, of Hernando, Florida, faces a maximum penalty of 30 years in prison, a $250,000 fine and an order to pay restitution to more than 250 victims. Brown, who is to be sentenced on June 10, was released on a $50,000 unsecured bond.

Hidden Overdrafts

The crime included conspiring to transfer funds between closely held Taylor Bean and Colonial Bank, a unit of Colonial BancGroup Inc., to hide overdrafts, prosecutors said. The bank was one of the 50 largest in the U.S., according to the government.

The SEC’s complaint alleges Brown violated antifraud, reporting, books and records and internal controls provisions of federal securities laws. She agreed to an injunction against future violations without admitting or denying the SEC’s allegations.

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.

Scheme to Defraud

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.

The U.S. said the scheme contributed to the failures of Colonial Bank and Taylor, Bean, which was based in Ocala, Florida.

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.

Fake Mortgage Assets

Brown, Farkas and unnamed conspirators sold Colonial Bank more than $400 million in fake mortgage assets in a scheme they called “Plan B,” according to the Justice Department statement.

The conspirators sent mortgage data to Colonial Bank for loans that didn’t exist or that Taylor, Bean had already committed or sold to other third-party investors, the Justice Department said.

“As a result, the Plan B loan data was recorded in Colonial Bank’s books and records, and gave the false appearance that Colonial Bank had purchased legitimate interests in mortgage loans from TBW,” the department said.

Brown, Farkas and the conspirators diverted more than $1 billion from Ocala Funding, a mortgage lending facility controlled by Taylor, Bean & Whitaker to cover its losses, according to the statement.

Ocala Funding sold asset-backed commercial paper to financial institutions including Deutsche Bank, Germany’s biggest bank, and Paris-based BNP Paribas, according to Farkas’s indictment.

Operating Losses

In 2008, when Taylor, Bean’s operating losses mounted, Farkas and his conspirators allegedly tried through Colonial BancGroup, Colonial Bank’s Montgomery, Alabama-based holding company, to obtain about $553 million through TARP, prosecutors said.

The application for funding included false information, and investigators detected irregularities before any TARP money was released, according to the Justice Department.

Alabama regulators seized Colonial Bank in 2009 and the Federal Deposit Insurance Corp. was appointed as receiver. Colonial BancGroup filed for bankruptcy in 2009.

The Brown case is USA v. Brown, 1:11-cr-00084, and the Farkas case is USA v. Farkas, 1:10-cr-00200, U.S. District Court, Eastern District of Virginia (Alexandria).