Taylor, Bean and Whitaker: Lee Farkas and the $1.5 Billion Hole

Ocala, Florida

0:02This is Ocala, Florida.

0:02On the morning of Monday the third of August, two thousand and nine, federal agents arrived at the headquarters of a mortgage company here called Taylor, Bean and Whitaker.

0:11They carried sealed search warrants.

0:11The company's chairman and principal owner was Lee Bentley Farkas.

0:15He was not a banker. His company was a private mortgage lending company.

0:23The same morning, in Orlando, a second set of warrants was served on a bank. Colonial Bank, at the office where it lent money to mortgage companies.

0:28The company from Ocala was that office's largest customer.

0:32The banker in this story is someone else. She ran the office in Orlando.

0:41The warrants were served by the inspector for the bank bailout. The Special Inspector General for the Troubled Asset Relief Program.

0:45The next day, the Federal Deposit Insurance Corporation wrote a problem bank memorandum about Colonial. It concluded the bank would need to be closed one quarter earlier than contemplated.

0:54Press reports of the raids, it recorded, had been picked up by national news outlets. The bank's cushion of cash was poor, the memo said, and that made the danger of a liquidity crisis worse.

1:09Eleven days after the warrants, on Friday the fourteenth of August, the Alabama State Banking Department closed Colonial Bank and handed it to the FDIC.

1:14Colonial was headquartered in Montgomery, Alabama, and had three hundred and forty six offices in five states. It closed with more than twenty five billion dollars in assets.

1:30Eight people would be sentenced to prison for the fraud.

1:33This is the story of a bank account that went overdrawn in two thousand and two, and of everything that was sold to fill it.

Act One: The Warehouse

1:51According to the indictment, Taylor, Bean and Whitaker was based in Ocala, and was founded in nineteen eighty two.

1:58The Justice Department called it one of the largest privately held mortgage lending companies in the United States.

2:01It made home loans and sold them on to investors. Its buyers, the indictment says, included Freddie Mac and commercial financial institutions.

2:11A company like that has a timing problem, and it is the whole business.

2:11On the day a family closes on a house, the lender has to hand over the money. The investor who will eventually buy that loan pays later. In between, somebody has to put up the cash.

2:25That somebody is a bank. The industry calls it warehouse lending. The bank advances the money, the loan sits in the warehouse, and when the investor pays, the bank is repaid.

2:30For this company, the indictment says, that bank was above all Colonial.

2:36Colonial was an Alabama bank that had grown fast. By the time it failed, the FDIC's inspector general found, it had bought twenty five banks, in fast-growing housing markets such as Florida, Nevada and Georgia.

2:46Colonial Bank ran its warehouse lending from a division in Orlando. The head of that division was a senior vice president named Catherine Kissick.

2:56One of the division's operations supervisors, who reported to Kissick, was Teresa Kelly.

3:05By June of two thousand and nine, Colonial's relationship with Taylor, Bean and Whitaker was worth three point three billion dollars. That was sixty three percent of everything the division held.

3:18At Colonial, the company had a master advance account, and an investor funding account. The master account is the one that would go overdrawn. The other held the proceeds of selling the company's loans to investors on the secondary market.

3:27The company also carried a promise it could not put down. As a servicer of loans for Freddie Mac and Ginnie Mae, the indictment says, it had to keep paying the investors on schedule, even in months when the homeowners did not.

3:40According to the court documents in Kissick's case, in early two thousand and two, the company began running overdrafts in its master account at Colonial Bank, because it could not meet its operating expenses.

3:50Those documents list them. Its payroll. The payments it owed to the investors who had bought its loans.

4:00An overdraft is a bank paying out money a customer does not have. It shows up on the bank's daily report.

4:04This one did not.

Act Two: The Sweep

4:19Between two thousand and two and two thousand and three, as the Court of Appeals set out the evidence at trial, Farkas and his co-conspirators disguised the overdrafts in the company's master advance account.

4:28They did it by sweeping.

4:33Money was moved out of the investor funding account, into the overdrawn master account, and back out again.

4:37The judge who later ruled on forfeiture described it as money moved into the account overnight, to disguise the fact that it was overdrawn.

4:47A daily report is a snapshot, taken once a day. Money that is in the right account when the snapshot is taken looks, on paper, as if it has always been there.

4:53As a result of this sweeping, the court found, Colonial Bank's daily reports did not show the overdrafts.

5:05The court named three of his co-conspirators. Ray Bowman, the president of Taylor, Bean and Whitaker. Kissick, head of Colonial's mortgage warehouse lending division. And Teresa Kelly, an operations supervisor in her division.

5:14According to the court documents the Justice Department cites, Kissick played a leadership role in the sweeping, and directed Kelly's part in it.

5:23At the mortgage company, the treasurer was a woman named Desiree Brown. She would later admit conspiring with Farkas to obtain funding for the company by fraud.

5:34A sweep has one limit that no amount of care can get round.

5:34It moves money. It does not add any.

5:39The same money was moved back and forth in front of the same hole. And the company was still short of cash, so the hole kept growing.

5:44The court put a size on it. The deficit in the company's assets at Colonial grew to well over one hundred million dollars.

5:55As it grew, the court found, the conspirators moved on to more sophisticated schemes.

6:02According to the court documents in Kissick's case, the conspirators had a name for what came next.

6:06They dubbed it Plan B.

Act Three: Plan B

6:20In the court's words, Farkas and his co-conspirators caused Taylor, Bean and Whitaker to sell sham mortgage loans, and pools of loans, to Colonial Bank.

6:25These loans, the court found, either did not exist, or had already been sold to investors.

6:36So some of what the bank was buying was nothing at all. And some of it was real, and already belonged to someone else. Either way, the court found, it was worthless, or its value was significantly impaired.

6:45A bank does not buy a mortgage by looking at a house. It buys data. A borrower. An address. An amount. A rate.

6:49According to the court documents in Kissick's case, that is how Plan B was carried out. The conspirators sent Colonial Bank mortgage data for loans that did not exist, or that the company had already committed or sold to other investors.

7:04The paperwork had a route. When the mortgage company needed an advance, the Justice Department wrote, conspirators there would wire a request to the bank, with false documentation made to look like a sale to Colonial.

7:18And according to those documents, Kissick would generally discuss new advances with Farkas, before she released the funds.

7:27On the bank's side, according to the documents in Kissick's case, false entries made it look as if Colonial owned a ninety nine percent interest in legitimate securities.

7:32In fact, those documents say, the securities had no value and could not be sold.

7:43The forfeiture judge set out one of these transactions from beginning to end.

7:43Farkas obtained fifteen million dollars from Colonial Bank.

7:47To cover it, he gave the bank a pool of loans, supposedly worth fifteen million dollars.

7:52There were no loans backing the pool.

8:00He then used the fifteen million to pay down what he owed his own company, on his shareholder account at Taylor, Bean and Whitaker.

8:10Plan B grew.

8:10By the middle of two thousand and five, the court found, Colonial held about two hundred and fifty million dollars of Plan B loans on its books.

8:16By August two thousand and nine, it held about five hundred million dollars of Plan B pools.

8:26Those numbers did not stay in Orlando. The bank's parent company, Colonial BancGroup, reported its assets to the Securities and Exchange Commission every quarter.

8:33Because of Plan B, the court found, those quarterly and annual reports significantly overstated what it owned.

8:43Kissick admitted that she had knowingly placed her bank at risk, by causing it to buy and hold more than four hundred million dollars in assets that had no value.

8:47She admitted a scheme to defraud, among others, Colonial Bank. Her own bank.

8:58When it came to forfeiture, the district judge, Leonie Brinkema, had to decide a narrow question. Would Taylor, Bean and Whitaker have survived without the fraud.

9:08She found that it was only able to continue its business activities due to the ongoing fraud. The Court of Appeals upheld her.

9:18And Colonial was not the only lender that had put up money.

Act Four: The Hole

9:34On or about the fourteenth of January, two thousand and five, the indictment says, the mortgage company formed a new company.

9:39It was called Ocala Funding. According to the indictment and the court records in a later plea, it was managed by its parent, and it had no employees of its own.

9:44The court found that Farkas created it.

9:50Ocala Funding raised cash by selling commercial paper.

9:53Commercial paper is a short loan, bought by big institutions. The buyer hands over cash now, and is repaid in weeks or months. The cash went to fund mortgage loans at the mortgage company.

10:03According to the Justice Department, the buyers included Deutsche Bank and BNP Paribas.

10:08The arrangement came with a condition. According to the Justice Department and the indictment, Ocala Funding had to hold collateral, in cash or mortgage loans, worth at least as much as the paper it had sold.

10:17If the collateral was there, the buyers were covered.

10:25The chief financial officer of Taylor, Bean and Whitaker was Delton de Armas. He reported to Farkas, and later to the chief executive, Paul Allen.

10:30According to the court records in his case, shortly after Ocala Funding was set up, de Armas learned there were not enough assets behind its commercial paper.

10:39Those records say that inside the company, the shortfall had a name. They called it the hole.

10:49According to the same records, he knew the hole grew, over time, to more than seven hundred million dollars.

10:54And he admitted he was aware that a person who reported to him had falsified the collateral reports, and sent them to the banks that had bought the paper.

11:04The court found that Farkas and his co-conspirators overstated the value of the collateral by hundreds of millions of dollars, and underreported what Ocala Funding owed.

11:12The result, the court found, was a shortfall of more than one point five billion dollars.

11:18The records in de Armas's case give the same number. By the time the company collapsed, the chief executive told him, the hole was more than one point five billion dollars.

11:31De Armas also acknowledged that he and the chief executive had given the investors a false explanation for the hole.

11:39In the Justice Department's account, Kissick and Kelly, the two Colonial Bank employees charged in this case, did not take part in what it calls the Ocala Funding misappropriations.

11:47The Justice Department puts that part of the scheme with the co-conspirators at the mortgage company.

11:52On the court's findings, that makes two holes. One in Colonial's books in Orlando. The other under Ocala Funding.

12:01Where did the money go, that did not go into the holes?

12:01The Justice Department's announcement of the sentence had a list. Multiple homes. Scores of cars. A jet and a seaplane. Restaurants and bars.

12:10What the judge found, for forfeiture, is narrower.

12:16The court found seven million, three hundred and thirty thousand, five hundred dollars in what the company's books called Lee loans.

12:22On the books they were supposed to be mortgages. The judge found they were taken out in other people's names, or backed by properties that Farkas did not own, or that did not exist.

12:30Those fake mortgages were then sold to, or funded by, Colonial Bank.

12:30And the judge found that Farkas used some of the Lee loan money to buy a private jet.

12:42And the company that owned Colonial Bank was about to ask the United States Treasury for money.

Act Five: The Bailout

13:00Congress had created the Troubled Asset Relief Program to rescue distressed financial institutions. One part of it, the Capital Purchase Program, offered banks taxpayer funding.

13:08According to the Justice Department, in the autumn of two thousand and eight, Colonial BancGroup, the bank's parent company in Montgomery, applied, and asked for five hundred and seventy million dollars.

13:21The application included financial data about Colonial's mortgage loans and securities. According to the Justice Department, that data was materially false, because of the scheme.

13:29The Justice Department says the application was conditionally approved for five hundred and fifty three million dollars, contingent on the bank raising three hundred million dollars in private capital.

13:43This is the final stage of the scheme, as the court described it. Farkas and his co-conspirators attempted to obtain five hundred and fifty three million dollars from the bailout by fraud.

13:53According to the Justice Department, the evidence at trial showed that Farkas and his co-conspirators falsely told Colonial BancGroup they had found enough investors to meet the condition.

14:01No one above Kissick at Colonial was charged, in any record this film draws on.

14:08According to the SEC's complaint, the mortgage company led an investor group that signed an agreement to put three hundred million dollars into Colonial BancGroup.

14:13On Tuesday the thirty first of March, two thousand and nine, the complaint says, the mortgage company issued its own press release about the deal.

14:23The SEC quotes it. Farkas, in his own company's words.

14:23We view this as a unique opportunity, and TBW is delighted to be able to participate in this important transaction with Colonial.

14:37The Justice Department's account of the trial evidence is that, to show the investors' money was real, twenty five million dollars was diverted from Ocala Funding into an escrow account, and falsely presented as money from the investors.

14:51According to the Justice Department, the conspirators then caused Colonial BancGroup to put out a false financial statement to the SEC, and a press release announcing that the capital raise had succeeded.

15:03The bailout's inspector general issued subpoenas for documents. The records this film draws on do not date them. They do record what Kissick did.

15:07She admitted that she deleted, and told her staff to delete, electronic messages on their BlackBerrys, to evade subpoenas for documents from the Special Inspector General for TARP.

15:24According to the Justice Department, Kissick knew the bailout application relied on false bank data, and Teresa Kelly was not aware of that part of the scheme.

15:28And then it is the third of August, and the warrants are served in Ocala and Orlando.

15:38That month, regulators suspended Taylor, Bean and Whitaker's operations.

15:38On the fifth of August, Colonial held about eight hundred and seventy five million dollars in escrow deposits, tied to mortgage securities that the company serviced.

15:49With the mortgage company shut down, control of those deposits passed to Ginnie Mae, the government mortgage agency, and they were at risk of being withdrawn.

15:57The FDIC's word for what losing them would do to the bank's cash was devastating.

16:04The FDIC and Alabama's regulator put the bank under a temporary cease and desist order. Among other things, it required Colonial to halt all transactions with Taylor, Bean and Whitaker.

16:17On the tenth of August, the FDIC estimated that the bank had lost about one point seven billion dollars on activities related to its mortgage warehouse operation.

16:26Nine hundred million of it in the account of loans held for sale. Eight hundred million in an account called Assignment of Trade, which funded loans bought from Taylor, Bean and Whitaker.

16:38That was an estimate of losses from the whole warehouse operation, made four days before the bank closed, and not a court's figure for the fraud. On the fourteenth of August, the Alabama State Banking Department closed Colonial. It found the bank did not have enough liquidity, that losses would wipe out its capital, and that it had no credible prospect of raising more.

16:56The FDIC has published two different figures for its assets that day.

17:04Ten days after the closure, the indictment records, the mortgage company filed for bankruptcy in Jacksonville. Colonial BancGroup filed for bankruptcy the same month.

17:15The fraud was not the only thing that failed Colonial. The FDIC's inspector general reviewed the failure, and found a liquidity crisis with three causes.

17:19One was inadequate risk management around heavy concentrations in loans for land acquisition, development and construction, and in higher risk mortgage securities. Another was weaknesses in underwriting and credit administration.

17:33The fraud was the other. Writing in April two thousand and ten, before any trial, the inspector general called it an alleged fraud affecting the bank's mortgage warehouse operation.

17:49The Justice Department's own releases say the scheme contributed to the failure of Colonial Bank. Some of the officials quoted in them go further.

17:58Colonial BancGroup never received any money from the bailout.

17:58The scheme's last move was on the bailout itself. And the warrants that came through the door in Ocala were served by the bailout's own inspector general, with agents from the FBI and two other inspectors general alongside.

Act Six: April 2011

18:24On Tuesday the fifteenth of June, two thousand and ten, a grand jury indictment against Lee Farkas was filed in Virginia. Sixteen counts. Two were dismissed before trial, on the government's motion.

18:35That night he was arrested in Ocala.

18:40The others did not go to trial.

18:43Desiree Brown, the treasurer, pleaded guilty in February two thousand and eleven. Catherine Kissick pleaded guilty in March. So did Teresa Kelly, and Ray Bowman. Paul Allen, who had been chief executive, pleaded guilty, and so did Sean Ragland, a senior financial analyst.

18:53Delton de Armas, the finance chief, pleaded guilty the following year.

19:03Seven people pleaded guilty. One went to trial.

19:03In April two thousand and eleven, Farkas went on trial in Alexandria, Virginia, before Judge Brinkema.

19:09One of the witnesses at the trial was Teresa Kelly, the operations supervisor from the Orlando office.

19:13When the judge later set out how the fraud began, with the overnight sweeps and then Plan B, she cited Kelly's testimony.

19:22On the nineteenth of April, the jury came back.

19:22The verdict form is four pages. It lists every count, and beside each, two choices. Not Guilty. Guilty.

19:32Fourteen counts went to the jury. There is a tick in the Guilty box beside every one.

19:42Conspiracy. Six counts of bank fraud. Four of wire fraud. Three of securities fraud.

19:43He was fifty eight. He was remanded into custody.

19:51In the Justice Department's announcement of the verdict, the United States Attorney for the district stated that in two thousand and eight, Farkas had boasted he could rob a bank with a pencil.

20:00That line comes from the prosecutor's press statement. It is not in the court filings this film draws on, and the trial transcripts are not among them.

20:12On Thursday the thirtieth of June, Judge Brinkema imposed a sentence of three hundred and sixty months in prison. Thirty years.

20:16He was ordered to forfeit thirty eight million, five hundred and forty one thousand, two hundred and nine dollars and sixty nine cents.

20:25That September, the court added restitution. More than three and a half billion dollars, owed to twenty victims.

20:35Forfeiture takes from him what the court found were the proceeds of his crimes. Restitution is what the victims are owed, and the court ordered Farkas and his co-defendants to pay it jointly and severally.

20:47The co-defendants were sentenced that June, and the finance chief a year later.

20:47Kissick, eight years. Brown, six. De Armas, five. Allen, forty months. Bowman, thirty. Kelly and Ragland, three months each.

21:03Brown and Bowman had cooperated with the government. In the Justice Department's release, the United States Attorney stated that their cooperation was taken into account in their sentences. In Kissick's sentencing release, the head of the Criminal Division said the same of her.

21:19The banker in this story received the longest sentence after his.

21:19Farkas appealed.

21:19He argued that the trial should have been postponed, because the defence faced what his lawyers called a monumental production of documents.

21:29And he argued that the judge was wrong to decline to define beyond a reasonable doubt for the jury.

21:37The Court of Appeals noted that the judge had referred to the reasonable doubt standard on at least twenty six separate occasions in her instructions.

21:45On the twentieth of June, two thousand and twelve, the Court of Appeals found no reversible error, and affirmed.

21:53On the day he was sentenced, the Justice Department's release quoted the United States Attorney whose office had prosecuted him.

21:56His statement was a prediction. He said the sentence ensured Lee Farkas would spend the rest of his life in prison.

Act Seven: September 2020

22:17He did not stop fighting the conviction.

22:17In two thousand and fourteen, the district court dismissed his motion to vacate it. More appeals followed.

22:22Each one failed. The last of them in the record was about money, and lawyers.

22:27Before trial, on the government's motion, the court had frozen his assets. At first, the Court of Appeals later wrote, that kept him from hiring the lawyers he wanted. Eventually the court released enough for him to hire a team.

22:37In two thousand and sixteen, the Supreme Court determined that freezing a defendant's untainted assets, when he needs them to hire a lawyer, violates the Sixth Amendment.

22:47He brought a new petition, in federal court in North Carolina. The Fourth Circuit held that the law did not let him bring that claim by that route.

22:58On Wednesday the twenty sixth of August, two thousand and twenty, the Fourth Circuit affirmed the dismissal of that petition.

23:07By then he had already filed something else.

23:07On the twentieth of August, two thousand and twenty, Farkas filed a motion for compassionate release, citing the COVID nineteen pandemic.

23:13The government opposed it.

23:18By then, according to the government's filing, he was held in the minimum-security camp at the prison at Coleman, and between April and July of two thousand and twenty he had asked the prison to release him to home confinement, under the emergency law passed for the pandemic, and the prison had told him no.

23:32The government argued that he had not shown his age, his medical history or his conditions put him at particular risk, and that the prison was taking extra precautions.

23:41In its filing, the government told the court he had served about one hundred and eleven months. Just under thirty one percent of his sentence. The same filing gave his projected release date as the thirty first of October, two thousand and thirty six.

23:59On Tuesday the fifteenth of September, two thousand and twenty, Judge Brinkema ruled.

24:05The three hundred and sixty month sentence she had imposed was reduced to time served.

24:12Her reasons were given in a telephone conference, on the record. The written order is two pages.

24:17It sent him first into fourteen days of quarantine, to make sure he did not have the virus. Then he was to be released, to live with a relative in Albuquerque, New Mexico, on three years of supervised release.

24:31The Bureau of Prisons records his release on Tuesday the twenty ninth of September, two thousand and twenty.

24:40This was not a pardon, and it was not a commutation. It was the judge who had sentenced him, reducing that sentence under a federal law that allows it. The government had opposed it in writing.

24:48The Bureau of Prisons record ends on the day it let him go. After that date, the records this film is built from say nothing about him.

25:00The money is harder to follow than the man.

25:00In two thousand and nineteen, the FDIC estimated its insurance fund's loss on Colonial Bank at two point nine five eight billion dollars, as of the end of two thousand and seventeen. That is the loss on the whole failure. It is not a figure for the fraud.

25:13That same year, it settled with the accounting firm PricewaterhouseCoopers for three hundred and thirty five million dollars.

25:23A federal court in Alabama had held that firm liable for professional negligence in its audit of Colonial Bank. The claim was negligence, not fraud.

25:35How much of the three and a half billion dollars in restitution has ever been paid, the court records this film draws on do not say.

25:44In the prosecutor's statement, thirty years meant the rest of his life.

25:44The same judge who imposed it cut it to time served, with an order two pages long, after what the government's own figure puts at about nine years in custody.

25:58In two thousand and two, a mortgage company in Ocala went overdrawn at its bank. For the next seven years, it stayed in business only because of the fraud.

26:09To stay in business, it sold the bank mortgages that did not exist, or that already belonged to someone else.