Posted by Edmond Geary | Posted in Fraud, Securities Fraud, White collar crime | Posted on 11-07-2011
Given the scope of the financial meltdown of 2008 and the suspicions of some wrongdoing to explain it, everyone has been expecting some big time prosecutions. Not much so far. Lee Farkas may be the biggest thing so far, and he isn’t all that big.
Farkas was a mortgage industry executive, chairman of the firm of Taylor & Whitaker in Florida. He was accused of carrying out one of the largest bank fraud schemes in history. He caused the failure of Colonial Bank, resulting in the loss of billions for investors and the federal government. However, his firm was not a large one, and his deeds began long before the financial crisis, so it really had nothing to do with the meltdown.
There was a prosecution in 2009 against some Bear Sterns hedge fund managers that resulted in an acquittal. Recently federal prosecutors dropped an investigation into Angelo Mozilo, the former head of subprime lending giant Countrywide Financial. He’s the one who testified to Congress that his performance at Countrywide was better than Warren Buffet’s performance at Berkshire Hathaway was for the same period. The statement was correct, but it omitted the period immediately after that period when Countrywide’s performance dropped off a cliff, so the statement was grossly misleading. He would have been a wonderful fish for the feds to fry.
U.S. District Judge Leonie Brinkema sentenced Farkas to 30 years. There is no parole in the federal system. The government asked the judge to impose the maximum sentence of 385 years, or, in the alternative, a sentence of at least 50 years so Farkas would spend the rest of his life in prison. The criminal defense attorneys for Farkas asked for a 15-year sentence, so they certainly acknowledged the prospect of a significant sentence. In addition to the 30 years in the sentence, the judge ordered Farkas to disgorge about $38.5 million.
Former fellow executives of Farkas decided to cooperate with the government to improve their chances at a sentence. The former chief executive and treasurer of Taylor, Bean pled guilty and agreed to testify against Farkas. Their sentences ranged from 3 months to 8 years.
Farkas did not plead guilty. After 10 days of trial, the jury found him guilty on all 14 counts of securities, bank and wire fraud and conspiracy to commit fraud. The government’s case was that Taylor, Bean was facing losses, and they schemed to hide the losses. In 2002, a they began to secretly overdraw Taylor, Bean’s accounts at Colonial Bank and sold Colonial $1.5 billion of worthless and fake mortgages. The U.S. Government guaranteed the worthless loans.
As things bled, Farkas persuaded Colonial Bank to seek $570 million in taxpayer bailout funds to staunch the flow. After initially approving this payment, the U.S. Treasury canceled the order. Colonial then filed bankruptcy in 2009, the 6th largest bank failure in U.S. history. Farkas was busy spending $40 million from Taylor, Bean and Colonial to fund his fancy lifestyle for usual things: private jet, vacation homes, a collection of classic cars.
At sentencing, the judge did not think Farkas was remorseful but just regretted getting caught. That’s never good to have the sentencing judge to believe that about you, but federal judges are sophisticated about human nature and the fine art of sentencing, so such things are just part of the mix to them. Sentencing is an art that has generated lots of literature, lots of theories and opinions and speculation, some science, but requires a strong will to wield.