Jenna Martino, CNBC Associate Producer
When Sandy Smith of Stevenville, Texas, purchased her home, she never dreamed there would be any issue taking out a mortgage with Taylor, Bean & Whitaker, a lending company based in Ocala, Fla. The previous homeowners had used them. This wasn’t Sandy’s first time taking out a mortgage and she thought she knew what she was getting into. She made her payments on time each month, but before she knew it, she started receiving foreclosure notices. She had unknowingly become a victim to a multibillion-dollar scam and was one of more than 500,000 homeowners who fell prey to mortgage mogul Lee Farkas.
Farkas’s crimes added up to a $2.9 billion fraud and directly led to the sixth largest bank failure in U.S. history.
There are many layers to this scam, multiple cover-ups, and a list of criminals who took part in this massive fraud, but it all comes down to one man: Lee Farkas. His actions bankrupted his own company, TBW, one of the largest privately held mortgage lending companies in the United States, and led to the failure of Colonial Bank, one of the 25 largest banks in the United States in 2009.
He diverted more than $40 million from his own company to finance his indulgent lifestyle, collecting classic cars, buying multiple vacation homes up and down the East Coast and purchasing a $28 million jet.
Farkas had also made TBW one of the fastest-growing mortgage lenders in the country, but the company had a secret. Their account at Colonial was massively overdrawn upwards of $100 million.
In an attempt to cover up the company’s deficits, Farkas persuaded a Colonial Bank executive to help mask his shortfalls. By shuffling money between his company’s accounts and pretending to sell loans to Colonial, they disguised the fraud for a period of time. However, the loans were either nonexistent or completely bogus, and the cover-up transformed into a vicious cycle.
Banks & Fraud
There have been more than 400 bank closures in the past 4 years, and they have failed for various reasons including fraud.
Although there are regulations and checks and balances in place for banks to be vigilant in detecting and reporting fraud, executives with unbridled authority can be a driving force behind these crimes.
Tracy Coenen is a forensic accountant and expert in financial fraud and head of Sequence Inc., a forensic accounting and fraud examination service.
According to Coenen, problems in management oversight and internal and external abuses are contributing factors in how a bank can fail.
“To commit the fraud, executives can approve transactions without proper documentation or any substance behind the transactions,” Coenen said. “They also have the authority to cover up these acts by creating fake documentation, making false accounting entries, directing employees to aid in the cover-up, and otherwise diverting attention away from the bad acts.”
Coenen mentions two ways in which Farkas’s bank scam grew so large that it led to the demise of Colonial Bank.
“Collusion and complexity. With multiple actors on either side of the fraud, the chances are increased that they’ll get away with the fraud for a longer period of time. Add to this a complex web of transactions that the fraudsters create, and it’s difficult to unravel the fraud,” Coenen said.
How did Farkas’s fraud last for so many years?
The scam involving TBW and Colonial Bank is one of the largest and longest running frauds in U.S. history. It lasted 7 years before being discovered.
“Sadly, the traditional audit process is not very good at detecting fraud because we’re dealing with very sophisticated knowledgeable executives. They are at very high levels, and they are familiar with banking and auditing. They know what the auditors will look for, so they can plan their fraud and cover-up accordingly,” Coenen said. “Normally, there are checks and balances in place to stop these kinds of schemes. But when upper level executives are in on the fraud, they override those checks and balances.”
When it All Comes to an End
For Farkas, problems finally arose when Colonial Bank began to struggle and applied for $553 million from the government’s Troubled Asset Relief Program. It was these investigators that finally revealed what he and his inner circle had tried so hard to cover up.
“In this case, Colonial Bank applied to the TARP program to receive additional funding. Presumably some of the funding was going to go to fund the fraud that was going on with Farkas and the other executives,” Coenen added.
Potentially, without the request for TARP funds, this fraud could have continued in the same fashion. However, when the investigators dug into the books, it did not take very long for red flags to pop up everywhere. The fraud broke wide open.
Cracking the Façade of the Fraud
Ultimately, Farkas destroyed his own company. He left more than 2,000 employees without work, and Colonial filed for Chapter 11 bankruptcy. Farkas was sentenced in 2011 to 30 years in prison after being convicted of 14 counts of conspiracy, bank, securities, and wire fraud. The scam, which had grown to $2.9 billion is responsible for the sixth largest bank failure in American history.
Is Your Money Safe?
According to Coenen, if you are a patron of a bank that fails, you are generally not going to lose any money.
“By knowing the FDIC limits and not exceeding them, if a bank goes under, the FDIC will reimburse customers for insured deposits up to a limit,” Coenen said.
As for Sandy Smith, it has been a terribly expensive and exhausting journey. She’s faced foreclosure six times and has fought eviction in court.
“You never know who is going to knock on your door, what is going to come in the mail, or who’s on the other end when you pick up the telephone. It’s 24 hours a day, 7 days a week. It’s a lot of stress,” Smith said.
When asked about her credit score, Smith replied, “It’s basically nonexistent. The last time I checked, there were two foreclosure notices. I haven’t checked it since.”
She admits what happened to her was terrible but refers to it as an “incredible journey.”
Now, Smith works with other victims to try to help them through their struggles concerning their own mortgage issues with Taylor, Bean & Whitaker. Although she could choose to be bitter, Smith instead says, “It’s not about me. It’s about putting the truth out there, to help as many people as I possibly can.”