July 16, 2024

DealBook: Mortgage Executive Receives 30-Year Sentence

A federal agents escorts Lee B. Farkas, a former mortgage industry executive, after a court appearance in June 2010 in Ocala, Fla.Bruce Ackerman/Ocala Star-BannerA federal agents escorts Lee B. Farkas, a former mortgage industry executive, after a court appearance in June 2010 in Ocala, Fla.

A federal judge sentenced Lee B. Farkas, a former mortgage industry executive, to 30 years in prison, far short of the 385-year penalty sought by prosecutors.

The case against Mr. Farkas, who was convicted of masterminding one of the largest bank fraud schemes in history, stands as the single biggest prosecution stemming from the financial crisis.

As chairman of mortgage firm Taylor, Bean Whitaker, Mr. Farkas orchestrated a plot that caused the demise of Colonial Bank and cheated investors and the government out of billions of dollars, prosecutors say.

Mr. Farkas led a minor financial firm based in Florida, and his crimes began well before the crisis struck. So while the case is a defining moment for the government, its relative obscurity also highlights the continued struggle to prosecute financial fraud in the wake of the crisis.

Other than Mr. Farkas and a string of small fry mortgage fraud prosecutions, no senior financial executives have been imprisoned. Even now, federal prosecutors have yet to bring charges against an executive who ran a large Wall Street institution leading up to the crisis.

A 2009 case against hedge fund managers at Bear Stearns ended in acquittal. Prosecutors also recently dropped perhaps their biggest case related to the crisis, an investigation into Angelo R. Mozilo, the former head of the subprime lending giant Countrywide Financial.

Mr. Farkas, 58, appeared in federal court in Alexandria, Va., on Thursday, wearing a green prison jumpsuit.

His sentence, while steep, falls short of the 150 years given to Bernard L. Madoff for running a huge Ponzi scheme.

Mr. Farkas’s fellow Taylor Bean executives fared far better. The firm’s former chief executive and treasurer, among others, pleaded guilty and cooperated in the case against Mr. Farkas. The executives received sentences ranging from three months to eight years.

The government, aiming to send a message to the financial industry, had asked the judge to impose the maximum penalty on Mr. Farkas, a 385-year sentence.

“Sentencing him to the maximum penalty allowed by law will send the most forceful and unequivocal message to senior corporate executives that engaging in fraud and deceit in order to pump up your company or line your own pockets is unacceptable and will have severe consequences,” prosecutors said in a recent court filing.

Mr. Farkas’s lawyers had asked for a 15-year sentence, saying his actions were intended to keep Taylor Bean and Colonial Bank in business. Mr. Farkas took the stand during the trial to deny any wrongdoing.

In recent weeks, his friends and supporters sent letters to the judge that painted Mr. Farkas as a kindhearted humanitarian, someone who always “displayed integrity.” Mr. Farkas once paid a stranger’s medical bills, often donated to the local salvation army’s Christmas fund-raiser and even offered up his private jet to transport a mother and her baby to New York for cancer treatment, they said.

A federal jury in Virginia was unmoved. In April, after a 10-day trial and little more than a day of deliberations, the jurors found Mr. Farkas guilty on 14 counts of securities, bank and wire fraud and conspiracy to commit fraud.

Mr. Farkas’s $2.9 billion scheme began in 2002, prosecutors say, when Taylor Bean was facing mounting losses. To hide the losses, Taylor Bean executives secretly overdrew the firm’s accounts with Colonial Bank. The lender, aiming to cover up the overdrafts, sold Colonial about $1.5 billion in “worthless” and “fake” mortgages. The government, in turn, guaranteed the bogus loans.

When Colonial started to struggle, Mr. Farkas helped convince the bank to apply for $570 million in taxpayer bailout funds. The Treasury Department initially approved the rescue loan, but ultimately withdrew the offer.

Colonial filed for bankruptcy in August 2009, making it one of the largest bank failures during the crisis.

Mr. Farkas, meanwhile, diverted more than $40 million from Taylor Bean and Colonial to “finance his lifestyle,” prosecutors said. He used the funds, according to the government, to buy a private jet, vacation homes and a collection of vintage cars.

Article source: http://feeds.nytimes.com/click.phdo?i=7c82d7417c11106e1b56a117fa364752

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