Mortgages: how fraud brought down Colonial Bank and a private lending company

Brown, 45, of Hernando, Florida., pleaded guilty before U.S. District Judge Leonie M. Brinkema in the Eastern District of Virginia. Brown faces a maximum penalty of 30 years in prison when she is sentenced on 10 June, 2011.

In a related action, the U.S. Securities and Exchange Commission (SEC) today filed an enforcement action against Brown in the Eastern District of Virginia.

According to court documents, Brown admitted that from late 2003 through August 2009, she and her conspirators, including former TBW chairman Lee Farkas engaged in a scheme to defraud various entities and individuals, including Colonial Bank, a federally-insured bank; Colonial BancGroup Inc.; shareholders of Colonial BancGroup; investors in Ocala Funding LLC, including Deutsche Bank and BNP Paribas; the Troubled Asset Relief Program (TARP); and the investing public. One of the goals of the scheme to defraud was to obtain funding for TBW to assist it in covering expenses related to operations and servicing payments owed to third-party purchasers of loans and/or mortgage-backed securities.

Fake Mortgage Assets

According to court documents, Brown and her conspirators referred to one aspect of the fraud scheme as “Plan B.” “Plan B” generated money for TBW through the fictitious “sales” of mortgage loans to Colonial Bank. The conspirators accomplished this by sending mortgage data to Colonial Bank for loans that did not exist or that TBW had already committed or sold to other third-party investors. 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. Brown admitted that she and her conspirators caused Colonial Bank to pay TBW for assets that were worthless to Colonial Bank.

Brown admitted that, as part of the fraud scheme, she and her co-conspirators also caused TBW to sell fictitious trades, which had no pools of loans collateralizing them, to Colonial Bank. Brown and her co-conspirators caused false information about the trades to be entered on Colonial Bank’s books and records, giving the appearance that the bank owned interests in legitimate trades, when in fact the trades had no value and could not be sold.

Court documents indicate that the conspirators caused Colonial Bank to pay TBW more than USD400 million for assets that in fact had no value, and caused Colonial Bank and Colonial BancGroup to hold these assets on their books as if they had actual value. Additionally, the conspirators caused TBW to misappropriate more than USD1,000 million in collateral from Ocala Funding LLC, a mortgage lending facility owned by TBW.

According to court documents, the fraud scheme also included an effort by the conspirators in the fall of 2008 to obtain USD570 million in taxpayer funding through the Capital Purchase Program (CPP), a sub-program of the U.S. Treasury Department’s TARP scheme.

Fraudulent documents led to bank making false declaration of assets.

In connection with the application, Colonial BancGroup submitted financial data and filings that included materially false information related to mortgage loan and securities assets held by Colonial Bank as a result of the fraudulent scheme admitted to by Brown. Colonial BancGroup never received the TARP funding.

In August 2009, the Alabama State Banking Department, Colonial Bank’s regulator, seized the bank and appointed the FDIC as receiver. Colonial BancGroup entered receivership in August 2009.

In June 2010, Farkas was arrested and charged in a 16-count indictment for his role in the fraud scheme. His trial is scheduled to begin in April 2011. He pleads not guilty.