President's Day

"Nearly all men can stand adversity, but if you want to test a man's character, give him power."

Abraham Lincoln

A couple of notable news items locally at the end of last week. On Thursday, President Obama nominated Jill A. Pryor, a partner at Bondurant, Mixson & Elmore, LLP, in Atlanta to serve on the Eleventh Circuit. Pryor graduated from William & Mary, then attended Yale University Law. She clerked for Judge Edmondson on the Eleventh Circuit, then spent her entire professional career with Bondurant, Mixson. President Obama said of Pryor that "she will be a diligent, judicious and esteemed addition to the Eleventh Circuit bench."

On Friday, Sally Yates, the U.S. Attorney, for the Northern District of Georgia announced that H. Gregory Cordell of Cartersville, Georgia was sentenced to 2 years, 3 months in federal prison for mortgage fraud. Yates said that Cordell, "lied on mortgage applications to get over $1 million in loans, he fraudulently inflated the purchase price to get a bigger mortgage and then was paid a kickback under the table from the proceeds." The U.S. Attorney's Office in Atlanta has been extraordinarily slow to pull the trigger on financial institution fraud cases, despite the fact that Georgia leads the league in defunct banks.

I'll follow up more this week on my thoughts regarding why this administration has faltered in its pursuit of financial fraud matters.


What is the Deal With this Administration's Handling of the Mortgage Crisis?

I began working as an Assistant U.S. Attorney in 1990, just this side of the Savings and Loan crisis caused by the implosion of the real estate market and the criminal dealings in that industry. To understand how quickly history repeats itself, check out this interesting analysis by the FDIC and its ironic title – “History of the 80s – Lessons for the Future” criticizing, in part, the “go-go” mentality that existed in the Savings and Loan industry at the time.

In the late 80s, early 90s financial institution fraud was the enforcement priority of the Department of Justice and hundreds of bankers were convicted as a result of that initiative.

Syracuse University has a fascinating database called the Transactional Records Access Clearinghouse, which has compiled government records since 1989. TRAC records indicate that in 1995, banking regulators referred more than 1,500 cases to DOJ (more on this later).

The current financial crisis that now burdens the world financial system reached the point of critical mass in the Fall of 2008. As we now know, that crisis was and is fueled in substantial measure by mortgage fraud, but TRAC records tell us that from 2006-2010, the average number of referrals was just over 70 - SEVENTY! At the height of the financial crunch – 70 odd regulatory referrals a year! In the words of Vizzini from “The Princess Bride” – “inconceivable!”

So, what is the deal? In November 2009 DOJ announced the formation of the Financial Fraud Enforcement Task Force, which has produced shockingly few prosecutions. I guess in an effort to shore up that unit, last month the President announced the formation of a new task force, the Residential Mortgage-Backed Securities Working Group. In fact, it turns out that Task Force is just going to be a unit of the previously formed Task Force.

So, how do we find ourselves, more than 3 years out from financial crisis and by all accounts, a law enforcement effort that has been minimal? We’ll look at this more in coming days.

Former Community Bank & Trust Executive Pleads Guilty to Fraud Charges

Randy Jones, a former executive vice president with Community Bank & Trust who worked for the bank for 30 years, pled guilty last week in the U.S. District Court for the Northern District of Georgia for an alleged multi-million dollar fraud scheme, according to an article in the Atlanta Journal-Constitution. Specifically, Jones was alleged to have made loans to a customer, Joseph Penick, Jr., to purchase tracts of land in North Georgia. Penick is alleged to have paid Jones $770,000. Penick has pled guilty to his involvement in the scheme.

Jones was also alleged to have used family members and friends to obtain more than $800,000 in loans from Community Bank & Trust to purchase an interest in six Zaxby's restaurants.


Community Bank & Trust was shut down by regulators in January of 2010. The bank opened in 1900 and had been insured by the Federal Deposit Insurance Corporation since 1934. Before it failed, it had 36 branches across the region and $1.1 billion in assets. An FDIC report in September of 2010 found that Community Bank & Trust failed to follow its own loan policy and had made more than $10 million in bad loans. Georgia has had more failed banks than any other state--52 since 2008. 

Investigators say he used the names of family members without their consent to obtain more than $800,000 in loans from the bank, which he used to buy a stake in six Zaxby's restaurants. And they claim he approved more than $2.8 million in loans to fraudulent borrowers so that a customer who was a real estate developer could pay down interest on loans.

The bank failures have also led to a number of prosecutions and suits against former bank executives, employees and others. Five people with ties to Omni National Bank of Atlanta were convicted on bank fraud and other charges after the bank collapsed during a federal mortgage fraud probe. A lawsuit by the FDIC also alleges that former officers of Alpharetta-based Integrity Bank engaged in gross negligence and breach of fiduciary duty relating to making bad loans. One of the defendants is State Senator Jack Murphy, a former bank official and the new Chairman of the Senate Banking Committee. Sen. Murphy has denied any wrongdoing.


Chairman of Nation's Largest Mortgage Company Indicted for Bank Fraud and TARP Fraud in Relation to Scheme Against Colonial Bank, SEC Charges Filed

The U.S. Department of Justice and the U.S. Securities and Exchange Commission have brought criminal charges and civil claims against Lee B. Farkas, former Chairman of Taylor, Bean and Whitaker Mortgage Corp. (“Taylor Bean”) for allegedly selling at least $1.5 billion in fictitious and impaired residential mortgage loans to Colonial Bank and its parent company, The Colonial BancGroup, Inc. (“CBG”), according to press releases by the Department of Justice and the SEC, and the SEC’s complaint. Mr. Farkas, a resident of Ocala, Florida, is also charged with attempting to defraud the U.S. Department of Treasury through its Troubled Asset Relief Program (“TARP”) by allegedly representing to CBG and the public that Taylor Bean had secured a $300 million equity investment in CBG which would allow CBG and Colonial Bank to qualify for $550 million in TARP funds. The government contends that the investment and prospective TARP grant was a sham.

Taylor Bean was the largest non-depository mortgage lender in the United States by 2008, originating more than $30 billion in mortgage loans. Taylor Bean engaged in the the origination, acquisition, sale and servicing of residential mortgages through a network of local banks and mortgage brokers. The company filed for Chapter 11 bankruptcy in August of 2009. 

Colonial Bank, one of the fifty largest banks in the U.S., has had its own problems. In August of last year, the Alabama State Banking Department seized the bank and appointed the Federal Deposit Insurance Corp. as receiver. CBG subsequently filed for Chapter 11 bankruptcy and a financial holding company purchased Colonial Bank’s assets and assumed its deposits.

Taylor Bean had a financing arrangement with Colonial Bank to fund the mortgage loans which it originated. Under the agreement, Taylor Bean would represent that the loans were of a certain quality and that there was a commitment from a third-party investor to ultimately purchase the loan. When the investor purchased the loan, Colonial Bank would receive the proceeds to reimburse it for advancing the loan funds.

Colonial Bank and Taylor Bean also had another financing agreement, called an assignment of trade agreement, under which Colonial Bank would purchase a 99 percent interest in a bundled group of mortgage loans, or mortgage-backed securities, which Taylor Bean would issue, market and sell to third parties. Under the agreement, Taylor Bean was required to provide evidence of a binding commitment from a third party investor to purchase the securities.

The government alleges that Taylor Bean began experiencing liquidity problems in 2002. It alleges that Farkas and an unnamed officer of Colonial devised a pattern of “kiting” in which certain debits to Taylor Bean’s warehouse line of credit were not entered until after credits for the following day were entered. As a result of this kiting, Taylor Bean was supposedly overdrawing its accounts with Colonial Bank by approximately $150 million a day.

Farkas and the bank officer, in order to conceal the kiting activity, allegedly devised a scheme in which Taylor Bean would create and submit fictitious loan information to Colonial Bank. In December of 2003, Farkas allegedly directed Taylor Bean to submit approximately $150 million in non-existent loans, which Farkas allegedly referred to as “Plan B,” and impaired loans, which Farkas is alleged to have referred to as the “Crap,” to Colonial Bank for funding.

In 2004, as the loans began to age, in order to conceal them, Farkas and the officer allegedly bundled the loans in fictitious trades to Colonial Bank. Following the trades, Colonial Bank was unable to identify individual loans, or the age of the loans, within the trade. Farkas and the officer then caused information to be submitted to Colonial Bank which would reset the commitment dates on the loans and make the loans appear as if they had only recently been purchased. Farkas also caused Ocala Funding, L.L.C., a wholly-owned subsidiary of Taylor Bean, to divert funds which it received from Freddie Mac and other third parties for purchases of mortgages to Taylor Bean in order to pay down Taylor Bean’s debt to Colonial Bank.

By the close of 2007, Colonial Bank allegedly held $1 billion in impaired loans and $500 million in wholly fictitious, unsecured loans, as a result of Farkas’ and the officer’s conduct. The impaired and fictitious loans caused Colonial Bank to misstate its assets to the SEC and investors.

Finally, in November of 2008, Colonial Bank applied for TARP funds from the U.S. Treasury. The Department of Treasury approved Colonial Bank to receive $550 million in TARP funds on the condition that Colonial Bank increase its equity by $300 million. In 2009, Farkas allegedly approached Colonial Bank to raise the $300 million captial infusion through an investment group. Farkas falsely represented to Colonial Bank that it had found investors to participate in the capital infusion, and created a false stock purchase agreement. Farkas diverted $50 million in funds from an Ocala Investors Account to an escrow account in a move which he allegedly referred to as “Project Squirrel” in order to convince Colonial Bank that Taylor Bean had obtained investors. Colonial Bank entered the stock purchase agreement with Taylor Bean, however both companies subsequently terminated the agreement.

The indictment against Farkas in the U.S. District Court for the Eastern District of Virginia charges him with one count of conspiracy to commit bank, wire and securities fraud; six counts of bank fraud; six counts of wire fraud; and three counts of securities fraud. The SEC complaint alleges violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

Baltimore Brother Sentenced in $12.4 Million Check "Kiting" Scheme

Brian I. Satisky of Pikesville, Maryland, and Vice President of A&B Check Cashing was sentenced last week to three years imprisonment in the U.S. District Court for the District of Maryland for perpetrating a $12.4 million check kiting scheme, according to a press release by the Federal Bureau of Investigation. The Court also ordered Satisky to pay restitution totalling $12.4 million.

A&B was a money services company with 21 locations in the Baltimore, Maryland, area. Most of its customers did not have access to traditional banking, credit or loans. Satisky and his brother Alec built A&B from a shoe store which they inherited from their parents. In 2003, A&B settled a class action lawsuit alleging that one of A&B's products constituted a "payday loan" in violation of Maryland law.

Satisky was also President of the trade group, Maryland Association of Financial Service Centers, Inc., and was on the board of directors of Financial Service Centers of America (FiSCA), a national trade group representing money service businesses. He even testified before Congress on behalf of FiSCA in June 2003.

The Satisky brothers "kited" checks between two of A&B's accounts. The brothers would draw checks on accounts which they knew had insufficient funds to cover the checks, and would cross-deposit the checks, artificially inflating the balances in the accounts. They would then write checks to A&B's operating account and to vendors or creditors in excess of the amount of funds which the business actually had. During the week of October 18 - 26, 2005, alone, Brian Satisky wrote in excess of $10 million in kited checks daily to keep the scheme going. The scheme finally collapsed in June 2006. Alec Satisky committed suicide. Baltimore Country Savings Bank lost $10.6 million and Carrollton Bank lost $1.8 million as a result of the scheme.

New York Defendant Indicted for $50 Million in Fraud from ATM, Armored Car and Other Businesses

As reflected in an FBI press release, an indictment was unsealed in the U.S. District Court for the Southern District of New York against Robert Egan, President of Mount Vernon Money Center (MVMC) on Wednesday charging Egan with one count of conspiracy to commit bank fraud and wire fraud and six counts of bank fraud for allegedly defrauding banks and other financial institutions of approximately $50 million.

MVMC operated various cash management businesses, including replenishing cash for over 5,300 automated teller machines (ATMs), payroll services for businesses, and an armored car service, Armored Money Services (AMS). MVMC's clients included banks and financial institutions, businesses and universities. MVMC also had several cash vaults to store and process cash from its businesses.

The government alleges that, from 2005 through 2010, Egan and MVMC's Chief Operating Officer, Barnard McGarry, allegedly collected hundreds of millions of dollars from MVMC clients based on false representations that they would not commingle clients' funds or use the funds for purposes other than those specified in MVMC's agreements with the clients. However, Egan and McGarry are alleged to have engaged in a practice known as "playing the float," in which they misappropriated funds from the substantial cash flow into MVMC to their own uses, to pay prior client obligations or to cover operating expenses of MVMC's businesses. Egan and McGarry are also alleged to have commingled its clients' monies in its accounts and cash vaults, and instructed employees to use whatever monies were available to replenish ATM machines. McGarry is alleged to have transferred clients' monies among MVMC's accounts. In addition, both defendants are alleged to have made false representations in reports to ATM clients regarding the amount of funds MVMC allegedly held in its vaults for the clients. MVMC was entrusted with approximately $70 to $75 million by its clients, but allegedly only kept approximately $20 to $25 million in its accounts and vaults.

Egan was arrested last month. A receiver has been appointed to administer MVMC. The press release stated that the case was brought in coordination with the White House's Financial Fraud Enforcement Task Force. Among the officials who addressed the media in conjunction with the press release was the Special Inspector General of the Troubled Asset Relief Program (SIGTARP) Neil Barofsky.

TARP Inspector General Investigations January 2010

Well, first of all, even if you like the Colts and Peyton Manning (I do), you still have to be happy for the Saints and the City of New Orleans. What a great American story.

Back to business though, the Troubled Asset Relief Program Inspector General (TARP IG), Neil Barofsky, announced in his January 20, 2010 report that TARP has continued to develop into a sophisticated white-collar investigative agency. Through December 31, 2009, TARP has opened 86 and has 77 ongoing criminal and civil investigations. These investigations include complex issues concerning suspected TARP fraud, accounting fraud, securities fraud, insider trading, bank fraud, mortgage fraud, mortgage servicer misconduct, fraudulent advance-fee schemes, public corruption, false statements, obstruction of justice, money laundering, and tax-related investigations.

The Inspector General (IG) highlighted three current investigations. First, the IG remarked that Omni National Bank (“Omni”) a national bank headquartered in Atlanta with branch offices in Birmingham, Tampa, Chicago, Fayetteville, N.C., Houston, Dallas, and Philadelphia continued to be under scrutiny. Omni failed and was taken over by the Federal Deposit Insurance Corporation (“FDIC”) on March 27, 2009. Prior to its failure, Omni had applied for but had not been approved for TARP funds. TARP has participated in several investigations concerning Omni that have led to criminal charges as part of a mortgage fraud task force that includes TARP, the U.S. Attorney’s Office for the Northern District of Georgia, the Office of the Inspector General of the Federal Deposit Insurance Corporation (“FDIC OIG”), the Office of the Inspector General of the Department of Housing and Urban Development (“HUD OIG”), the Federal Bureau of Investigation (“FBI”), and the U.S. Postal Inspection Service.

TARP, the IG noted continues to play a significant role in the investigations by the Office of the New York Attorney General, the U.S. Attorney’s Offices for the Southern District of New York and Western District of North Carolina, the Securities and Exchange Commission (“SEC”), and the FBI into the circumstances of Bank of America’s merger with Merrill Lynch and its receipt of additional TARP funds.

And, finally, as previously reported, in August 2009, TARP, along with the FBI, FDIC OIG, and HUD OIG, conducted search warrants at the offices of Colonial Bancorp and Taylor, Bean & Whitaker (“TBW”). On December 16, 2009, TBW consented to its debarment from participating as an originator of Federal Housing Administration (“FHA”)-insured mortgages. HUD also terminated TBW as a Government National Mortgage Association (“Ginnie Mae”) issuer of mortgage-backed securities and took control of TBW’s $25 billion Ginnie Mae portfolio. In conjunction with the suspensions, HUD also proposed debarments of two officers of TBW. On August 7, 2009, Colonial reported that it is the target of a criminal probe. The investigation, the IG noted is ongoing.

The federal government’s enormous investment of monies into the TARP program and the establishment of the TARP IG, means a continued focus on financial crimes in the future.