Lee B. Farkas, former mortgage industry executive and mastermind of one of the largest bank fraud schemes in history, was sentenced to 30 years in prison by a federal judge.  Mr. Farkas is the former chairman of mortgage firm Taylor, Bean & Whitaker;  his conviction is the single biggest prosecution stemming from the financial crisis. 

During the sentencing in Alexandria, VA, the judge told Mr. Farkas, "I do not detect one bit of actual remorse.  You regret getting caught."
 

No Other Financial Executives Imprisoned.   As chairman of Taylor Bean, Mr. Farkas orchestrated a plot that caused the demise of Colonial Bank and cheated investors and the government out of billions of dollars.  Still, Taylor Bean was a minor financial firm based in Florida, and Mr. Farkas’s 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 Mozilo, former head of Countrywide Financial.

The government, aiming to send a message to the financial industry, asked Judge Brinkema to impose the maximum 385-year sentence on Mr. Farkas.  As an alternative, the government recommended a penalty of at least 50 years to ensure he will “spend the remainder of his life in prison.”

Mr. Farkas, who was ordered to turn over roughly $38.5mn, had asked for a 15-year sentence.  His lawyers argued that his actions were intended to keep Taylor Bean and Colonial Bank in business.  Farkas’s fellow Taylor Bean executives fared far better.  The firm’s former CEO and Treasurer, among others, pleaded guilty and cooperated in the case against Mr. Farkas.  The executives received sentences ranging from 3 months to 8 years.

Farkas' Scheme.   The $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 the sixth largest bank failure in history.  Mr. Farkas, meanwhile, diverted more than $40 million from Taylor Bean and Colonial to “finance his lifestyle,” prosecutors said - supposedly buying a private jet, vacation homes and a collection of vintage cars.   [NYTimes, 6/30/11]