SEC Spears a Former Big Fish in Mortgages

ALEXANDRIA, Va. (CN) – As CEO of Taylor, Bean and Whitaker Mortgage, Paul Allen helped company Chairman Lee Farkas bankrupt Colonial BancGroup and defraud its shareholders and the Department of the Treasury’s Trouble Asset Relief Program, the SEC says.

     The SEC charged Allen in Federal Court with aiding and abetting fraud. Allen, 55, of Oakton, Va., was CEO of Taylor, Bean and Whitaker until August 2009.
     Farkas, who is in custody awaiting criminal sentencing, falsely claimed to have secured a $300 million equity investment in BancGroup, which qualified BancGroup and its subsidiary Colonial Bank for $550 million in TARP funds, the SEC says.
     However, “Contrary to Farkas and Allen’s representations, TBW had never secured financing or sufficient investors to fund the Capital Infusion. Farkas and Allen’s misleading statements were disseminated in Forms 8-K that BancGroup publicly filed with the Commission as well as in press releases issued by BancGroup and TBW,” the SEC says. “The effect of their false statements was to materially inflate the price of BancGroup’s publicly traded securities.”
     The SEC says Colonial Bank applied for and received preliminary approval for the $550 million based on the $300 million investment promise made by Farkas and Allen.
     The bank’s stock price jumped 54 percent immediately, “the largest one-day price increase since 1983,” according to the complaint.
     The money was critical to Colonial Bank and TBW’s survival, says the SEC. It claims Farkas said both companies would go bankrupt without the TARP funds.
     “TBW’s ability to participate in the Capital Infusion was a sham led by Farkas and substantially assisted by Allen. Farkas repeatedly misrepresented to BancGroup, and directed Allen to misrepresent to BancGroup, that a foreign held investment bank had committed to finance TBW’s equity investment in Colonial Bank, when it had not,” the SEC states in its complaint.
     “Allen knew at the time he communicated to BancGroup that all of the necessary third-party funding commitments had been obtained that such statements were false.”
     The SEC says Farkas persuaded the bank that the investment was legit through “Project Squirrel,” which was designed to “secretly divert money from other sources to the Capital Infusion escrow account.”
     In July 2009, BancGroup and TBW mutually announced the death of the stock purchase, which knocked BancGroup’s stock down to $0.49, the SEC says. It has not traded for more than 77 cents a share since then.
     The SEC accuses Allen of aiding and abetting fraud. It seeks unspecified civil penalties.
     The SEC is represented by Assistant U.S. Attorney Steven Gordon.

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