(CN) - Found guilty of conspiracy and bank and wire fraud, former Taylor Bean chairman Lee Farkas must forfeit over $38.5 million in proceeds obtained as a result of his illegal activity, a federal judge ruled.
From 2002 to 2009, former Taylor, Bean & Whitaker (TBW) chairman Lee Bentley Farkas and his co-conspirators used an elaborate fraud scheme to hide the mortgage company's financial difficulties, ultimately resulting in over $3.5 billion in losses to various victims.
The scheme began when conspirators at Colonial Bank agreed to sweep funds overnight into an overdrawn Taylor Bean account. Eventually, Farkas had Taylor Bean create a subsidiary, Ocala Funding, which was used to sell mortgage-backed securities without proper protection, resulting in a shortfall of over $1.5 billion.
Farkas was found guilty in April 2011 on 14 counts including conspiracy and bank and wire fraud. The government then requested that Farkas forfeit more than $38.5 million in proceeds obtained directly or indirectly as a result of his fraudulent activities, allowing other property to be forfeited as a substitute in the case that the proceeds were not available for forfeiture.
U.S. District Judge Leonie Brinkema outlined the court's reasons for granting the government's motion.
Farkas had insisted that the funds at issue did not result from illegal activity during the period of fraud, but rather were generated by Taylor Bean's legitimate business operations, and thus should not be subject to forfeiture, according to the court.
But Brinkema threw out this argument, holding that the criminal forfeiture statute "clearly states that, to be forfeitable, proceeds need not be obtained as a direct result of the crime; indirectly-acquired funds are subject to forfeiture as well."
The judge also rejected Farkas' argument for a narrower view of "proceeds" based on a previous ruling on a similar case. Farkas had also cited improper precedent that "was decided before the Civil Asset Forfeiture Reform Act, which added to § 981 the definition of 'proceeds' as 'not limited to the net gain or profit realized from the offense,'" according to the Oct. 26 decision.
The court then turned to the government's request that Farkas forfeit $15 million he obtained from Colonial Bank, as well as $7.3 million in fraudulent loans, referred to as "Lee loans" in Taylor Bean's books.
Farkas used the $15 million to pay down his due-from-shareholder account at Taylor Bean, and provided Colonial Bank with a pool of fake loans to pay them back, according to the court. The Lee loans were securitized by fake mortgages that were either taken out in other people's names or backed by properties that Farkas did not own or that did not actually exist, and then sold to or funded by Colonial Bank.
"The government therefore correctly contends that the $15 million and the Lee loans 'were part and parcel of the massive fraud scheme,' as Farkas obtained these funds fraudulently by using fake mortgages as security," Brinkema concluded. "As such, these funds are direct proceeds of defendant's fraud and subject to forfeiture."
Farkas failed to persuade the judge that he only temporarily possessed the $15 million, and that using these funds to pay down his due-from-shareholder account actually benefitted Taylor Bean, not him.
"The government correctly argues that what TBW ultimately did with those funds is also not relevant to the forfeiture determination," Brinkema ruled. "Moreover, title to the illegally-obtained funds vested in the government at the moment the fraud was committed, and the government's interest is therefore not contingent on the defendant's ultimate disposition of those funds."
Disagreeing with Farkas' claim that the Lee loans were intended merely to document money he owed to Taylor Bean, Brinkema found that "the evidence at trial established that the security for these loans were on properties Farkas did not own or that did not even exist." The court thus concluded that "the loans were clearly fraudulent and the proceeds are therefore subject to forfeiture."
Ultimately, all of Farkas' arguments failed. "Defendant places great significance on the argument that TBW generated revenue from legitimate business operations after the fraud commenced and until the company's demise," the 16-page decision states. "However, whether the specific funds resulted from legitimate or illegal activities at TBW is irrelevant because any funds held by TBW would have been unavailable to defendant but for his fraud."