Business: Bank exec at trial: 'I was in too deep'- Over a decade, fraud grew to $2 billion scheme

By Matthew Barakat

AP Business Writer

ALEXANDRIA, Va. (AP) -- A bank executive testified Thursday that she "was in too deep" as she explained to jurors how she left an overdraft of a few million dollars in 2002 grow to become the centerpiece of a $2 billion fraud scheme that by 2009 caused the sixth biggest bank collapse in U.S. history.

"I felt powerless to stop it," said Catherine Kissick, who was a senior vice president at now-defunct Colonial Bank, which had been based in Montgomery, Ala. "I felt like I didn't have any other choice."

Kissick testified at the fraud trial of Lee B. Farkas, who had been chairman and majority owner of Taylor Bean & Whitaker, which had been one of the nation's largest private mortgage companies.

Prosecutors say Farkas led a staggering fraud scheme for the better part of a decade that led not only to Taylor Bean's collapse but also Colonial's. Toward the end of the scheme, the prosecutors allege, Farkas and others tried to bail themselves out by seeking more than $500 million in 2008 from the federal government's bank bailout program, known as the Troubled Assets Relief Program (TARP).

Ultimately, neither Taylor Bean nor Colonial received any TARP funds and investigators from TARP's inspector general's office helped uncover the fraud, along with the FBI.

In a separate scheme, Farkas and co-conspirators allegedly cheated Deutsche Bank and BNP Paribas out of an estimated $1.5 billion by selling them commercial paper -- essentially IOUs -- that were not backed by any collateral as they should have been

Neil Barofsky, who recently resigned as TARP's special inspector general, has called the Farkas case "the most significant criminal prosecution to date rising out of the financial crisis." Six executives at Taylor Bean and Colonial, including Kissick, have already pleaded guilty to their roles in the fraud; Farkas is the only one who has gone to trial.

In Thursday's testimony, Kissick testified that she was first alerted in March 2002 to overdrafts that Taylor Bean had on its primary account with Colonial. Rather than allow overdraft reports that would draw scrutiny at bank headquarters in Alabama, Kissick agreed to "sweep" money into Taylor Bean's account at the end of each day so it would not look like the account was overdrawn.

At first, Kissick said she informed her bosses that she was sweeping the accounts. But by 2003, only she and two underlings knew about the sweeping, which was carefully hidden from bank auditors.

When Kissick first learned of the problem, the overdrawn funds were in the range of $10 million. Kissick said kept hoping that Taylor Bean would turn the tide, make money and fill the hole in its bank account.

She said she constantly leaned on Farkas to come up with the money, and that Farkas always apologized and said he was doing his best.

Jurors saw a stream of pleading e-mails from Kissick to Farkas, first beginning in April 2002, when she told Farkas "I think this might be the final straw." But Kissick continued to send similar exasperated e-mails for the next six years.

She said that when she tried to take a stand with Farkas to stop the growing fraud, Farkas would remind her that, by that point, she was complicit and the two companies' fates were tied.

"He would get upset and he said it would be, pardon my French, a real s---storm. ... If Taylor Bean blew up, Colonial would blow up," Kissick testified.

As the fraud grew to nearly $600 million by 2008, Farkas and Kissick had taken more elaborate measures to conceal it. Rather than sweeping funds from account to account, they arranged for Taylor Bean to sell worthless mortgages to Colonial that the bank would hold on its balance sheet as actual assets. They were worthless, though, because the mortgages had already been sold to other investors.

On Tuesday, jurors heard testimony from Taylor Bean's president, Ray Bowman, who told jurors that at one point he tried to close the hole by making trades in the market. He ended up losing the $60 million he had used to make the trades.

"I was a poor trader," Bowman said.

Meanwhile, while Taylor Bean's fraud had grown to massive proportions, Bowman testified on cross-examination that he and Farkas were worried about the results of the 2008 presidential election. When Barack Obama won, Farkas agreed to give Bowman the bulk of his 2009 salary -- more than $400,000 -- in 2008 because they feared that Obama would raise taxes on people making more than $150,000 once he took office.

"It was kind of a protest," Bowman said.

Published: Mon, Apr 11, 2011