Former Colonial Bank supervisor charged in $1.5 billion fraud scheme

By Caroline Salls

Pittsburgh, March 16 - Former Colonial Bank mortgage warehouse lending division operations supervisor Teresa A. Kelly has been charged by the Securities and Exchange Commission with participating in a $1.5 billion securities fraud scheme, according to a news release.

The SEC alleged that Kelly enabled the sale of fictitious and impaired mortgage loans and securities from the division's largest customer, Taylor, Bean & Whitaker Mortgage Corp., to Colonial Bank.

In addition, the agency alleged that Kelly caused these securities to be falsely reported to the investing public as high quality, liquid assets.

As previously reported, the SEC charged former Taylor Bean chairman and majority owner Lee B. Farkas in June 2010, Taylor Bean's former treasurer Desiree E. Brown in February and Colonial Bank mortgage warehouse lending division head Catherine L. Kissick earlier this month in connection with the alleged scheme.

"For nearly seven years, Kelly abused her access to Colonial Bank's accounting systems, allowing Farkas and TBW to defraud the bank and its investors out of more than $1.5 billion," SEC Atlanta associate regional director William P. Hicks said in the release.

According to the SEC's complaint filed in U.S. District Court for the Eastern District of Virginia, Kelly, Farkas, Kissick and Brown perpetrated the fraudulent scheme from March 2002 to August 2009 when Colonial Bank was seized by regulators and Colonial BancGroup, Inc. and Taylor Bean each filed for bankruptcy.

The SEC said that because Taylor Bean generally did not have enough capital to internally fund the mortgage loans it originated, the company relied on financing arrangements primarily through Colonial Bank's mortgage warehouse lending division to fund the mortgage loans.

The SEC alleged that Taylor Bean began to experience liquidity problems and overdrew its then-limited warehouse line of credit with Colonial Bank by about $15 million each day.

According to the release, Kelly, Farkas, Kissick and Brown allegedly concealed the overdraws through a pattern of "kiting" in which debits were not entered until after credits due for the following day were entered.

The SEC alleged that in order to conceal this initial fraudulent conduct, Kelly, Farkas, Kissick and Brown created and submitted fictitious loan information to Colonial Bank and created fictitious mortgage-backed securities assembled from the fraudulent loans.

By the end of 2007, the scheme consisted of roughly $500 million of fake residential mortgage loans and $1 billion of severely impaired residential mortgage loans and securities, the release said.

The SEC said these fictitious and impaired loans were misrepresented as high-quality assets on Colonial BancGroup's financial statements.

The agency's complaint charges Kelly with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws as well as aiding and abetting violations.

The SEC said its investigation is continuing.

Colonial BancGroup is the Montgomery, Ala.-based holding company for Colonial Bank. The company filed for bankruptcy on Aug. 25, 2009 in the U.S. Bankruptcy Court for the Middle District of Alabama. Its Chapter 11 case number is 09-32303.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.