Ex-mortgage CEO gets 40 months for $3B fraud
Posted: 7:31 pm Tue, June 21, 2011
ALEXANDRIA, Va. — The CEO of what had been one of the nation’s largest privately held mortgage lenders was sentenced Tuesday to more than three years in prison for his role in a $3 billion scheme that officials called one of the biggest corporate frauds in U.S. history.
The 40-month sentence for Paul R. Allen, 55, of Oakton, Va., is slightly less than the six-year term sought by federal prosecutors.
“I messed up. I messed up big,” Allen told U.S. District Judge Leonie Brinkema before he was sentenced, apologizing to his family and “the entire financial community. “There was no excuse for my behavior.”
Allen was chief executive at Ocala, Fla.-based Taylor Bean & Whitaker, which collapsed in 2009 after the criminal investigation became public, resulting in its 2,000 employees losing their jobs. The fraud also contributed to the collapse of Alabama-based Colonial Bank — the sixth largest bank failure in U.S. history — after Colonial bought hundreds of millions of dollars in Taylor Bean mortgages that had already been sold to other investors.
Two other banks — Deutsche Bank and BNP Paribas — lost nearly $2 billion after buying corporate paper from Taylor Bean that was not properly backed with collateral, authorities said.
Taylor Bean and Colonial also tried to obtain more than $500 million from the government’s Troubled Asset Relief Program but ultimately never received any funding from the program also known as TARP.
Neil Barofsky, who served as TARP’s special inspector general, said the Taylor Bean case was the most significant criminal prosecution to arise out of the nation’s financial crisis. The convictions of Farkas and Allen represent some of the most high-profile executives in the housing and financial industries to receive prison time in the aftermath of the housing sector meltdown.
Allen’s lawyer argued for leniency on the theory that Allen was CEO in name only. The real mastermind was company chairman Lee Farkas, who kept Allen out of the loop on much of the company’s day-to-day operations, according to trial testimony.
“Mr. Allen was not treated as a CEO. He did not function as a CEO,” said defense lawyer Stephen Graeff. “Sentence Mr. Allen the man, not Mr. Allen the title.”
But Brinkema said Allen’s title was significant, adding Allen’s reputation in the industry lent credibility to Taylor Bean that it otherwise would not have had. Even worse, Brinkema said, Allen had subordinates who were reporting the problems to Allen, but Allen left them to fend for themselves. One of those Taylor Bean employees, Sean Ragland, also was sentenced Friday to three months in prison and nine months of home detention for his role in the scheme.
“I can’t understand why in the world you didn’t stop it,” Brinkema told Allen.
Allen, for his part, apologized to his family and to “the entire financial community.”
By the time Allen became CEO in 2003, the fraud was already under way, and Taylor Bean owed more than $100 million to Colonial. Allen’s part in the schemes, came later, especially in the commercial paper loans from Deutsche bank and BNP Paribas that eventually grew to become the largest part of the fraud.
Ragland and Allen are the fifth and sixth persons to be sent to prison as part of the Taylor Bean-Colonial fraud, and investigators say the investigation is continuing. Sentences have ranged from three months to eight years.
All six received credit on their sentences for cooperating with investigators and testifying at Farkas’ trial.
“Mr. Allen’s sentence reflects his ultimate cooperation with this investigation, but also sends the message that unless executives expose and stop fraud when they first learn of it, they will be punished,” said Neil MacBride, U.S. Attorney for the Eastern District of Virginia.
Farkas is to be sentenced next week, and prosecutors have indicated they will seek a significantly longer sentence for Farkas than for his co-conspirators.
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