Today, federal prosecutors as well as the SEC filed charges against Lee Bentley Farkas, the former chairman of private mortgage lending company Taylor, Bean & Whitaker. The DOJ announced that Farkas was arrested last night and charged in a 16-count indictment for his alleged role in a nearly $2 billion fraud scheme that contributed to the failures of Colonial Bank and TBW. Farkas also allegedly attempted to scam the U.S. Treasury's Troubled Asset Relief Program (TARP).

TBW was the largest customer of Colonial Bank's Mortgage Warehouse Lending Division. Among other things, prosecutors allege that beginning in 2002, Farkas and his co-conspirators ran overdrafts in TBW bank accounts at Colonial Bank in order to cover TBW’s cash shortfalls. Farkas and his co-conspirators at TBW and Colonial Bank allegedly transferred money between accounts at Colonial Bank to hide the overdrafts. When these overdrafts grew to tens of millions of dollars, Farkas and his co-conspirators allegedly

covered up the overdrafts and operating losses by causing Colonial Bank to purchase from TBW more than $400 million in what amounted to fake mortgage loan assets, including loans that TBW had already sold to other investors and fake interests in pools of loans. Farkas and his co-conspirators allegedly caused Colonial Bank to hold these purported assets on its books at their face value when in fact the mortgage loan assets were worthless.

The indictment further alleges that Colonial Bank’s holding company, Colonial BancGroup Inc., applied for $570 million in taxpayer funding through a sub-program of the TARP. Colonial BancGroup allegedly submitted financial data and filings that included materially false information related to mortgage loan and securities assets held by Colonial Bank as a result of the scheme described above. In addition, to meet Treasury's requirement for the TARP application that the bank raise $300 million in private capital, Farkas and his co-conspirators are alleged to have falsely informed Colonial BancGroup that they had identified sufficient investors to satisfy the TARP contingency. Ultimately, Colonial BancGroup did not receive any TARP funds.

Notably, both the criminal case and the related SEC action are filed in the Eastern District of Virginia despite the lack of any obvious connection between Farkas or TBW and Virginia. Why, then, Virginia? As previously discussed here, jurisdiction over securities fraud cases is technically proper in the the Eastern District based on the physical location of the SEC's EDGAR database. Indeed, the SEC's complaint against Farkas states:

The fraudulent conduct of Defendant Farkas directly caused BancGroup to transmit and to file multiple false and misleading Forms 10-K, 10-Q and 8-K to the Commission’s electronic data gathering, analysis and retrieval system (“EDGAR”), the servers of which are physically located within the Eastern District of Virginia.

[Note: Colonial BancGroup, Inc. is Colonial Bank's publicly traded parent company]

Moreover, Neil H. MacBride, the U.S. attorney for the Eastern District, said that the criminal case was brought there because at least some victims of the scheme live in Northern Virginia, and because TBW and Colonial did business with Freddie Mac, which is based in McLean, Virginia. MacBride has also previously asserted that the Eastern District may have jurisdiction in cases involving wire transfers because the Federal Reserve Bank in Richmond is one of the primary hubs for such transfers, and in cases involving alleged misuse of bank-bailout funds as the Federal Deposit Insurance Corp. is also based in Arlington.