The Taylor, Bean & Whitaker investigation spawned guilty plea number five on Friday. Paul Allen, the former CEO of the collapsed firm, pleaded guilty to conspiracy to commit bank and wire fraud and making false statements. U.S. v. Allen (E.D. Va.). The SEC has also brought cases based on the failure of the firm. The Taylor Bean investigation is among the few to generate enforcement actions despite substantial investigative efforts into the worst market crisis since the 1930s.
Mr. Allen admitted in his plea to participating in a key facet of the Taylor Bean fraud. It involved Ocala Funding, a wholly owned lending facility. That facility raised money by selling commercial paper to financial institutions such as Deutsche bank and BNP Paribas. The funds were used to purchase TBW mortgages.
Shortly after Ocalla was set up, Mr. Allen learned that there was a “hole,” that is the assets backing the paper were inadequate. He participated in efforts to cover up the hole by preparing false reports. The reports were sent to investors. The hole was moved to Colonial Bank. At the time TBW ceased operations it was about $1.5 billion.
In March 2009 Mr. Allen approached private equity investors to secure the $300 million private capital requirement of the U.S. Treasury for Colonial Bank. Meeting the requirement meant that the bank would be eligible for $553 million in TARP funds. Mr. Allan secured the financing but Taylor Bean’s former chairman diverted $5 million to an escrow account in an investor’s name. Nevertheless, Colonial Bank announced it has met the requirement and sent a letter to the FDIC confirming the representation. The announcement and the letter were false. The bank however never obtained the TARP funding. Mr. Allen also admitted furnishing false information to the government regarding TBW’s audited financial statements for the fiscal year ended on March 31, 2009.
The Taylor Bean investigation is one of dozens of market crisis inquiries the Department of Justice and the SEC have conducted in the years since the market crisis began. The SEC, for example, told congress in 2008 that it had multiple working groups conducting investigations of the financial crisis. Undoubtedly DOJ and the FBI had similar working groups. Yet the Taylor Bean investigation is one of the few to result in a series of cases. This week a congressional committee is scheduled to hold hearings on this issue.