First Major Criminal Conviction Related to the Mortgage Meltdown

Lee Farkas in front of his private jet in 2005

The Justice Department is celebrating this week after finally landing a major criminal conviction in the aftermath of the mortgage meltdown. The Justice Department was able to stick 14 counts of fraud and conspiracy on Lee Farkas in what is reported to be a $2.9 billion mortgage fraud scheme. Mr. Farkas operated a huge mortgage business, known as Taylor, Bean and Whitaker.

Taylor Bean apparently sold billions of dollars of mortgages to Fannie Mae and Freddie Mac and obtained loans from large U.S. and foreign banks that were collateralized with fictitious mortgages or mortgages already sold to others.

As is common with many fraudsters, Mr. Farkas had an appetite for material possessions that led him to spend at least $20 million of other peoples' money on things like fancy homes, classic cars and even a private jet (see the photo to the right). According to the NY Times,

More on Ernst and Young and Lehman Brothers (links)

Going Concern recently interviewed us about E&Y and Lehman--check it out here.  The accounting news source also has a great roundup of other thoughts and opinions on the case from around the blogosphere.  I would also encourage readers to check out David Zaring's thoughts on the matter over at The Conglomerate.

Ernst & Young and Lehman: A Not-So-Happy New Year is in Store

The Wall Street Journal and other news sources are reporting today that Ernst and Young is about to be hit with a civil lawsuit for its dealings with Lehman Brothers before the investment bank filed the largest bankruptcy in history ($691 Billion). We posted a few times earlier in the year on Lehman's use of Repo 105 and 108 transactions (hereafter Repo transactions) and how EY will be perceived in these transactions but it's been quiet for some time now and I was starting to wonder what would become of it. The lawsuit will certainly claim that EY was helping Lehman be obscure in their financial reporting by allowing them to hide debt through the Repo transactions. Here is an excerpt from the Wall Street Journal article:

Foreclosure Fraud and the Economic Recovery

Real estate industry analysts are looking at the foreclosure fraud allegations and saying that this is a huge game changer in the economic recovery that is (or was) under way. If you've heard a bit about this and have been wondering what is going on, here is a short overview from what I can gather.

First, anyone who was foreclosed on during the past three years has a chance that the bank that foreclosed on them did not cross the i's and dot the t's during the foreclosure process. According to one article:

Reasons why fraud spikes in a recession

A recent Time Magazine article explains: "As sure as growth slides and employment numbers tumble, so cases of fraud rise during recessions. This time is no different."

This article is interesting but I think it would be more complete if it analyzed different forms of fraud. Some may actually go down during hard times. For example, I'm of the opinion that financial statement fraud probably spikes in boom times but comes to light in a recession. On the other hand, embezzlement and scams probably spike in hard times as people are more desperate.

Finally, I disagree with the article when it says: "The slump may also prompt fraudsters to rationalize their behavior." I think a slump causes increased pressure and not necessarily a change in rationalizing behavior. The increased pressure of hard economic times is simply a harder test of a person's ability to not rationalize committing fraud that is failed by more people.