Breaking: ML-Implode Warned Government Of Taylor Bean Fraud A Year Before Collapse

ML-Implode staff has confirmed that the advance tip about the Taylor, Bean and Whitaker mortgage company mentioned in the Federal Housing Finance Authority (FHFA) Office of Inspector General’s June 2011 Complaints Process Audit came from ML-Implode. The tip, regarding basic fraud in the process of originating and selling Freddie Mac-backed loans, was received by us from an industry source, researched to confirm plausibility (and likelihood), and then forwarded on to OFHEA’s (the FHFA predecessor’s) tip line on June 23rd, 2008.

As the FHFA IG’s report reveals, nothing was done (see page 16 of the report).

Over a year later, on August 3rd and 4th 2009, Taylor Bean and its funding affiliate, Colonial Bank, were raided by Treasury agents under the TARP Special Inspector General office. TBW also had its FHA approval suspended at the same time.

Ultimately, on April 19, 2011, Taylor Bean owner and CEO Lee Farkas was convicted of fraud and earned himself a 30 year sentence. Many officers of Colonial, who had also been ensnared, received lesser sentences.

Both Colonial Bank and Taylor Bean collapsed, putting over 2,000 people out of work and costing $2.9 billion.

BELATED ENFORCEMENT

Former TARP Special Inspector General Neil Barofsky called the conviction of Farkas “the most significant criminal prosecution to date rising out of the financial crisis.” Yet, the halting of the fraud could have started at least a year earlier, had our tip been heeded.

Certainly, measurably less financial damage would have occurred had TBW and Colonial been stopped in their tracks before collapsing.

Colonial had even applied for $550 million in TARP funding, which was provisionally granted, before something (it isn’t clear what) stopped TARP administrators from moving forward and the bank was raided.

Ironically, at the time, Taylor Bean was offering a $300 million investment in Colonial to keep it afloat. Earlier in the year it had led a consortium of investors in an attempt to buy out Colonial, but that effort failed when regulators failed to procure an approval (perhaps THAT was the trigger for the switch to a more proactive investigation; though this would suggest the FDIC was spearheading the effort, instead of SIG-TARP).

What is clear is that TBW was intent on doing anything in its power to paper over the problems within itself and at Colonial in 2009, and it almost succeeded.  All the while, a central regulator to this affair had a “cheat sheet” to what was going on.

Further, the main reason that TBW’s FHA approval was finally revoked by HUD was that TBW’s auditor, Deloitte, quit in June 2009 after find­ing “indi­ca­tions of fraud” (HUD also cited TBW’s failure to report investigations of “irregularities” by 14 states, resulting in a $9 million settlement in the same month).

Obviously alarm bells were going off, yet the feds seemed to have waited until the signs of metastasized fraud were so obvious that it was simply not plausible to ignore them.

CONTEMPT FOR WHISTLEBLOWERS

The FHFA IG’s report paints a picture of a shoddy complaint process, rife with disorganization, lack of complete procedures, and absence of true audits or investigations, which are instead pawned off to the potentially-culpable offices to conduct “on their own honor”.

Obviously the TBW/Colonial example is a “big deal”, as it implied the failure to catch on a timely basis the biggest mortgage criminal of the financial crisis (per Barofsky).

Yet, the FHFA did not go so quietly into the night when this revelation was unearthed by the Inspector General.  Fantastically, it claimed this anecdote was “not representative” of its complaint handling, and requested it be removed from the report (see page 26 of the report).  This is the esteem the FHFA bureaucrats hold the general public and whistleblowers in.   If they fail horribly by ignoring information provided by the public, the public shouldn’t know about it.

Luckily, the IG disagreed, and included all of the above in the final report.

When we saw that report, we had a suspicion that we were the source of the TBW tip.  However, as the whistleblower was not named by name, we could not be 100% sure it was us (certainly it was plausible someone else saw the signs of fraud, and reported them to another journalist, who then reported them to OFHEO).  Thus, to confirm, we had to file a Freedom of Information Act request with FHFA, requesting the initial tip the IG’s report was referring to.   This was done on July 5th, 2011 (receipt was confirmed).

No answer had been received as of late August (the mandated response period, if an extension is not requested, is 20 business days), and it was not until our nagging of FHFA on August 23rd that an answer was received.

The final response came back from the Inspector General’s office, not FHFA proper (though they sent an intermediate response)¹.   The reason was that FHFA had forwarded the request to the Inspector General, claiming they did not have the original tip email, that the Inspector General did.   But in its own response, the IG’s office pointed out that it did not have the email — only discussion based on it — and that only FHFA had the original email.

Thus: we are to believe that nobody has the original whistleblower tip to FHFA (how convenient).

We followed up with the Inspector General’s office, and they reiterated that they had never received the original tip, just the follow-on internal communications, and that they would be happy to send it to us to satisfy our FOIA request.  (For the record, we believe the IG’s office, though that raises the question of why they didn’t try to get and see the original tip, and if they tried, why they didn’t report FHFA’s stonewalling).

Luckily, that brief email thread did contain enough information to confirm that the tip had come from our staff.

So, you can add to the Inspector General’s charges that FHFA may elect the right to either destroy whistleblower tips or lie about possessing them (or simply is so inept it cannot confirm their existence).

In the email thread we received from FHFA-OIG (our staffer’s name is blacked out for their own privacy), one can see the following brief set of events: when it was received, OFHEO’s Stephanie Mullin summarized the tip, asking “Is this something we can discuss?”.   James Lockhart (the OFHEO head) replied, “No, but we should look into it.”  One Chris Dickerson replied simply with “we are” (their posts or titles are not mentioned at all in the emails, either in the header or “signature” lines).

And that, presumably, was the end of OFHEO’s inquest into a $2.9 billion fraud.  As the OIG reported, it appears nothing further was done.   It isn’t clear what Dickerson’s assurance that they are “looking into it” actually meant, in practice.

FEAR OF A “SLAPP” PLANET

This whole episode has a few other disturbing implications having to do with free speech.

As one might expect from our centrality in covering the mortgage collapse, ML-Implode has found itself the target of frivolous “SLAPP” lawsuits a number of times from mortgage-related companies.    SLAPP stands for “Strategic Litigation Against Public Participation”, and denotes a type of libel lawsuit where the plaintiff does not believe they can win on the merits, but seeks to simply silence the target — which is typically an individual or small company that does not have the resources to fight a legal battle.    More often than not, the target has to acquiesce (regardless of the merits of their speech) or go broke fighting.  Either course represents a victory for the plaintiff, and the latter helps dissuade others from speaking out about corrupt, well-heeled interests.

Our first such suit happened in 2007 (versus a pay option ARM lender called Loan Center of California), which ended with a walk-away.  The company, of course, went bankrupt (obviating the underlying reason they sued us — which was in denial of tips we published that they were inevitably done for).  ML-Implode barely survived this episode, financially or otherwise, and it cast a pall on all reporting and forum activities afterwards.

That takes us to the period of the TBW tip (June 2008).  Previously, we might have published the whistleblower’s tip (anonymously), or allowed them to do so on our forums.  But after the suit by Loan Center of California, we could no longer risk the wrath of a such a rich and powerful lender as Taylor Bean & Whitaker.

That is supremely sad, because a public trial could force the details of such fraudulent activities to the surface.  The problem for SLAPP defendants is getting that far, given litigation costs.

Regardless of our increased caution (if not self-censoring), in September 2008 we were sued twice more, by a FHA downpayment-evasion outfit called the “The Grant America Program” (which had recently been totally outlawed, a fact conceded even by its own principals), and by an allegedly-corrupt mortgage lender out of New Hampshire, the Mortgage Specialists (which recently had been fined by multiple regional authorities).

So when we did not see any action taken on the TBW issue, we certainly were not going to push for public circulation of the underlying information, after being attacked frivolously twice more.  LCC, Grant America, and The Mortgage Specialists were pipsqueaks compared to TBW.

Due to those subsequent two suits (which still drag on, though putatively in terminal stages), ML-Implode has had been forced down to a small fraction of its former size and scope as a media company, and has had its potential business prospects dashed (in fact, not having the financial resources to continue litigating on the Grant America lawsuit, we have entered into default).

Interestingly, FHFA evidenced concern about such lawsuits in their communications about our TBW tip.

In the first email received, by Mullin, included were two Google results for “mortgage implode-o-meter”.  These two results were regarding the Loan Center of California suit — one about it being filed, and the other that our anti-SLAPP dismissal motion had been denied (wrongly, in our opinion).   However, nothing on the favorable conclusion of that matter was presented (we had released a web site “press release” on the settlement, which concluded the matter).

In other words, when we were presented as the source, it seems to have been suggested that we were not credible because we were being (had been) sued for libel by a company covered on our web site.

Interesting how that standard of credibility never seems to apply to the rich business interests subject to fines and penalties, if not settlements, by their government regulators.

QUESTIONS

Some questions remain after reflecting on this whole episode.

– How did this tip “die”?

– Was the tip ever referred, even belatedly?  If so, to who/which offices?

– Did the tip play a role at a later date in spurring any investigations, augmenting them, or helping to ensure the TBW buyout of Colonial or the TARP funding did not go through?

– Why didn’t FHA seem to know about the tip, given that it didn’t take administrative action against TBW until after they had already been raided by SIG TARP?   (FHFA and HUD/FHA should be very closely connected on these sorts of concerns).

– Does the FHFA do cursory “background checks” on whistleblowers as a first order of business, before actually checking into substance of their reports?

– Is the culture of FHFA such that they intrinsically shy away from those being SLAPP-sued by regulated companies?

The latter would certainly be a shame, because it hands yet another implicit victory to SLAPP plaintiffs and would-be SLAPP filers: the shirking of their targets of attack by the regulatory authorities, effectively silencing them to the ears of those who could be doing the most to scrutinize the plaintiff and hold them accountable — and protect the interests of the general public.

---

Footnotes:

1. The ML-Implode staffer’s name and address information in the FOIA responses included here is redacted. This has been done at their request out of fear of reprisal by TBW/Colonial Bank persons and others involved in the handling of this matter. This concern, sadly, is typical of what whistleblowers face, even in our ostensibly “free and open” society. Of the long list of reasons NOT to blow the whistle (among them, almost-certain destruction of the whistleblower’s career, if not ability to work at all), there’s only one reason to do so: because it is the right thing to do. Contrary to popular belief, the remote prospect of monetary settlement on the defense side of libel, or in a wrongful dismissal lawsuit, or for a statutory whistleblower bounty, is easily seen not to be worth the effort unless the underlying claims are unambiguously true.