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Univ. of Toledo College of Law

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Friday, March 4, 2011

Former Colonial Bank Executive Charged with Securities Fraud Scheme

The SEC charged Catherine L. Kissick, a former vice president at Colonial Bank who was the head of its mortgage warehouse lending division, with conducting a $1.5 billion securities fraud scheme.  According to the SEC, Kissick enabled the sale of fictitious and impaired mortgage loans and securities from the mortgage warehouse lending division’s largest customer – Taylor, Bean & Whitaker Mortgage Corp. (TBW) – to Colonial Bank, and she caused these securities to be falsely reported to the investing public as high-quality, liquid assets.  The SEC previously charged former TBW chairman and majority owner Lee B. Farkas in June 2010, and charged TBW’s former treasurer Desiree E. Brown last week.

In a related action today, Kissick pleaded guilty to criminal charges filed by the Department of Justice in the Eastern District of Virginia.

According to the SEC’s complaint filed in U.S. District Court for the Eastern District of Virginia, Kissick along with Farkas and Brown perpetrated the fraudulent scheme from March 2002 to August 2009, when Colonial Bank was seized by regulators and Colonial BancGroup and TBW each filed for bankruptcy. Because TBW generally did not have sufficient capital to internally fund the mortgage loans it originated, it relied on financing arrangements primarily through Colonial Bank’s mortgage warehouse lending division to fund such mortgage loans.

The SEC alleges that when TBW began to experience liquidity problems and overdrew its then-limited warehouse line of credit with Colonial Bank by approximately $15 million each day, Kissick, Farkas and Brown concealed the overdraws through a pattern of “kiting” in which certain debits were not entered until after credits due for the following day were entered. In order to conceal this initial fraudulent conduct, Kissick, Farkas, and Brown created and submitted fictitious loan information to Colonial Bank and created fictitious mortgage-backed securities assembled from the fraudulent loans. By the end of 2007, the scheme consisted of approximately $500 million in fake residential mortgage loans and approximately $1 billion in severely impaired residential mortgage loans and securities. These fictitious and impaired loans were misrepresented as high-quality assets on Colonial BancGroup’s financial statements.

Kissick consented to an order barring her from acting as an officer or director of any public company.  Kissick also consented to an order prohibiting her from serving in a senior management or control position at any mortgage-related company or other financial institution.

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