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June 22, 2011

Former CEO of big mortgage firm gets 40 months on fraud conviction

This Reuters story, headlined "Ex-CEO of mortgage lender sentenced to prison," reports on one (of many?) criminal justice echoes of the housing crash.  Here are the basics:

The former chief executive of one of the largest mortgage firms to collapse in the U.S. housing crash was sentenced to more than three years in prison on Monday for his role in a fraud scheme dubbed "Plan B" that federal prosecutors say cost investors $1.5 billion.

Paul Allen, 55, the former CEO of Taylor, Bean & Whitaker, or TBW, pleaded guilty in April to one count of making false statements and one count of conspiring to commit bank and wire fraud.  The Justice Department said the fraud scheme contributed to the failure of TBW, which was one of the largest privately held U.S. mortgage lending companies, as well as the bankruptcy of Alabama-based Colonial Bank, which was one of the 50 largest U.S. banks.

Former TBW Chairman Lee Farkas, who was convicted on April 19 on 14 counts of fraud for his role in masterminding the scheme, is scheduled to be sentenced on June 27....

Allen's co-conspirator Sean Ragland, a 37-year-old former senior financial analyst at TBW, was also sentenced today by Judge Leonie Brinkema to three months in prison.  Four other senior officials with TBW and Colonial Bank have also been sentenced to time in prison ranging from three months to eight years for their role in the fraud.

June 22, 2011 at 09:49 AM | Permalink


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O.k., that's a small handful, now what about the larger financial institutions - Bear Stearns, Countrywide, Washington Mutual? Too big to prosecute or convict, apparently. Impunity reigns at the top.

Posted by: anonymous | Jun 22, 2011 1:31:12 PM

let me see two BIG multi state companies and out of all t hose 1,000's of employee's he's the only one who broke the law!

what a joke!

Posted by: rodsmith | Jun 22, 2011 1:46:16 PM

Bear two things in mind: First, the government needs proof, not just a general “feeling” that, out of 1,000s of employees, someone there must have been a criminal.

Second, an awful lot of the financial crisis came about because of stupid, rash, irrational business judgments. Just because bad things came of them, does not mean those judgments were illegal. It is not a crime to be dumb.

Posted by: Marc Shepherd | Jun 22, 2011 3:22:45 PM

Marc --

Of course it's true that it's not a crime to be dumb, but my instincts lie more with "anonymous" in this instance. For a very long time, and through the amassing of some eye-popping fortunes, there was a good deal more going on here than just "stupid, rash, irrational business judgments." There was shrewdness, willful blindness, deceit and greed -- and those are the petri dish of crime.

I'm a big fan of capitalism, but I have to think that much of what created this disaster was less capitalism than a good, old fashioned swindle.

Posted by: Bill Otis | Jun 22, 2011 4:27:04 PM

This case discussed above is the only prosecution to date for any flavor of mortgage securitization fraud. See in particular the comment thread to the following link to see how pervasive one particular flavor of mortgage securitization actually is:


Posted by: Fred | Jun 22, 2011 9:44:23 PM

Wow! This guy, Paul Allen, only gets 40 months for a loss of $1.5 Billion?! And then we have stories of drug addicts' getting LWOP!! It is abundantly clear that the Justice Department is running amok playing God!! One has keep in mid that sentencing disparities such as these were the genesis of the much-reviled US Sentencing Guidelines ("USSG"). What is sadder is that the same USSG is being manipulated in the name of substantial assistance ("Section 5K1.1") to an inept, arrogant God-playing Government (read: prosecutors). My question is: Why would the Government even need substantial assistance from coconspirators and other codefendants if it did its job properly in the first instance? I thought that it was the Government's job (and duty to their bosses, the taxpayers) to execute their functions diligently and faithfully. We have to get rid of the laws rewarding the "substantial assistance" providers. It just engenders lies and fabrications just to save one's own skin. While we are at it, we might as well get rid of the conspiracy statute, also. These two, in my opinion, are the bane to the justice in the society as a whole. Per the latest version of the USSG, Paul Allen was probably facing a minimum of 25 years and perhaps even 30-years-to-life sentence. We really have a misplaced sense of equitable justice in this country. What a shame!

Posted by: John Marshall | Jun 23, 2011 2:09:27 AM

are these judgments subjected to Laws..?

Posted by: adi traffic school | Jun 23, 2011 7:48:13 AM

John Marshall at 2:09 A.M.:

This is the one and only prosecution of mortgage securitization fraud so far. There were over 1000 prosecutions during the savings and loan crisis in the '80s. Considering that various examples of fraud in the mortgage securitization process have been reported publicly since 2004, that there has only been this prosecution is the scandal.

As to the use of 5K motions in this case, its use can only be justified by the number of additional prosecutions it leads to. If this prosecution is a one off, then its use was a joke.

Posted by: Fred | Jun 23, 2011 11:42:54 AM

Marc Shepherd at Jun 22, 2011 3:22:45 PM:

"Second, an awful lot of the financial crisis came about because of stupid, rash, irrational business judgments. Just because bad things came of them, does not mean those judgments were illegal. It is not a crime to be dumb."

Agreed. The vast majority of people involved in the mortgage securitization process committed no crime or civil wrong. However, for those who did "stupid, rash, irrational business judgments" is no defense. The two fundamentals of the mortgage securitization process were (1) real estate values would ALWAYS continue to rise and (2) there was a INFINITE pool of creditworthy borrowers.

As a result, loan volume was valued more than loan quality. Any lender whose bonus structure was based on loan volume rather than loan quality knew exactly what was going on and should be the first targets of any criminal investigations.

Posted by: Fred | Jun 23, 2011 7:18:36 PM

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