The Securities & Exchange Commission (SEC) has charged Catherine L. Kissick, former vice president at Colonial Bank who was the head of the company's mortgage warehouse lending division with conducting a $1.5 billion securities fraud scheme. The SEC alleges that 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 Corporation (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 recently charged TBW’s former treasurer Desiree E. Brown. In a related action, Kissick pleaded guilty to criminal charges filed by the U.S. Department of Justice (DOJ) in the Eastern District of Virginia.
“For more than seven years, Kissick betrayed her duties to Colonial Bank and its investors by working with Farkas to defraud the bank of $1.5 billion,” said Lorin L. Reisner, Deputy Director of the SEC’s Division of Enforcement.
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.
The SEC’s complaint charges Kissick with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. Without admitting or denying the SEC’s allegations, Kissick consented to the entry of a judgment permanently enjoining her from violation of Section 17( a ) of the Securities Act of 1933, Sections 10( b ) and 13( b )( 5 ) of the Securities Exchange Act of 1934 ( Exchange Act ) and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and from aiding and abetting violations of Sections 10( b ), 13( a ), 13( b )( 2 )( A ) and 13( b )( 2 )( B ) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. Kissick also consented to an order barring her from acting as an officer or director of any public company that has securities registered with the SEC pursuant to Section 12 of the Exchange Act. 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 or from holding any position involving financial reporting or disclosure at a public company. The proposed preliminary settlement, under which the SEC’s requests for financial penalties against Kissick would remain pending, is subject to court approval.
The SEC’s case was investigated by Aaron W. Lipson, Yolanda L. Ross and Barry R. Lakas of the Atlanta Regional Office. The SEC acknowledges the assistance of the Fraud Section of the U.S. Department of Justice’s Criminal Division, the Federal Bureau of Investigation, the Office of the Special Inspector General for the TARP, the Federal Deposit Insurance Corporation’s Office of the Inspector General, the U.S. Department of Housing and Urban Development’s Office of the Inspector General, and the Civil Division of the U.S. Attorney’s Office for the Eastern District of Virginia. The SEC brought its enforcement action in coordination with these other members of the Financial Fraud Enforcement Task Force.
For more information, visit www.sec.gov.
