The government has charged a former mortgage executive of attempting to defraud investors and the Troubled Asset Relief Fund (TARP), created by Congress during the banking crisis to buy toxic assets from troubled financial institutions.

Federal prosecutors charged that Lee Farkas, former chairman of failed Taylor, Bean & Whitaker Mortgage Corp., engineered a multibillion-dollar fraud and also attempted to obtain more than $550 million from the TARP program.

Assistant Attorney General Lanny Breur called the alleged fraud "truly stunning in its scale and complexity."

Farkas was arrested last night in Ocala, Fla., and charged in a 16-count indictment for his alleged role in a more than $1.9 billion fraud scheme that contributed to the failures of Colonial Bank, one of the 50 largest banks in the United States in 2009, and TBW, one of the largest privately held mortgage lending companies in the United States in 2009, according to a U.S. Justice Department statement.

An indictment unsealed today in U.S. District Court for the Eastern District of Virginia charges Farkas, of Ocala, Fla., with one count of conspiracy to commit bank, wire and securities fraud; six counts of bank fraud; six counts of wire fraud; and three counts of securities fraud. The indictment also seeks approximately $22 million in forfeiture from Farkas.

Farkas' lawyer said his client would plead "absolutely not guilty."

Farkas and his co-conspirators allegedly engaged in a scheme to misappropriate more than $400 million from Colonial Banks Mortgage Warehouse Lending Division in Orlando, Fla., and approximately $1.5 billion from Ocala Funding, a mortgage lending facility controlled by TBW. Farkas and his co-conspirators allegedly misappropriated this money to cover TBWs operating losses.

According to the government, the fraud scheme contributed to the failures of Colonial Bank and TBW. The indictment further alleges that Farkas and his co-conspirators committed wire and securities fraud in connection with their attempt to convince the United States government to provide Colonial Bank with approximately $553 million in TARP funds.

"Taxpayers have paid a hefty price for the crimes related to the current financial crisis, and investors in Colonial and Ocala Funding were among those directly affected by this conspiracy," said Neil MacBride, U.S. Attorney for the Eastern District of Virginia.

Court documents allege that the scheme began in 2002, when Farkas and his co-conspirators ran overdrafts in TBW bank accounts at Colonial Bank in order to cover TBWs cash shortfalls. Farkas and his co-conspirators at TBW and Colonial Bank allegedly transferred money between accounts at Colonial Bank to hide the overdrafts.

After the overdrafts grew to tens of millions of dollars, Farkas and his co-conspirators allegedly covered up the overdrafts and operating losses by causing Colonial Bank to purchase from TBW more than $400 million in what amounted to fake mortgage loan assets, including loans that TBW had already sold to other investors and fake interests in pools of loans. Farkas and his co-conspirators allegedly caused Colonial Bank to hold these purported assets on its books at their face value when in fact the mortgage loan assets were worthless.

Court documents also allege that Farkas and co-conspirators caused TBW to hide impaired-value mortgage loans that it was unable to sell. Through a series of sham transactions, the conspirators allegedly hid impaired-value loans on Colonial Banks books for a period of years in some cases.

According to court documents, Farkas and his co-conspirators at TBW also misappropriated hundreds of millions of dollars from Ocala Funding. Ocala Funding sold asset-backed commercial paper to financial institution investors, including Deutsche Bank and BNP Paribas Bank. Ocala Funding, in turn, was required to maintain collateral in the form of cash and/or mortgage loans at least equal to the value of outstanding commercial paper.