The former chairman of mortgage lender Taylor, Bean & Whitaker has been arrested and charged for his alleged role in a $1.9 billion fraud scheme federal prosecutors said contributed to last year’s failure of Colonial Bank.

Lee Bentley Farkas and co-conspirators are accused of misappropriating more than $400 million from Alabama-based Colonial Bank

The former chairman of mortgage lender Taylor, Bean & Whitaker has been arrested and charged for his alleged role in a $1.9 billion fraud scheme federal prosecutors said contributed to last year’s failure of Colonial Bank.

Lee Bentley Farkas and co-conspirators are accused of misappropriating more than $400 million from Alabama-based Colonial Bank’s mortgage warehouse lending division in Orlando, Fla., and approximately $1.5 billion from Ocala Funding, a mortgage lending facility controlled by Taylor, Bean & Whitaker (TBW).

The 16-count indictment against Farkas also alleges he and his co-conspirators committed wire and securities fraud in connection with an unsuccessful attempt to obtain $553 million in Troubled Asset Relief Program (TARP) funds for Colonial Bank.

An attorney for Farkas released a statement saying Farkas would enter a plea of not guilty, and "looks forward to having his day in court to clear his name."

Prosecutors allege the scheme dates to 2002, when Farkas and his co-conspirators allegedly ran overdrafts in TBW bank accounts at Colonial Bank in order to cover TBW’s cash shortfalls.

The scheme also allegedly relied on Ocala Funding, which sold asset-backed commercial paper to financial institution investors, including Deutsche Bank and BNP Paribas Bank.

When TBW and Colonial Bank failed in August 2009, Deutsche Bank and BNP Paribas Bank held approximately $1.68 billion in Ocala Funding commercial paper that had only approximately $150 million in cash and mortgage loans collateralizing it, prosecutors said.

According to the FDIC, Colonial Bank had assets of $25 billion and $20 billion in deposits, most of which were acquired by Branch Banking and Trust (BB&T) of Winston-Salem, N.C.

The U.S. Securities and Exchange Commission on Wednesday announced it has filed a separate civil suit against Farkas, charging him with securities fraud and attempting to scam the TARP program.

The SEC’s complaint alleges that in order to conceal overdrafts of TBW’s accounts with Colonial Bank, Farkas created and submitted fictitious loans to the bank and directed the creation of fictitious mortgage-backed securities supposedly backed by the fake loans.

By the end of 2007, Farkas had created approximately $500 million in fake residential mortgage loans and approximately $1 billion in severely impaired residential mortgage loans and securities, the SEC alleged.

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