Interview with ExCon Bank CEO Paul Allen Even

Interview with Ex-Con Bank CEO Paul Allen “Even a Pro can be Conned” Paul Allen Gary Zeune CPA

Paul R. Allen Over 30 years of experience in all areas of mortgage banking at senior executive levels Successful entrepreneur, having started and sold a technology company. Now working on three start-ups in various industries Served as professor of finance at a major research institution; published numerous scholarly articles, including research on risk-based capital adequacy Over 500 presentations made to financial audiences ranging from Boards of Directors to analyst societies to regulators Founder of Oakmont Advisors, LLC pallen@oadvisors. com 718 -715 -9682 ©Paul Allen 2

Gary Zeune CPA has 40+ years in public accounting, corporate finance, investment banking. He also has the only speakers bureau in the U. S. for white collar criminals. The Pros & The Cons has been profiled in NY Times, WSJ, LA Times, Forbes and numerous other publications. Since 1987 more than 20, 000 professionals have attended his classes on fraud, ethics and corporate strategy. He writes extensively and has had more than 20 articles published in national magazines and journals. www. The. Pros. And. The. Cons. com gzfraud@The. Pros. And. The. Cons. com 614 -761 -8911 ©Paul Allen 3

Allen’s Personal Background • Served 32 months in a Federal Facility in Brooklyn, NY • Pled to two felonies – Conspiracy to commit bank fraud – False statements to Federal officials • Solid personal background – Stable family – Well educated – “Saver, not spender” ©Paul Allen 4

Allen’s Personal Background • Served 32 months in a Federal Facility in Brooklyn, NY • Pled to two felonies – Conspiracy to commit bank fraud – False statements to Federal officials • Solid personal background – Stable family – Well educated – “Saver, not spender” ©Paul Allen 5

Allen’s Professional Background • University professor in finance in mid-1980’s • “Drafted” by Freddie Mac in 1986 to pioneer work on risk-based capital adequacy • Subsequently worked at Fannie Mae, North American Mortgage • Started and sold document imaging company • Started consulting company in early 2003 • Became Taylor, Bean & Whitaker (TBW) CEO in August 2003 ©Paul Allen 6

Allen’s Reputation • Takes on challenges • Always willing to learn • Not afraid to pioneer work (like capital adequacy) • Thorough worker; detail focused • Committed and loyal • “Does things the right way” ©Paul Allen 7

Aside: What We Learned from Risk. Based Capital Adequacy Project • Big difference between accounting and economic measures of capital adequacy and risk • Book values don’t mean much in a dynamic world • Understanding real equity in properties is critical • When performing risk analysis, focus on current market and business conditions, not historical cost ©Paul Allen 8

Allen and TBW • Met Farkas in June 2003 • Started as consultant • TBW needed to improve reputation, contacts, credibility; Allen was ‘perfect’ • Farkas told Allen that he wanted to ‘clean things up’ and that all the problems had been Farkas’ doing ©Paul Allen 9

Due Diligence • Waited for financial audit results before signing on • Spoke with TBW’s warehouse lenders and mortgage insurers • Read up on TBW’s troubles in 2002; spoke with Fannie and Freddie about it • Conclusion: Nothing nefarious was going on at TBW ©Paul Allen 10

Why TBW was Attractive • Apparent openness of Farkas – Admitting messing up was ‘refreshing’ honesty – Was Allen being set up? • Young daughter was in Tampa – TBW HQ was only 80 miles away; could see her often • In process of adopting two infants; did not want to move to FL – Farkas was OK with remote CEO – Again, was Allen being set up? ©Paul Allen 11

Start of Slippery Slope • Farkas offered lifestyle (family time) to Allen • Flattered Allen by saying he was “the only one” who could help TBW • Did not pay him large salary/bonus; in fact, Allen took pay cut • Let him have a good work/life balance • Knew Allen would like the work challenge • Also knew giving Allen family time would build commitment and loyalty to TBW ©Paul Allen 12

Red Flags and Rationalizations • Red Flag #1: Farkas promised operational control and never gave it • Rationalization: It’s his company; plenty of other things to do; not a prima donna • 20/20 hindsight: Farkas was boxing out Allen and keeping me away from the fraud that started in 2002 ©Paul Allen 13

Red Flags and Rationalizations (2) • Red Flag #2: TBW was going to be acquired in late 2003, but Farkas pulled the plug • Rationalization: It’s his company; fiesty to want to remain independent; loyal to people in little town • 20/20 hindsight: No way that TBW could have made it through a real due diligence without fraud being discovered ©Paul Allen 14

Red Flags and Rationalizations (3) • Wanted to move TBW to Atlanta to take advantage of deeper talent pool; Farkas said “no” • Rationalization: It’s his company; loyal to employees in small town; big fish in small pond • 20/20 hindsight: Farkas used being in a small town as lever to get things he wanted and to build loyalty among townspeople. Similar to what happened at Worldcom, Phar-Mor and Adelphia. ©Paul Allen 15

Red Flags and Rationalizations (4) • Farkas did not want Allen talking to Colonial Bank, TBW’s chief lender • Rationalization: Farkas had relationship with Colonial before Allen’s arrival; Allen had other things to work on • 20/20 hindsight: The centerpiece of the fraud was between TBW and Colonial. Had Allen gotten too close, he would have discovered it ©Paul Allen 16

Audits and TBW • In 6 years, financial audits uncovered nothing – Audited by big four firm throughout that time • Other audits by regulators and third parties also gave no indication anything fraudulent was going on • However, audits were very predicatble • Whenever there was a question, Farkas would threaten to take business elsewhere ©Paul Allen 17

Big Red Light: Ocala Funding LLC Major project; took almost 2 years to complete SPE, post-Enron Bankruptcy-remote Wholly-owned by TBW Never had its own audit, Board or management team • At peak, Ocala Funding was 8 x the size of the rest of TBW • • • ©Paul Allen 18

Ocala Funding Rationalizations • Bad bookkeeping – All the loans where somewhere in the TBW family, just did not know the exact room they were in • Farkas told Allen to “go away”, that he did not know what was going on • Third party reports also showed no issues • Everything consolidated up, so why be worried? ©Paul Allen 19

Ocala Funding Fraud • Because TBW could not balance Ocala’s books, receivable was created – Ineligible asset per SPE documents • Receivable was always good when needed – Commercial paper holders always got their money when they wanted it from 2005 -09 • As long as everyone was getting paid, everything was fine with third parties – Fraudsters know this and will pay people to keep them quiet and in the deal – Lawyers, bankers got paid a lot and were happy to stay in deal ©Paul Allen 20

Lesson Learned: Understand Business Model and How Cash is Generated • No one on the outside understood business model, but Allen did • No one knew how loans get sold into the secondary market and how cash returns to seller • Auditors need to understand how the business generates cash, not just simply having enough cash to pay bills – Ponzi schemes rely on fraudsters having enough cash to pay off everyone, but no one asks how the business generates such high returns ©Paul Allen 21

Final Days of TBW • Early 2009, Colonial Bank on ropes due to bad commercial loans on Gulf Coast • Needs to find buyer • TBW wants to buy Colonial – “Minnow swallowing whale” • Rationalization: Colonial has been there to help TBW; now we are going to help Colonial • 20/20 hindsight: Hail Mary pass to keep fraud from being discovered ©Paul Allen 22

Final Days at TBW (2) • Deloitte refuses to sign off on TBW audit – Thought Colonial was giving money to TBW to buy Colonial • Deal falls through • Colonial fails; then TBW (August 2009) • Allen stays on for a few months to help trustees • Starts hearing of $ billions in shortfall ©Paul Allen 23

Final Note on TBW built lavish HQ in 2007 Started in old auto part store; little office space New HQ was over the top Gave fortress image and a defense against people looking too closely • “Look how strong we are. If you question us, we will go someplace else. ” • Another illusion/diversion by Farkas to knock people off his trail • • ©Paul Allen 24

Auditor’s Note • If you really want to know what’s going on, talk to non-management • Management will not talk • Non-accounting people will talk ©Paul Allen 25

Allen’s Takeaway • Always on outside • Never got cashflow statement • Repeatedly manipulated by Farkas – Used reputation – Flattered Allen; gave him lifestyle to build loyalty – Knew he would follow through on projects • Fraudsters count on sense of duty • Know we want to be “go to guy” • Should have gotten title changed – CEO carries responsibilities • Fraudster also gives plausible explanations – Need to look beyond things that sound true and plausible ©Paul Allen 26

Allen’s Current Situation • Blessed to have incredible wife and family • Prison was hard but not physically threatening – Mostly a gigantic waste of time – System focused on punishment, not rehabilitation • Barred from working in mortgage banking, at least for now • Working on getting new businesses off ground • Partnering with true friends – Humbling experience to know the blessing of true friendship ©Paul Allen 27