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Colonial Clarifies Criminal Probe

Colonial BancGroup on Friday said it was the target of a criminal investigation by the Justice Department and a separate SEC investigation.



) --

Colonial BancGroup


said in a regulatory filing on Friday that it was the target of a criminal investigation by the Justice Department and a separate

Securities and Exchange Commission


The company said the Justice Department's investigation centered on Colonial's mortgage warehouse lending division and "related alleged accounting irregularities." One of Colonial's prime warehouse lending customers was

Taylor, Bean and Whitaker Mortgage

of Ocala, Fla.

The headquarters of Taylor, Bean and Whitaker, which last week had backed out of an agreement to raise $300 million for Colonial, and an Orlando office of Colonial Bank were


Monday by investigators from several different federal agencies, including Housing and Urban Development and the Inspector General's Office of the Troubled Assets Relief Program, or TARP.

On Wednesday, the Federal Housing Administration suspended Taylor, Bean and Whitaker from making FHA-insured mortgage loans, saying the lender hadn't filed a required annual financial report and had failed to disclose "certain irregular transactions that raised concerns of fraud."

This crippled the privately held lender, which announced the following day that it was suspending all lending activities and "terminating" all employees except those needed to service the company's remaining loan portfolio.

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Misleading Press Releases on TARP

Colonial BancGroup said the SEC had subpoenaed documents related to the company's loss reserve accounting and its various disclosures related to its TARP application.


highlighted back in February,


failed to mention it would first have to raise $300 million in new capital on its own, before being eligible to receive a $553 capital infusion via TARP when it announced the government's investment on Dec. 2. The company's shares rallied 50% after the initial TARP announcement.

Colonial did not disclose the caveat until Jan. 27. Meanwhile, because of mounting loan quality concerns, the company had entered into a memorandum of understanding with the

Federal Reserve

and Alabama regulators for main subsidiary Colonial Bank to increase its Tier 1 leverage ratio to 8% and its total risk-based capital ratio to 12% by March 31. These ratios need to be at least 5% and 10%, respectively, for most banks to be considered



On March 31, the company entered into an agreement to raise $300 million by issuing preferred shares to an investor group lead by Taylor, Bean & Whitaker, subject to the investor group's due diligence and receipt of confirmation that the TARP money would be forthcoming. The money was never received, despite news headlines that day saying that company had beaten its regulatory deadline to raise capital and another announcement by Colonial on May 26 that the investor group's due diligence requirements had been "satisfied."

On July 31, when

Colonial released its second quarter results

, the company announced the termination of its deal with Taylor, Bean and Whitaker, and expressed "substantial doubt" about its ability to continue operating.

The company also said Friday it was continuing to explore strategic alternatives, and ominously announced that the Alabama State Banking Board was expected to ask Colonial Bank to consent on Aug. 12 to the State Banking Superintendent's "exercise of his statutory authority to appoint the FDIC as receiver or conservator for the bank if and when the superintendent deems such appointment to be necessary."


Written by Philip van Doorn in Jupiter, Fla.

Philip W. van Doorn joined Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.