By Erica Orden and Kara Scannell, CNN

(CNN) -- New York federal prosecutors on Thursday charged President Donald Trump's former adviser Steve Bannon and three others with defrauding donors of hundreds of thousands of dollars as part of a fundraising campaign purportedly aimed at supporting Trump's border wall.

Bannon, 66, was arrested on a boat Thursday off the Eastern coast of Connecticut by federal agents along with officials from the United States Postal Inspection Service, according to the agency and a law enforcement official. He will make his initial court appearance in New York later Thursday, according to the US attorney's office. Bill Burck, an attorney for Bannon, declined to comment.

The four men are indicted for allegedly using hundreds of thousands of dollars donated to an online crowdfunding campaign called We Build the Wall for personal expenses, among other things. Bannon and another defendant, Brian Kolfage, promised donors that the campaign, which ultimately raised more than $25 million, was "a volunteer organization" and that "100% of the funds raised...will be used in the execution of our mission and purpose," according to the indictment unsealed Thursday.

But instead, according to prosecutors, Bannon, through a non-profit under his control, used more than $1 million from We Build the Wall to "secretly" pay Kolfage and cover hundreds of thousands of dollars in Bannon's personal expenses.

Kolfage, according to the charges, spent more than $350,000 of the donations on personal expenses, including cosmetic surgery, a luxury SUV, a golf cart, payments toward a boat, home renovations, jewelry, personal tax payments and credit card debt.

Bannon, Kolfage and the other two defendants, Andrew Badolato and Timothy Shea, are charged with one count of conspiracy to commit wire fraud and one count of conspiracy to commit money laundering.

Kolfage, Badolato and Shea didn't immediately respond to requests for comment Thursday.

"As alleged, the defendants defrauded hundreds of thousands of donors, capitalizing on their interest in funding a border wall to raise millions of dollars, under the false pretense that all of that money would be spent on construction," Acting Manhattan US Attorney Audrey Strauss said in a statement. "While repeatedly assuring donors that Brian Kolfage, the founder and public face of We Build the Wall, would not be paid a cent, the defendants secretly schemed to pass hundreds of thousands of dollars to Kolfage, which he used to fund his lavish lifestyle."

The indictment describes a sleight-of-hand perpetrated by the defendants on donors to the We Build the Wall group. Within days of launching the group, Kolfage, along with Bannon and Badolato, made a "secret agreement" in which Kolfage would be paid "$100k upfront [and] then 20 [per] month," according to the indictment. To disguise the transfer of the money to Kolfage, Bannon agreed to pass the payments through the non-profit he controlled, according to prosecutors, and in February 2019, Bannon and Badolato directed the non-profit to pay Kolfage $100,000 from We Build the Wall.

Trump: 'I feel very badly' Speaking at the White House in the hours after Bannon's arrest, Trump said he felt "very badly."

"Well I feel very badly. I haven't been dealing with him for a long period of time," Trump said, noting that he was "involved in our campaign" and "for a small part of the administration very early on." Bannon served in the Trump administration from the inauguration through August 2017.

As for the border wall fundraising project, Trump claimed he knew "nothing" about it and did not know the people involved with it, even though other key allies are on its board.

"I know nothing about the project other than I didn't like when I read about it. I didn't like it. I said this is for government, this isn't for private people, and it sounded to me like showboating and I think I let my opinion be very strongly stated at the time: I didn't like it, it was showboating and maybe looking for funds, but you'll have to see what happens. I think it's a very sad thing for Mr. Bannon," he said.

In February, CNN reported that We Build the Wall had communicated with the administration on plans to build a wall along the southern border and donate it to the US government.

Text messages and 'secret deal'

Prosecutors appear to have reviewed text messages between Bannon, Badolato and others that show the $100,000 was intended as salary for Kolfage, and that in each of the following two months, Bannon paid Kolfage another $20,000 in monthly salary "consistent with the secret deal Bannon had approved."

When Kolfage texted Badolato to say the We Build the Wall group would have to disclose payments to the non-profit in its tax filings, according to the indictment, Badolato replied, "better than you or me lol."

After Kolfage told Badolato to make the payments to Kolfage's spouse, the non-profit filed a tax form falsely saying it had paid his spouse for "media," according to court filings.

In subsequent months, Kolfage's "secret monthly salary" was allegedly passed through other third-party entities that prosecutors described as purported vendors for We Build the Wall, and eventually through a new shell entity created by Shea to "conceal the source and nature of the payments," which Kolfage told Shea they could describe as for "social media."

In October 2019, however, Kolfage, Bannon and Badolato began taking steps to conceal their behavior after learning from a financial institution that We Build the Wall might be under federal criminal investigation, according to the indictment.

At that point, Kolfage and Bannon began using encrypted messaging applications on their phones, Kolfage stopped receiving secret salary payments and a statement on the group's website that said he wasn't receiving compensation disappeared, according to the indictment. Instead, the website subsequently read that he would be paid a salary beginning in January 2020.

According to a law enforcement official, officials at Justice Department headquarters were briefed in advance of the indictment of Bannon and others, but this person didn't indicate when that briefing occurred.

Attorney General William Barr's abrupt removal of then-Manhattan US Attorney Geoffrey Berman in June drew scrutiny of Barr's relationship with the New York prosecutors' office, but department officials have said the firing wasn't related to the handling of any particular case.

Bannon's history with Trump

Bannon was once an influential voice inside the White House as Trump's chief strategist, until he was ousted by the President in August 2017.

Bannon had helped run Trump's 2016 presidential campaign, alongside now-White House senior adviser Kellyanne Conway, and was credited as a driving force behind Trump's populist appeal, nationalist ideology and controversial policies.

Furious from an interview in which Bannon was quoted contradicting Trump on North Korea and claiming he had authority to make personnel changes at the State Department, Trump fired Bannon.

He and the President had a falling-out in 2018 after Bannon was quoted calling an infamous 2016 meeting of a Russian lawyer, Donald Trump Jr., then-campaign chairman Paul Manafort and the President's son-in-law Jared Kushner "treasonous."

Before joining Trump's campaign, Bannon was the former executive chairman of Breitbart, a right-wing news site that traffics in incendiary headlines, many of them outwardly racist, misogynist, anti-Semitic. Bannon returned to Breitbart after leaving the White House, but left again in 2018.

We Build the Wall controversy

We Build the Wall Inc., a group founded by Air Force veteran Kolfage, gained national attention after raising millions of dollars in a GoFundMe campaign, and launching two private wall projects in New Mexico and Texas. Those projects were constructed on private land -- a strategy that largely shielded them from government intervention.

Kolfage has come under scrutiny for his inflammatory rhetoric and promises. In the past, he's been accused by some of his donors as overpromising and underdelivering. Other allegations against him include being clandestine in his operations and unwilling to disclose certain logistics. He often uses his Twitter account to spar with or confront liberal critics. In the past, Kolfage has defended himself against criticism.

He previously told CNN that his group is a "game-changer for border security" and is "trying to make America safer."

As of October 2019, the group said it raised roughly $18.5 million in direct donations, with an additional $6 million in pledged donations dependent on meeting "certain milestones," according to its website. The group said it had more than 500,000 donors.