Judge rules PricewaterhouseCoopers must pay $625.3 million in damages
Wall Street Journal
By Michael Rapoport
02 July 2018
PricewaterhouseCoopers LLP must pay $625.3 million in damages for
failing to catch a fraud scheme that helped cause one of the biggest
bank failures of the financial crisis, a federal judge ruled Monday.
The judgment against PwC over the 2009 failure of Alabama’s Colonial
Bank is one of the largest judgments or settlements ever for
malpractice by an accounting firm, and accentuates longstanding
concerns over the quality of audits performed by the Big Four
accounting firms.
The decision follows a December ruling in which U.S. District Judge
Barbara Jacobs Rothstein found PwC, the outside auditor for Colonial’s
bank-holding company, negligent in not detecting a massive fraud at a
major customer of the firm. That scheme helped trigger the bank’s
collapse.
In her ruling, Judge Rothstein agreed with the Federal Deposit
Insurance Corp., which had sued PwC as the receiver for the failed
bank, that $625.3 million was the proper level of damages to assess
against PwC. That amount was “amply supported by reliable evidence,”
she said. PwC had asked the judge to impose damages of less than half
that amount.
“We are pleased that the court recognized there are consequences when
an auditor breaches its duty to the investing public,” said Stephen
Sorensen, a lawyer for the FDIC.
Philip Beck, a lawyer for PwC, said the firm is “disappointed” in the
ruling and plans “to pursue an appeal of this matter at the earliest
opportunity.”
The case stemmed from a fraud scheme at Taylor Bean & Whitaker
Mortgage Corp., once of one of the nation’s biggest mortgage companies.
Authorities have said Taylor Bean overdrew its account at Colonial for
years to cover its own cash shortfalls. Taylor Bean covered that up by,
among other things, selling Colonial thousands of mortgages it had
already sold to other investors—even as PwC’s audits of Colonial found
no problems.
When the fraud was discovered, Taylor Bean filed for bankruptcy in
August 2009. This was followed shortly by Colonial’s failure, which
cost the FDIC’s deposit insurance fund billions of dollars. Taylor
Bean Chairman Lee Farkas and at least seven other people, including two
Colonial employees, were convicted or pleaded guilty to participating
in the scheme.
The FDIC sued PwC in 2012. In her December ruling, Judge Rothstein
threw out some of the FDIC’s claims. But she found PwC had violated
auditing rules by failing to design its audits to detect fraud. She
also said the firm didn’t inspect some of the underlying documents for
the mortgages at issue, which could have uncovered the fraud.
PwC had argued that any damages shouldn’t exceed $306.7 million. The
firm contended Colonial’s losses on some Taylor Bean mortgages
shouldn’t be considered part of the fraud. In its statement Monday, PwC
noted the judge had previously found employees at Colonial interfered
with its audits.
But the judge said in Monday’s ruling that PwC’s definition of
fraud-related losses was “artificially narrow,” and that PwC’s
negligence had caused those losses, too.
The PwC ruling marks the latest in a series of significant payments by
accounting firms over the Colonial/Taylor Bean case. Deloitte &
Touche LLP, Taylor Bean’s outside auditor, agreed in February to pay
$149.5 million to settle Justice Department allegations. Crowe Horwath
LLP, which acted as Colonial’s internal auditor, settled FDIC claims in
April for $60 million. PwC itself reached a settlement for undisclosed
terms with Taylor Bean’s bankruptcy trustee in 2016.
top contents appendix previous next