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.

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