PwC Settles $5.6B negligent auditing case mid-trial
Daily Business Review
26 August 2016
Accounting giant PricewaterhouseCoopers on Friday settled a $5.6 billion case mid-trial for an undisclosed amount.
"The case was settled to the mutual satisfaction of the parties," a company spokeswoman said.
The bankruptcy trustee for mortgage lender Taylor Bean & Whitaker
Mortgage Corp. sued PwC for allegedly negligently auditing Colonial
Bank, missing a multibillion-dollar fraud that led to one of the
biggest bank collapses of the recession.
Trial began Aug. 1 before Miami-Dade Circuit Judge Jacqueline Hogan
Scola. The plaintiff wrapped up its presentation of witnesses just
before the case settled.
PwC's lead counsel is Beth Tanis of King & Spalding in Atlanta.
The trustee is Neil Luria of SOLIC Capital Management in Evanston,
Illinois. He was represented by Steven Thomas of Thomas, Alexander
& Forrester in Venice, California, whose spokesman declined to
comment beyond confirmation of the settlement.
auditors had a responsibility to the public to detect fraud
During opening statements, Thomas argued PwC auditors had a
responsibility to the public to detect fraud. Although Taylor Bean had
its own auditor and did not work with PwC, Thomas argued the
now-shuttered lender was harmed by PwC's failure to uncover a scheme
carried out by employees at Colonial Bank and its biggest customer,
PwC did not meet accounting standards
"For seven years, Pricewaterhouse signed their name to an audit report
certifying over $4.6 billion in fake assets," he told jurors Aug. 9.
Thomas argued PwC did not meet accounting standards, citing an earlier
finding by Miami-Dade Circuit Judge John Thornton that PwC was not
sufficiently independent from Alabama-based Colonial Bank, which at one
point had about $25 billion in assets.
PwC did not perform basic checks
The trustee's attorney also claimed PwC did not perform basic checks to
verify the existence of mortgages that were reportedly sold and showed
jurors audit reports that indicated a PwC intern, not a certified
public accountant, had written the company "felt" the bank's collateral
Tanis maintained the jury could not hold PwC liable for $5.6 billion in
damages claimed for creditors and beneficiaries of the trust. The eight
people who pleaded guilty in the scheme included Taylor Bean owner Lee
Farkas and several Taylor Bean board members and C-level executives, as
well as two Colonial Bank employees.
"The money from these frauds was stolen for Taylor Bean, not from
Taylor Bean," Tanis told jurors. "Taylor Bean doesn't have that money
anymore because Taylor Bean spent that money on itself. It spent that
money paying its bills."
Taylor Bean, which was the fifth-largest issuer of Government National
Mortgage Association securities, filed for bankruptcy protection in
The company had more than 2,000 employees who lost their jobs after FBI agents raided its headquarters in Ocala.
PricewaterhouseCoopers Settles $5.5 Billion Crisis Era Lawsuit
Wall Street Journal
By Patrick Fitzgerald
26 August 2016
Accounting giant PricewaterhouseCoopers LLP has settled a $5.5 billion
lawsuit in the middle of a weekslong trial over its alleged failure to
catch the massive fraud that led to one of the most expensive bank
failures in U.S. history.
Steven Thomas, a lawyer for the bankruptcy trustee overseeing the
remains of failed mortgage lender Taylor Bean & Whitaker Mortgage
Corp., announced the settlement at a hearing Friday morning in Miami.
Mr. Thomas and PwC each said the settlement terms were confidential but
that the lawsuit has been resolved “to the mutual satisfaction of the
Taylor Bean was a Florida mortgage lender that collapsed seven years
ago, when a multibillion-dollar mortgage fraud orchestrated by the
company’s leader, Florida businessman Lee Farkas, unraveled. Its
collapse also brought down Colonial Bank, one of the largest bank
failures in U.S. history.
a fundamental question in accounting
The bankruptcy trustee for Taylor Bean, once one of the nation’s
biggest privately held mortgage companies, sued PwC in 2013, seeking
$5.5 billion in damages. At issue in the case, one of the few
allegations of wrongdoing during the financial crisis that has reached
a courtroom, was a fundamental question in accounting: How much
responsibility do auditors have for catching fraud?
The trustee claimed PwC was negligent in not detecting the fraud at the
mortgage lender. PwC’s lawyers countered by saying the accounting firm
was deceived by Mr. Farkas as well, and it shouldn’t be expected to
catch the Taylor Bean fraud when neither bank regulators nor Colonial
or Taylor Bean did.
The civil trial, which started earlier this month in state court in
Miami, had been expected to last about six weeks. Just getting to trial
was something of a rarity. Most crisis-related legal probes involving
auditors have ended in settlements. Taylor Bean’s own auditor, Deloitte
LLP, settled with the trust in 2013 for an undisclosed amount.
Although the details are under wraps, the settlement represents a
victory for Mr. Thomas and another notch on the belt for the former
partner at Sullivan & Cromwell, who negotiated the Deloitte
settlement as well as winning a judgment against accounting firm Ernst
“The fact that they reached a settlement after three weeks of a bloody
trial, means someone at PwC did a reality check about their exposure,”
said Jim Peterson, a former Arthur Andersen partner, whose book, “Count
Down: The Past, Present and Uncertain Future of the Big Four Accounting
Firms,” looks at whether a big accounting firm can withstand a
so-called black swan event like having to pay out a big legal judgment.
Whatever amount PwC agreed to pay, they can afford
“Whatever amount PwC agreed to pay, they can afford,” said Mr.
Peterson, but that doesn’t mean the accounting firm won’t feel any pain.
A spokeswoman for PwC declined to comment on the Taylor Bean settlement.
But Mike Young, a trial lawyer at Willkie Farr & Gallagher who has
defended accounting firms, cautioned against reading too much into
PwC’s decision to settle the case.
“Cases settle when the parties decide they want to be done with it,”
said Mr. Young, who isn’t involved in the Taylor Bean litigation. “You
can’t assume anything by the mere fact that a case has settled.”
PwC was Colonial’s auditor, not Taylor Bean’s, but the two firms had a
close relationship. Colonial was Taylor Bean’s main lender, providing
the lifeblood for the Florida’s company’s mortgage assembly line. The
fraud unraveled after federal authorities raided Colonial’s and Taylor
Bean’s offices in August 2009.
The mastermind behind the fraud at Taylor Bean was Mr. Farkas, who is
now serving a 30-year prison sentence. Mr. Farkas, whom federal
prosecutors described as a “consummate fraudster,” was convicted in the
spring of 2011 of misappropriating about $3 billion and trying to
fraudulently obtain more than $550 million from the government’s
Troubled Asset Relief Program in a failed effort to prop up Colonial.
Colonial officials Catherine Kissick and Teresa Kelly and five other
Taylor Bean executives––including the company’s chief executive,
president, and chief financial officer––were convicted of crimes in
connection with the fraud.
The collapse of Colonial, which had $25 billion in assets and $20
billion in deposits, was the biggest bank failure of 2009. The FDIC
estimates Colonial’s collapse will cost its insurance fund $5 billion,
making it one of the nation’s most expensive bank failures.
The settlement doesn’t end PwC’s legal battles
The settlement doesn’t end PwC’s legal battles in connection with the
fraud at Taylor Bean. The accounting firm is facing $1 billion lawsuit
filed by the Federal Deposit Insurance Corp., the government agency in
charge of managing Colonial Bank’s receivership. The FDIC says PwC’s
audits should have uncovered the massive holes in Colonial’s balance
sheet. That lawsuit, filed in federal court in Alabama, is pending.
PwC is also facing a $1 billion lawsuit over claims of bad accounting
advice it gave to failed commodities broker MF Global Holdings. PwC
agreed to pay $65 million to settle a separate lawsuit last year over
accusing it of failing to properly audit MF Global’s internal controls
before its collapse. PwC has denied wrongdoing with respect to the
Colonial and MF Global litigation.
—Michael Rapoport contributed to this article.
Comments from readers
The dirty little secret of all the large accounting companies:
They're pretty useless at identifying large scale Corporate issues,
they're good for catching up with people (sometimes) who are running
games. If the Company is running a game, they won't catch it. And
they're really good at issuing lots of recommendations for "Segregation
of Duties", "Risk Mitigation Plans" lots of plans, and lots of Fee's.
They create an Audit Plan jointly with the Client Company. So if the
Client doesn't want to evaluate it- it's not looked at. They do RISK
BASED audits, they only look at subsections of records, not the entire
companies transaction log. For a complex multi-national, they cannot do
a substantial volume. If an Auditor actually finds something, they
report it to the Manager, who reports it to a Partner who tells the
Auditor to ignore it.
But- they do live in a world where they market themselves as the cure
to all your ills. So holding them to the marketing hype is a good
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