By Patrick Fitzgerald
The Federal Deposit Insurance Corp. is bolstering its efforts to
recover $1 billion from a pair of accounting firms that failed to
catch massive fraud that brought down Colonial Bank, the bank
regulator's sole effort to sue the auditors of a failed bank since
the onset of the financial crisis.
The FDIC, the government agency in charge of managing the
receiverships of failed banks, is suing the two
firms--PricewaterhouseCoopers LLP and Crowe Horwath LLP--for
professional malpractice, gross negligence and negligent
misrepresentation for failing to detect the long-running fraud at
Colonial's largest client, Taylor Bean & Whitaker Mortgage
Corp.
The FDIC lawsuit, which survived a recent legal challenge from
the accounting firms, blames the auditors for missing "huge holes
in Colonial's balance sheet" and other serious gaps without ever
detecting the multi-billion dollar fraud at Taylor Bean.
The agency filed an amended lawsuit Friday in U.S District Court
in Montgomery, Ala., after a federal judge earlier this month
rejected the accounting firms' bid to dismiss the case. The new
suit buffers the FDIC's claim that Colonial lost at least $1
billion due to the firms' failure to uncover the Taylor Bean
fraud.
The Taylor Bean fraud "would have been prevented had PwC and
Crowe properly performed their audits in compliance with applicable
professional standards," said the FDIC's lawyers in the amended
suit.
Both PwC and Crowe Horwath have denied any wrongdoing.
A PwC spokeswoman declined to comment, but the accounting firm's
lawyers have previously argued the FDIC's suit is without merit
because Colonial's own management and largest customer--Taylor
Bean--lied to regulators, internal auditors and to PwC itself.
Crowe Horwath spokeswoman Amanda Shawaluk said the firm plans to
defend itself to the fullest possible extent. "We stand behind our
work and the people who performed it, and we believe that all
claims against Crowe are totally without merit," Ms. Shawaluk
said.
The FDIC has been left with remnants of hundreds of failed banks
in recent years, the result of the wave of bank closures by
regulators in the aftermath of the bursting of the housing bubble.
Although the FDIC transfers a failed bank's deposits to a stronger
company--to BB&T Corp. (BBT) in Colonial's case--it is left as
a receiver for what is left.
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 most expensive bank failures in U.S.
history.
The FDIC, however, hadn't made a point of targeting the
professional firms who advised the failed banks until filing the
original Colonial lawsuit last fall.
The mastermind behind fraud at Taylor Bean was the company's top
executive, Lee Farkas, now serving a 30-year prison sentence. Mr.
Farkas is the Florida businessman who built Taylor Bean into one of
the nation's biggest mortgage lenders--the biggest not owned by a
bank--by orchestrating a seven-year, multibillion-dollar fraud.
His scheme involved Colonial "purchasing" mortgage loans from
Taylor Bean that already had been sold to other investors, such as
Freddie Mac. He wasn't caught until after federal authorities
raided Colonial's and Taylor Bean's offices in August 2009.
PwC served as Colonial's external auditor and Crowe provided
internal auditing service to the bank. If the two auditors had done
their jobs properly, the FDIC argues, the Taylor Bean fraud would
have been uncovered as early as 2007 and more than $1 billion in
estimated losses at the bank would have been avoided. The FDIC
wants to recover those losses.
Colonial was founded more than 20 years ago by Bobby Lowder, who
built Colonial into a regional banking power largely through
mortgage-lending activities in the southeast. The bank suffered big
losses as the housing market cratered, but its fate was sealed with
the collapse of Taylor Bean, which filed for bankruptcy in August
2009.
Colonial's mortgage-warehouse lending division played a critical
role in the Taylor Bean fraud. Two Colonial officials, Catherine
Kissick and Teresa Kelly, each received prison sentences for their
roles in the fraud.
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.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
Write to Patrick Fitzgerald at patrick.fitzgerald@wsj.com
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