A federal judge has found PricewaterhouseCoopers negligent in failing to detect fraud that led to one of the biggest bank failures in the financial crisis, the 2009 collapse of Alabama's Colonial Bank.
U.S. District Judge Barbara Jacobs Rothstein said PwC could have down more to avert a $2 billion fraud orchestrated by the a major Colonial customer — Ocala-based mortgage lender Taylor Bean & Whitaker — which led to Colonial's downfall.
The judge's ruling last week was the first stage in the process. Next, she has to consider damage claims againsy PwC in the suit filed by the Federal Deposit Insurance Corp. PwC, the world's second-biggest professional services firm by annual revenue, could potentially face hundreds of million of dollars in damages, according to a report by the Wall Street Journal.
The FDIC had to pay $2.8 billion to cover Colonial's collapse. PwC had given the bank's parent, Colonial BancGroup, a clean audit for years before it emerged that huge chunks of Colonial's loans to Taylor Bean & Whitaker were secured against assets that did not exist.
Taylor Bean, the country's third-largest FHA lender, was arguably the biggest player in the mortgage industry you've never heard of. Its sudden collapse in 2009 put up to 1,000 employees out of work and closed its national network.
Taylor Bean started unraveling when federal Housing and Urban Development officials noticed that FHA-insured loans underwritten by the company were defaulting at a significantly greater rate than those of FHA's other borrowers.
PwC said it was duped by the executive who had built Taylor Bean into a national powerhouse, Lee Farkas. In the wake of Taylor Bean's collapse, investigators detailed a long-running scheme by Farkas to skim millions of dollars from the lender to buy a private jet, vintage cars and a vacation home. Farkas was subsequently sentenced to 30 years in prison by a judge who accused him of showing no remorse. Others from both Taylor Bean and Colonial were also sentenced in connection with the fraudulent scheme.
The aftermath of the collapse led to confusion for months as mortgage holders were given conflicting information by regulators and lenders about where to send their payments and many payments were not properly credited.
Jacobs Rothstein, in her judgment, said PwC failed to perform adequate checks that Colonial's financial statements were fairly stated.
In a statement, PwC noted that the judge rejected four of the five main claims made by the FDIC and Colonial, and that numerous employees at the bank "actively and substantially interfered" with its audit.
"PricewaterhouseCoopers looks forward to the damages phase where the FDIC will bear the burden of proof on what remains of their inflated damages claim," it said.
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The verdict comes more than a year after PwC settled a $5.5 billion case brought against it Taylor Bean's bankruptcy trustee. The confidential settlement came as the case was being heard in a state court in Miami.
Colonial was the 25th biggest bank by assets when it went failed, making it the sixth biggest banking collapse in history.