PricewaterhouseCoopers (PwC) Settles $5.5 Billion Lawsuit
The accounting firm PricewaterhouseCoopers LLP has settled a $5.5 billion lawsuit brought by the trustee of Taylor, Bean & Whitaker Mortgage Corp., alleging that the auditing firm failed to detect the fraud that led to the mortgage company’s downfall.
Prosecution of Taylor Bean Executives
The lawsuit arose out of PwC’s work for the Alabama-based Colonial BancGroup Inc, where Taylor Bean was the largest client. Taylor Bean is a privately-held Florida mortgage lender. Taylor Bean collapsed when a multibillion-dollar fraudulent scheme by its chairman, Lee Farkas, was revealed by federal regulators. Taylor Bean’s collapse caused the collapse of Colonial Bank. At the time of its collapse, Colonial had $25 billion in assets and $20 billion in deposits. Taylor Bean filed for bankruptcy in August 2009. Colonial also filed bankruptcy that month, the sixth-largest bank failure in U.S. history.
Prosecutors showed that Farkas had personally misappropriated more than $38.5 million from Taylor Bean and Colonial Bank to finance his extravagant lifestyle. Farkas was convicted of 14 counts of conspiracy and fraud. He was ordered to turn over approximately $38.5 million in gains and was sentenced to 30 years in prison. Other Taylor Bean executives received sentences ranging from three months to eight years.
$5.5 Billion Dollar Lawsuit
In 2013, Taylor Bean’s trustee filed a lawsuit against PricewaterhouseCoopers in Miami-Dade County Circuit Court, arguing that if PwC had adequately vetted Taylor Bean’s documents, it would have found the multibillion-dollar fraud that took place over a period of seven years.
Taylor Bean’s trustee claimed that PwC certified the existence of over $1 billion of Colonial Bank assets that did not exist. PwC had given Colonial BancGroup a clean audit opinion each year from 2002 to 2008.
Attorney for the trustee, Steven Thomas, argued, “Year after year, Pricewaterhouse didn’t do their job, they didn’t follow the rules and they failed to detect the fraud.” Attorney for PwC, Beth Tanis, maintains that PwC complied with auditing standards. She noted, “Taylor Bean’s owner and half of its board of directors were criminals… They didn’t rely on Pricewaterhouse’s audit report because they knew about the fraud they were committing.”
During the trial, the parties were able to reach a settlement agreement. Attorney Steven Thomas announced the settlement at a court hearing, saying that the terms were confidential, but resolved “to the mutual satisfaction of the parties.” PwC released a similar statement.
PricewaterhouseCoopers’ legal troubles in connection with this fraud are not over. PwC faces a $1 billion lawsuit filed by the FDIC, the government agency that is managing Colonial Bank’s receivership. The failure of Colonial Bank in August 2009 cost the FDIC approximately $3 billion. The FDIC has argued that PwC’s audits should have uncovered the fraud. That suit is pending in federal court in Alabama.
PwC is also facing a $1 billion lawsuit by commodities broker MF Global Holdings over bad accounting advice. PwC has already agreed to pay $65 million to settle a separate MF Global lawsuit that accused it of failing to properly audit MF Global’s internal controls.