(Reuters) - A federal judge on Monday said PricewaterhouseCoopers LLP must pay $625.3 million in damages to the Federal Deposit Insurance Corp for failing to uncover fraud that led to one of the largest bank failures of the global financial crisis.

U.S. District Judge Barbara Rothstein found it more likely than not that PwC’s negligence was the proximate cause of FDIC damages from the August 2009 demise of Montgomery, Alabama’s Colonial BancGroup Inc, once among the 25 largest U.S. banks.

Rothstein said PwC failed to uncover a multi-year fraud between Colonial, its former client, and Ocala, Florida-based Taylor, Bean & Whitaker, once the nation’s 12th largest mortgage lender and a major Colonial customer.

The FDIC sued in its role as receiver for Colonial Bank, which once had more than $25 billion of assets and 340 branches.

Taylor Bean also failed in August 2009. Its former chairman, Lee Farkas, is serving a 30-year prison term for his 2011 conviction on fraud and conspiracy charges.

Rothstein had found PwC liable for negligence in December, after a non-jury trial, and tried the damages issue in March, also without a jury.

PwC had argued that the FDIC could recover $306.7 million at most, and that no damages were justified because numerous Colonial employees had interfered with its audits.

“We intend to pursue an appeal of this matter at the earliest opportunity,” its outside lawyer Phil Beck said in a statement provided by PwC.

The FDIC said it does not discuss pending litigation. It previously settled with Colonial’s internal auditor, Crowe Horwath.

On Feb. 28, Taylor Bean’s former auditor Deloitte & Touche LLP [DLTE.UL] agreed to pay $149.5 million to settle U.S. government claims it also missed the fraud.

According to the FDIC, the fraud began in 2002 when Taylor Bean began overdrawing its accounts and Colonial, at Farkas’ urging, began manipulating those accounts to conceal it.

This allegedly included the sale by Taylor Bean to Colonial of mortgages that had already been sold to other investors, and Colonial receiving stakes in mortgages that had no collateral or were in default.

By the time the fraud was discovered, Colonial’s balance sheet included $1.47 billion of mortgage trades that were “fake or otherwise impaired,” Rothstein wrote.

The $625.3 million award covers PwC’s audits of Colonial from 2003 to 2005 and in 2008.

A trial for the 2006 and 2007 audits has not been scheduled because the FDIC did not waive its right to a jury trial.

The case is Federal Deposit Insurance Corp as receiver for Colonial Bank v PricewaterhouseCoopers LLP, U.S. District Court, Middle District of Alabama, No. 12-00957.</s>(Reuters) - A federal judge on Monday said PricewaterhouseCoopers LLP must pay the Federal Deposit Insurance Corp $625.3 million in damages for failing to uncover a fraud scheme between its client Colonial Bank and the mortgage lender Taylor, Bean & Whitaker.

U.S. District Judge Barbara Rothstein ruled after a non-jury trial on damages held in March. She had ruled in December that PwC was liable, without setting damages.

Colonial and Taylor Bean both failed in August 2009.

PwC did not immediately respond to requests for comment. An FDIC spokeswoman declined to comment.

Colonial, based in Montgomery, Alabama, had been among the 25 largest U.S. banks, while Ocala, Florida-based Taylor Bean was the nation’s 12th largest mortgage lender.

The FDIC, which was Colonial’s receiver, said Colonial reported owning significant stakes in mortgages, including some bought from Taylor Bean, when they had been sold to other investors or had other problems, including defaults.

It said the fraud began in 2002 when Taylor Bean began overdrawing its accounts and Colonial, at the urging of Taylor Bean Chairman Lee Farkas, began manipulating those accounts to conceal the overdrafts.

The FDIC accused PwC of negligently auditing Colonial from 2003 to 2005 and in 2008.

In Monday’s decision, Rothstein found it more likely than not that PwC’s negligence was the proximate cause of the FDIC’s damages, and that the auditor “is responsible for the full measure of damages resulting from its negligence.”

Farkas is serving a 30-year prison term following his 2011 conviction on 14 fraud and conspiracy charges.</s>(Reuters) - A federal judge on Monday said PricewaterhouseCoopers LLP should pay the Federal Deposit Insurance Corp $625.3 million in damages for failing to uncover a fraud scheme between its client Colonial Bank and the mortgage lender Taylor, Bean & Whitaker.

U.S. District Judge Barbara Rothstein ruled after a non-jury trial on damages held in March. She had ruled in December that PwC was liable, without setting damages.

Colonial and Taylor Bean both failed in August 2009.</s>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, one of the largest-ever awards for accounting malpractice, was assessed against the Big Four accounting firm over the 2009 failure of Alabama’s Colonial Bank in a lawsuit brought by the Federal Deposit Insurance Corp.</s>When it gets too complicated for senior auditors, send in a “college-aged intern.”

For PricewaterhouseCoopers, having for years rubber-stamped as outside auditor the financial statements of Colonial Bank in Alabama is getting expensive.

Colonial, the 25th largest bank in the US at the time, collapsed unceremoniously in 2009, brought down in part by a $2.3 billion fraud scheme it had going on with its biggest customer, Taylor Bean & Whitaker Mortgage, the 12th largest mortgage lender in the US, which had collapsed shortly before the bank.

The FDIC, which took over Colonial and made its insured depositors whole, was not amused. In November 2012, it sued PwC as the outside auditor of Colonial, accusing it of negligently auditing the bank from 2003 to 2005 and in 2008.

Today, federal district judge Barbara Jacobs Rothstein ruled that PwC, which in December was found negligent in detecting the fraud scheme at the bank, must pay the FDIC $625.3 million in damages, the full amount the FDIC had requested – and one of the largest awards for accounting malpractice.

Others involved in the scheme:
• In February, Deloitte & Touche, which had been Taylor Bean’s outside auditor, had settled allegations by the Justice Department for $149.5 million.
• In April, Crowe Horwath, which had been Colonial’s internal auditor, had settled allegations by the FDIC for $60 million.
• In 2016, PwC had settled with Taylor Bean’s bankruptcy trustee, but terms were not disclosed.
• Taylor Bean’s former Chairman Lee Farkas is serving a 30-year stint in the hoosegow after his 2011 conviction on 14 fraud and conspiracy charges.
• Several other people, including employees of Colonial, pleaded guilty or were convicted for their roles in the scheme.

Today’s ruling was about the amount of the award. In December, Judge Rothstein had already ruled that PwC had negligently failed to design and perform the audits, based on PwC’s own admissions, to detect the $2.3-billion fraud scheme between Colonial and Taylor Bean. It was the first time that a federal district judge ruled that an audit firm was liable for failing to detect a fraud under the Sarbanes-Oxley act.

In the December ruling, Judge Rothstein had found, according to Reuters:

The auditor relied on the chief architect of the fraud, Taylor Bean chair Lee Farkas, to verify key information about the collateral underlying a Colonial credit facility for Taylor Bean. PwC also signed off on Colonial’s audit without ever understanding the third and most complex iteration of the fraud, which involved a credit facility based on phantom mortgage securitizations. After an auditor who was supposed to make sense of the transactions gave up, saying they were “above his pay grade,” PwC assigned a college-aged intern to evaluate the nearly $600 million asset. Judge Rothstein was distinctly harsh about PwC’s failings. Basing Colonial’s certification on Farkas’ account of Taylor Bean’s collateral was “quintessentially the same as asking the fox to report on the condition of the hen house,” she wrote. And charging an intern to decipher a loan facility beyond the expertise of a senior auditor was a “truly astonishing” departure from PwC’s mandate, the judge wrote.

Taylor Bean was one of Colonial’s most important customers, Judge Rothstein said, and the bank was at first eager to help the mortgage lender survive overdrafts. Later, as the fraud ballooned, Colonial execs frantically tried to recoup Colonial’s money from Taylor Bean. According to the judge’s decision, over the course of several years, to keep the scheme secret, Colonial execs lied to PwC auditors, circumvented internal controls by “recycling” mortgage data and even created wire transfers to trick PwC into believing Taylor Bean collateral mortgages had been paid off.

Today’s ruling awards the FDIC the full damages it had sought. PwC had earlier asked the judge to keep the damage award down to $306.7 million. Today, PwC said that it intends “to pursue an appeal of this matter at the earliest opportunity.”

PwC is the same audit firm that confidence-inspiringly and diligently performs the annual audits of the financial statements of each of the 12 regional Federal Reserve Banks – such as the New York Fed and the San Francisco Fed – along with the combined financial statements of the Federal Reserve System. So when things get complex – and there surely are very complex and immense transactions at the Fed – and senior auditors can’t figure out what they’re looking at and can’t make heads or tails of it, they’re sending in a “college-aged intern” to paper over it?

PwC is also the firm that audited the financial statements of construction and outsourcing giant Carillion, which collapsed in January. PwC is part of the audit oligarchy that is now down to just four mega-firms, and they audit nearly all of the S&P 500 companies while also providing a host of consulting and tax services. 



Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.</s>A federal judge’s decision on Monday that global audit firm PricewaterhouseCoopers LLP must pay $625 million to the Federal Deposit Insurance Corporation provides a rare look into the typically secret settlements between global audit firms and bankruptcy trustees.

Judge Barbara Rothstein’s decision in the case of Colonial BancGroup Inc. and the FDIC v. PricewaterhouseCoopers LLP, is the largest ever judgment against an audit firm in the United States. It will compensate the FDIC for its losses as the receiver of Colonial, a crisis-era bankruptcy.

Read: FDIC win against PwC could finally force auditors to look for fraud

The only reason the public knows about this $625 million whack back at PwC for an allegedly negligent audit is because the FDIC is restricted by law from agreeing to a confidential settlement. That’s not the case with private plaintiffs. On a regular basis, bankruptcy courts and trustees — and their attorneys — cooperate with Big 4 global audit firms and their defense attorneys to hide the size of the settlements in high profile multibillion-dollar bankruptcy cases from public view.

PwC was the auditor of Colonial Bank Group and the judge said in January that PwC “did not design its [Colonial Bank] audits to detect fraud and PwC’s failure to do so constitutes a violation of the auditing standards.”

TBW and Colonial Bank collapsed in 2009, after federal regulators found a $3 billion fraud involving fake mortgage assets. Several executives from both firms went to prison.

Money-losing investors, and receivers like bankruptcy trustees and the FDIC, bring the largest global audit firms — PwC, Deloitte, KPMG and Ernst & Young — to court quite often. However, the Big 4 rarely went to trial in the past. All that changed in the last two years when PwC went to trial for three different multibillion-dollar cases that came close to delivering jury verdicts.

See also: PwC faces 3 major trials that threaten its business

In 2012, the Colonial Bank bankruptcy trustee and the Federal Deposit Insurance Corp. sued PwC for negligence as the auditor of Colonial Bank. That claim was for $1 billion in damages.

The same year, the trustee of the Taylor Bean & Whitaker Bankruptcy Plan sued TBW auditor Deloitte, and also Colonial auditor PwC, for negligence, seeking $7 billion in damages from Deloitte and $5.5 billion in damages from PwC.

In 2013, weeks before starting a trial Deloitte agreed to settle the TBW case; the parties mutually agreed not to disclose the amount. On Aug. 16, 2016, three weeks into a jury trial, PwC stopped the TBW proceedings by also agreeing to settle. Again, the amount was not disclosed.

In March of 2017, PwC agreed to another confidential settlement to shut down a trial before a jury verdict. The firm was facing the $1 billion claim of negligence brought by the bankruptcy trustee of brokerage firm MF Global, PwC’s audit client, which failed on October 31, 2011.

The audit firms argue for confidentiality for these settlements using the “Arthur Andersen pass,” claiming they are systemically important to the capital markets because of the legal mandate for public company audits. They fear that public awareness of potentially large settlement amounts might undermine confidence in an audit firm’s continued financial viability and/or prompt clients to abandon it.

Steve Jakubowski, an attorney and author of the Bankruptcy Litigation Blog, told MarketWatch, “Given that the primary goal of the estate and the liquidating trustee is to maximize the value of the estate’s litigation assets, confidential settlements are favored on the theory that the defendant is paying more in settlement because it’s not having to signal what the amount of the litigation settlement is.”

In 2008 a bankruptcy trustee sued PwC for malpractice related to the bankruptcy of SemGroup. The $1.1 billion claim was settled confidentially right before trial in Tulsa in 2011.

KPMG was sued by the bankruptcy trustee for New Century, an early crisis-era mortgage originator that collapsed in bankruptcy. The settlement, reached in August of 2010 before a trial, was also sealed from public scrutiny.

“While there is a good argument that there should be transparency in matters as important as auditor competence in financial reporting,” Jakubowski told MarketWatch, “that policy objective will generally take a back seat to the bankruptcy objective of maximizing the value of the bankruptcy estate.”

PwC’s lead attorney in the case, Phil Beck of the law firm Bartlit Beck, told MarketWatch via a spokeswoman on Monday, “PwC US is disappointed by today’s ruling and we don’t believe the FDIC is entitled to the recovery of any damages in this case in light of the Court’s prior findings that numerous employees at Colonial actively and substantially interfered with our audits. We intend to pursue an appeal of this matter at the earliest opportunity.”

A spokeswoman for the FDIC said it does not comment on litigation.</s>Editor's note: Morning Scan will not publish on Wednesday, July 4, in observance of Independence Day. We’ll be back on Thursday, July 5.



Missed signals: A federal judge ordered PricewaterhouseCoopers to pay $625.3 million in damages for failing to detect a fraud that led to the 2009 failure of Alabama’s Colonial Bank, one of the largest bank failures during the financial crisis. U.S. District Judge Barbara Jacobs Rothstein ruled last December the accounting firm was negligent in failing to discover the fraud at Colonial, and on Monday she sided with the Federal Deposit Insurance Corp., the failed bank’s receiver, on the proper level of damages.

The judgment against PwC “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 Wall Street Journal says. Wall Street Journal, Financial Times



Let’s make a deal: The Federal Reserve showed mercy when it gave Goldman Sachs and Morgan Stanley the option of accepting failure on the second round of stress tests or agreeing to hold steady the amount of dividends and stock buybacks they will return to shareholders. The banks settled on the latter, rather than having to retake the tests if they wanted to return more to investors.

“The arrangement is the first of its kind in the eight years of the Fed’s annual tests, and one of the clearest signs to date of a significant shift in the regulatory environment for banks, which have been expecting a gentler approach from Washington ever since the election of President Donald Trump,” the paper comments.

On the hunt: Social Finance wants to build a $500 million war chest through an unsecured line of credit from banks “that could go toward potential buyouts of other financial-technology firms.” SoFi, which is now led by Anthony Noto, a former Goldman Sachs banker, “is looking to ramp up acquisitions as a way to make the online lender a more full-service financial institution.”

“We don’t have any near-term plans, but we’re building a strategy and a process to evaluate the different opportunities as they come our way,” Noto said.

Where are they now: Fabrice Tourre, the former Goldman Sachs subprime mortgage bond trader who was convicted in 2013 of federal charges of defrauding investors, is now conducting postdoctoral research in economics at Northwestern University.

Joseph Cassano, the former chief executive of AIG’s financial products unit in London, now devotes his time to philanthropy. “Few individuals played a more pivotal role in the financial crisis than” he, the paper says.



Moving toward legitimacy: Switzerland is expected to grant cryptocurrency companies full access to conventional banking services by the end of the year, “removing one of the restrictions to future growth.” The move would allow “crypto companies to operate with banks in the same way as other companies.”



Growing shadow: The so-called shadow banking industry in the U.K. is now larger than the country’s GDP, according to the Office for National Statistics. The agency estimated the nonbank lending industry totals £2.2 trillion, although it could be much larger. By contrast, traditional British banks have combined balance sheets of £12 trillion.



“We are pleased that the court recognized there are consequences when an auditor breaches its duty to the investing public.” — FDIC attorney Stephen Sorensen on a federal judge’s ruling against PricewaterhouseCoopers in the failure of Colonial Bank.
A US federal judge orders PricewaterhouseCoopers to pay US$625.3 million compensation to Federal Deposit Insurance Corp. The judge rules PwC negligently caused losses to F.D.I.C. by failing to uncover fraud during audits of Colonial BancGroup. Colonial, one the nation's 25 largest banks, and Taylor, Bean & Whitaker, the 12th-largest mortgage broker in the US, both collapsed in August 2009 as a result of fraud between the two. F.D.I.C. was the receiver for Colonial.