PricewaterhouseCoopers LLP failed to spot for seven years a multibillion-dollar fraud that led to the demise of Taylor Bean & Whitaker Mortgage Corp., a lawyer for the lender's bankruptcy trustee told a Miami jury on Tuesday.
At issue is PwC's work for Colonial Bank, which bought mortgages that Taylor Bean originated. Had PwC adequately vetted documents that Taylor Bean gave to the bank, it would have spotted a multiyear fraud by executives at both firms far earlier and put an end to it, the trustee claims. Instead, federal regulators uncovered it in 2009, and Taylor Bean went bankrupt and Colonial failed. The bankruptcy trustee sued in 2013 seeking $5.6 billion in damages.
"Year after year, Pricewaterhouse didn't do their job, they didn't follow the rules and they failed to detect the fraud," Steven Thomas, an attorney for the trustee, said in opening statements.
There have been several suits stemming from the financial crisis in which bankruptcy trustees sorting through the remains of firms that collapsed due to fraud have gone after auditors, saying they failed in their roles as watchdogs. Taylor Bean's accountant, Deloitte & Touche, settled similar allegations by the trustee three years ago for an undisclosed amount.
This isn't the first time PwC has been accused of negligence. Last year, the firm agreed to pay $65 million to settle similar claims tied to the collapse of MF Global Holdings Ltd.
PwC maintains it complied with auditing standards in the Taylor Bean case and accused the mortgage issuer of being responsible for its own losses.
"Remember, Taylor Bean's owner and half of its board of directors were criminals," Beth Tanis, an attorney for the accounting firm, told jurors. "They didn't rely on Pricewaterhouse's audit report because they knew about the fraud they were committing."
Taylor Bean, once the 12th-largest U.S. mortgage lender, collapsed after federal regulators uncovered a $3 billion scheme involving fake mortgage assets. Six Taylor Bean executives were convicted and jailed for their roles in the fraud, including former chairman Lee Farkas, who was sentenced to 30 years in prison.
Beginning in 2002, Farkas sent mortgage data to Colonial Bank for loans that didn't exist or that Taylor Bean had already committed or sold to other investors. By the end of 2007, the scheme, which involved executives at Colonial Bank, consisted of about $1.5 billion in fake or severely impaired residential mortgage loans.
PwC allegedly failed to spot the fraud when it audited the books of Colonial's parent, Colonial BancGroup Inc., even though Taylor Bean was the bank's largest client and a "stakeholder" in PwC's audits, according to court documents. PwC allegedly certified the fake mortgage assets as "true sales" to Colonial and tried to cover up its negligence when federal regulators questioned the accounting, according to the papers.
Colonial Bank, which became the sixth-largest bank failure in U.S. history, cost the Federal Deposit Insurance Corp.'s insurance fund about $4.2 billion.
The judge overseeing the case ruled last year that a jury should determine whether or not punitive damages are warranted to punish PwC based on allegations of gross negligence and intentional misconduct.