Alleged ‘Malpractice’ Puts PricewaterhouseCoopers in Bad Light
Bank holding company Colonial Bancgroup has filed a lawsuit against accounting firm PricewaterhouseCoopers for malpractice, breach of contract and negligence, before the Montgomery County Court.
The Alabama-based company claimed in the suit that negligence and accounting malpractice by PricewaterhouseCoopers and Crowe Horwath has allowed Taylor Bean & Whitaker to sucker Colonial Bancgroup for $1.8 billion in securities backed by nonexistent mortgages, the sixth largest failure in U.S. history.
According to BancGroup, its failure in 2009 can be traced back in 2002. On August 2009, BB&T Corporation of North Carolina has taken over the bank following federal regulators’ intervention. The failure was said to have cost the Federal Deposit Insurance Corporation about $2.8 billion.
“The fraud involved, among other things, the sale by Taylor Bean to Colonial Bank of 99 percent participation interests in allegedly qualifying pools of mortgages which were required to be subject to existing, enforceable, takeout commitments from the takeout buyers,” the complaint said.
“This purchase facility was only available to Taylor Bean and referred to as the ‘AOT’ facility,” the suit added, describing the magnitude of these purchases as “significant.”
BancGroup’s year-end consolidated financial statements for 2007 and 2008 estimated the balance of this AOT facility, referred to as ‘Securities Purchased Under Agreements to Resell,’ to be in excess of $1.5 billion each year.
“In reality, there were no qualifying pools of mortgages, only manufactured data based on preexisting mortgages that had long ago been sold in the marketplace to investors. There were no collateral packages delivered to Colonial Bank as custodian that matched or supported this fraudulent data on the fictitious mortgage pools,” the complaint said.
There allegedly were no takeout commitments from takeout buyers and no real takeout buyers existed in the first place.
“The AOT facility was an empty vessel, and what had been purchased was a sham. The facts, details, and extent of this bank, wire and securities fraud would lead to the criminal conviction of Lee Farkas, the president of Taylor Bean, in April of 2011, and the guilty pleas of other employees of Taylor Bean and certain individuals within the MWLD [Colonial Bancgroup's Mortgage Warehouse Lending Division]. The extent of the Taylor Bean fraud exceeds $1.8 billion,” the suit stated.
PricewaterhouseCoopers served as the banks outside auditors throughout these seven years. Crowe Horwath and its predecessor, Crowe Chizek & Co., stood as its internal auditor. However, BancGroup said: “No effort was made by PwC and Crowe to understand or audit the AOT facility at all, despite its materiality to BancGroup’s consolidated financial statement.”
“Both PwC’s independent audits and Crowe’s internal audits of BancGroup’s financial statements demonstrate a remarkable lack of due care and a failure by defendants to gain an understanding of BancGroup’s business and the risks associated with it,” the complaint added.
It continued: “PwC’s and Crowe’s complete failure to audit the MWLD’s AOT facility or to perform a meaningful audit of the Taylor Bean relationship with the MLWD [sic] constitutes gross negligence, and PwC’s and Crowe’s representations and reports to BancGroup’s Audit Committee were reckless and grossly inaccurate with regard to BancGroup’s true financial condition and defendants’ compliance with professional standards.
“Had PwC and Crowe properly discharged their professional duties, the ongoing fraud and the hole in BancGroup’s balance sheet in excess of $1.8 billion would have been detected by no later than fiscal year-end 2007, and BancGroup’s Board of Directors could have taken corrective measures, including (but not limited to) drastically altering the business or even placing BancGroup into bankruptcy at that point, thereby avoiding the deepening of BancGroup’s insolvency and the concomitant consumption of BancGroup’s existing assets.”
BancGroup unwittingly continued to downstream to Colonial Bank more than $500,000,000 from the second quarter of 2008 through the second quarter of 2009, incurring large additional debt in the process.
By the time the fraud was exposed in 2009, more than $1.8 billion had been siphoned out of Colonial Bank and BancGroup was left with hundreds of millions of dollars in worthless or non-existent assets on its balance sheet.
However, BancGroup’s collapse was assured at that point.
Left with no other choice, BancGroup filed for bankruptcy protection.
“BancGroup’s capital investment in Colonial Bank in excess of $1.2 billion dollars was rendered worthless. BancGroup’s damages, which continue to be assessed and determined, easily exceed $500,000,000.”
The plaintiffs, represented by Andrew Campbell with Leitman, Siegal, Payne & Campbell of Birmingham, seek actual and exemplary damages, and disgorgement of the defendants’ profits.
Last June, Judge Dwight Williams Jr., of the U.S. Bankruptcy Court in Montgomery, Ala., signed off on the bank’s Chapter 11 liquidation plan over dissenting voice from its longtime sparring partner, Federal Deposit Insurance Corp., which was named receiver of Colonial BancGroup in the summer of 2009 after seizure of the bank by state regulators in Alabama.