FDIC Sues Pricewaterhouse Coopers & Crowe Horwath for Over $1B Over Alleged Failure to Detect Large Fraud That Led to Colonial Bank’s Collapse

In a record first involving the Federal Deposit Insurance Company suing the auditors of a failed bank, the government agency has filed a lawsuit against Crowe Horwath LLP (CROHORP) and PricewaterhouseCoopers LLP for over $1 billion for their alleged failure to detect the securities fraud perpetuated by Taylor Bean & Whitaker Mortgage Corp. that led to the demise of Colonial Bank. Taylor Bean was one of the bank’s biggest clients. The two auditors are accused of gross negligence, professional malpractice, and breach of contract for not spotting the scam.

According to the FDIC’s complaint, two Colonial mortgage lending employees, Teresa Kelly and Catherine Kissick, let Taylor Bean officials divert money from the bank without it getting collateral in return. This resulted in Taylor Bean allegedly stealing nearly $1 billion from Colonial by promising it would provide the bank with mortgages that it had actually sold to other banks. The FDIC contends that not only did Kissick and Kelly know about Bean’s fraud but also they made it possible for the cash to be illegally diverted. The two of them would later plead guilty to aiding Taylor Bean’s fraud.

In 2009, Alabama banking regulators seized Colonial. The downfall of Colonial Bank is considered one of the biggest bank failures in our nation’s history and Is expected to cost the FDIC’s insurance fund about $5 billion.

Although auditing firms usually tend to benefit from pari delicto, a common-law doctrine that prevents one wrongdoer from suing another for money made from a joint wrongdoing (and since employees’ actions are usually imputed to the corporation, in this case Colonial typically would also be considered a wrongdoer), the FDIC’s securities case portrays the Colonial lending officials as rogue employees who were working against the bank’s interest—especially as Colonial was harmed by the fraud when it lent Taylor Bean hundreds of millions of dollars that had been secured by loans that didn’t exist or were worthless. If the FDIC succeeds in demonstrating that Kissick and Kelly were working for their own benefit, then in pari delicto may not provide Pricewaterhouse Coopers and Crowe Horwath with such protections.

Meantime, Pricewaterhouse Coopers’s legal team is contending that Colonial’s employees acted to protect Colonial from loss and that Taylor Bean had been paying the bank $20-30 million/month in interest. The defendants are also arguing that auditors shouldn’t have been expected to discover the fraud that was so well hidden that the FDIC and OCC didn’t uncover it either when they conducted targeted exams.

A Tale of Two Lawsuits — PricewaterhouseCoopers and Colonial Bank, Forbes, November 10, 2012

FDIC Sues Auditors Over Colonial Bank Collapse, Smart Money/Dow Jones, November 15, 2012

Federal Deposit Insurance Corporation

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FDIC Objects to Bank of America’s Proposed $8.5B Settlement Over Mortgage-Backed Securities, Stockbroker Fraud Blog, August 30, 2011

Texas Securities RoundUp: Provident Royalties CEO Pleads Guilty in $485M Ponzi Scam and District Court Upholds $100K Arbitration Award in Adviser Fee Dispute, Stockbroker Fraud Blog, November 10, 2012

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Lee Farkas, Taylor Bean’s former top executive, is now serving a 30-year prison term for perpetuating the long-term fraud against Colonial. He was convicted of misappropriating approximately $3 billion and attempting to fraudulently get over $550 million from the Troubled Asset Relief Program to try bolstering Colonial.