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PwC sued for $5.5bn over mortgage underwriter TBW’s collapse

ft.com | August 16, 2016

By Ben McLannahan

PwC is being sued for a record $5.5bn for failing to detect fraud that led to a bank collapse during the global financial crisis, in a case that could bring more auditing firms into the line of fire.

Since the financial crisis, banks have paid out hundreds of billions of dollars in settlements while other services companies, such as credit rating agencies, have had to dig deep for payouts. But there have only been a handful of significant cases involving audit firms, which have argued they cannot be held liable for missing signs of fraud.

The case — the biggest against an auditing firm — has been filed in a Miami state court on behalf of a trustee of Taylor, Bean & Whitaker, a defunct mortgage underwriter, and accuses PwC of failing to catch a multibillion-dollar conspiracy between Lee Farkas, the company’s founder, and executives at Colonial Bank, an Alabama-based lender that supplied TBW with loans.

PwC gave the bank’s parent, Colonial BancGroup, a clean audit opinion every year from 2002 to 2008. Colonial collapsed in 2009, becoming the sixth-largest US bank failure in history.

According to TBW’s trustee, PwC certified the existence of more than $1bn of Colonial Bank assets that did not exist, that had been sold or were worthless. Steven Thomas, lead trial lawyer for the trustee, described the case as “particularly egregious” given that Dennis Nally, who retired last month after eight years as PwC’s global chairman, told the Wall Street Journal in 2007 that the “audit profession has always had a responsibility for the detection of fraud”.

“They then come into court, telling a jury just the opposite,” said Mr Thomas. “It’s just not right.”

Lawyers for PwC, the world’s biggest professional services firm with $35bn in group revenues for the year to June 2015, argued last week in opening statements that the firm had no relationship with TBW and never audited the company nor had access to its records.

They also pointed out that Deloitte & Touche, which did audit TBW for the seven years leading up to its collapse, never uncovered any wrongdoing. Deloitte reached confidential settlements with the trustee in 2013 to settle three lawsuits.

Beth Tanis, lead trial lawyer for PwC, said in a statement to the Financial Times: “As the professional audit standards make clear, even a properly designed and executed audit may not detect fraud, especially in instances when there is collusion, fabrication of documents, and the override of controls, as there was at Colonial Bank. We are confident that a jury will understand the applicable rules and standards in this case and decide accordingly.”

The trial, which began on August 9, is expected to last about six weeks.

Colonial’s failure in August 2009, shortly after TBW, cost the Federal Deposit Insurance Corporation about $3bn. A separate lawsuit filed against PwC by the FDIC and Colonial’s bankruptcy trustee is pending in Alabama federal court. Mr Farkas, who diverted millions of dollars from TBW to buy a private jet, vacation homes and vintage cars, was jailed in 2011 for 30 years.

The Florida trial could be damaging for PwC, said Jim Peterson, a former Arthur Andersen partner who has written a book questioning the ability of the Big Four to withstand a big shock like a litigation judgment or a law-enforcement sanction.

He estimates that damages of $2bn to $3bn could be “a tipping point” for PwC, prompting partners to scatter rather than give up current and future earnings.

“To serve global clients, you’ve got to be viable,” he said. “PwC is in a case for its life.”

 

 

 

 

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