PwC settles $5.5 billion lawsuit over Taylor, Bean & Whitaker audits

Accused of failing to recognize malfeasance in TBW, Colonial Bank accounts

The ghost of Taylor, Bean & Whitaker struck again Friday, as PricewaterhouseCoopers agreed to settle a $5.5 billion lawsuit that accused the company of failing in its audits duties by not discovering the accounting malfeasance that led to one of the most spectacular crashes to come out of the housing crisis.

The news of the settlement comes courtesy of Reuters, which reported that the lawsuit stemmed from PwC’s auditing work at Colonial Bank, which provided funding to TBW originate mortgages.

TBW was, at one time, the largest privately held mortgage company in the U.S., employing over 2,000 people. TBW originated, serviced and sold mortgages in pools to Freddie Mac.

Its funding was provided by Colonial Bank and later, by a TBW subsidiary, Ocala Funding.

From 2002 to 2009, TBW chairman Lee Farkas and others swept funds between accounts at Colonial and Ocala to cover constant overdrafts.

By December 2003, the rolling overdraft grew to more than $120 million and sweeping the funds back and forth became too complex, so Farkas and others began selling mortgages that didn’t exist to cover the shortages.

By 2009, Colonial Bank had more than $500 million in nonexistent loans on its books.

According to the Reuters report, the trust that handles TBW’s bankruptcy sued PwC, accusing the company of failing to discover the actions Farkas and his co-conspirators took to cover up the massive fraud.

From Reuters:

The settlement ends a civil trial in Miami-Dade County Circuit Court in Florida in which the trustee had sought more than $5.5 billion in damages from PwC. Terms are confidential, a lawyer for the trustee said.

"It was settled to the mutual satisfaction of the parties," said Steven Thomas, the trustee's lawyer.

PwC in a statement confirmed the settlement, using language similar to Thomas. It declined further comment.

This is the second time this year that an auditor settled a case stemming from the ghosts of TBW’s past.

In January, Freddie Mac and Deloitte & Touche reached a settlement over allegations of fraud involving the collapse of TBW, and agreed to dismiss Freddie Mac’s $1.3 billion lawsuit against Deloitte.

Freddie Mac initially sued Deloitte & Touche in 2014, alleging that Deloitte had been “grossly negligent” in its auditing of the financials of Taylor, Bean & Whitaker, which Freddie Mac relied upon as part of its seller/servicer agreement with TBW.

According to court filings, Deloitte served as TBW’s independent auditor from 2002-2007 and was contracted to provide an “unqualified opinion” on TBW’s financial statements and to certify that the financial statements were “free of material misstatement due to error or fraud.”

Freddie Mac accused Deloitte of failing in its duties after TBW collapsed.

For his part, Farkas received a sentence of 30 years in prison in 2011, and was ordered to forfeit $38.5 million in ill-gotten gains for the $2.9 billion scheme after he was found guilty on 14 counts of bank, wire and securities fraud. Six of his co-conspirators also served (or are serving) significant jail time.

For much more on the fall of TBW, click here.

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