Deloitte & Touche will pay $149.5 million to the federal government as part of a settlement over its role in the spectacular collapse of Taylor, Bean & Whitaker, which was one of the country’s largest mortgage lenders.
The story of TBW is one of the most notorious from the fallout of the financial crisis.
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 and Fannie Mae.
TBW’s 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.
At the same time, Farkas had also set up Ocala Funding to provide commercial paper to investor banks. According to a 2014 report from the Federal Housing Finance Agency’s Office of the Inspector General, BNP Paribas and Deutsche Bank purchased $1.7 billion in commercial paper from Ocala. The commercial paper was supposedly backed by mortgages originated or purchased by TBW.
But that was not the case.
Farkas and his fellow conspirators diverted nearly all of the funds and when TBW went belly up in 2009, BNP Paribas and Deutsche Bank lost nearly $1.5 billion.
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.
In early 2016, Deloitte & Touche reached a settlement to dismiss Freddie Mac’s $1.3 billion lawsuit against Deloitte over the TBW affair.
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.”
This new settlement with the federal government, announced Wednesday by the Department of Justice, resolves “potential False Claims Act liability” arising from Deloitte’s role as the independent outside auditor of TBW.
During the time in question, TBW acted as a Department of Housing and Urban Development direct endorsement lender, which allowed the lender to underwrite and originate Federal Housing Administration mortgages without prior approval from the government.
To maintain its status as a direct endorsement lender, a lender is required to send HUD annual audit reports on its financial statements and related reports on its internal controls and its compliance with certain HUD requirements.
The government alleged that Deloitte failed in its duties as TBW’s auditor from 2002 to 2008.
“The United States alleged that during that time period TBW had been engaged in a long-running fraudulent scheme involving, among other things, the purported sale of fictitious or double-pledged mortgage loans, and as a result, TBW’s financial statements failed to reflect its severe financial distress,” the government said Wednesday.
The government also alleged that Deloitte’s audits “knowingly deviated from applicable auditing standards and therefore failed to detect TBW’s fraudulent conduct and materially false and misleading financial statements.”
The government further alleged that Deloitte’s audit failures “extended to the specific financial arrangements through which TBW carried out its fraudulent conduct.”
And by “failing to detect TBW’s misconduct,” Deloitte’s audit reports allowed TBW to continue originating FHA-insured mortgages until the company collapsed in 2009.
“With taxpayer dollars at stake, auditors must take their obligations seriously when auditing companies that participate in government programs,” said Acting Assistant Attorney General Chad Readler for the Justice Department’s Civil Division. “When auditors fail to exercise their professional judgment, and make false statements that allow bad actors to remain in government programs and submit false claims to the government, there will be consequences.”
The DOJ notes that the claims settled by the agreement are merely allegations, and there has no determination of liability.
“HUD relies on auditors to ensure the soundness of participants in HUD programs. When CPA firms and auditors fail to detect fraud, waste or abuse the consequences are significant to federal programs, and, ultimately, to the American taxpayer and must be addressed,” said Helen Albert, acting HUD inspector general.
In a statement provided to HousingWire, a Deloitte spokesperson said that the company was misled by TBW, just as many other companies and regulators were, but said that Deloitte is “pleased” to put this matter to bed.
“Members of Taylor Bean & Whitaker management, including its CEO, were convicted of engaging in a complex, collusive fraud with a counterparty bank specifically aimed at misleading our organization and investors,” Deloitte spokesperson Jonathan Gandal said in a statement. “Deloitte & Touche is deeply committed to the highest standards of professionalism, and we stand behind this work that dates back over a decade. Nonetheless, we are pleased to have resolved this matter to avoid the risk and uncertainty of protracted litigation.”