PricewaterhouseCoopers will pay $335 million to the Federal Deposit Insurance Corp. in a settlement that ends claims that the auditor failed in its duties by not discovering the accounting malfeasance that led to the late-2000s collapse of Colonial Bank, which funded the mortgages originated by Taylor, Bean & Whitaker.
Once upon a time, TBW was the largest privately held mortgage company in the country, employing more than 2,000 people. But TBW collapsed in 2009 after it was discovered that TBW Chairman Lee Farkas and others were cooking the books to cover for hundreds of millions of dollars in nonexistent mortgages.
PwC acted as the auditor for Colonial Bank, which also collapsed when the issues at TBW were uncovered.
When it failed, Colonial Bank was taken over by the FDIC, which then sued PwC and claimed that the bank’s failure cost the insurer $5 billion, making it one of the country’s largest ever bank failures.
Eventually, a federal judge ruled that PwC was “negligent” in its role as Colonial Bank’s auditor, stating that the company could have done more to prevent Colonial’s collapse.
And last year, the judge ordered PwC to pay more than $625 million for its actions in the Colonial/TBW matter.
But, late last week, the two sides announced that they’d reached a settlement in the matter that will see PwC pay $335 million to the FDIC for its role in the TBW affair.
That amount is much closer to the $306.75 million that PwC originally contended it should pay the FDIC, rather than the $625 million awarded to the agency by District Judge Barbara Jacobs Rothstein.
And the FDIC agreed to the settlement over the objections of former FDIC Chair Martin Gruenberg, who still serves on the FDIC board of directors.
Gruenberg issued a statement through the FDIC, in which he stated that he did not vote to approve the settlement because the settlement did not require PwC to admit liability in the matter.
“As a result of its failure to follow required auditing standards, PwC did not detect that hundreds of millions of dollars of assets claimed by Colonial did not in fact exist, had been sold to others, or were worthless. If PwC had complied with auditing standards, it would have discovered the fraud, the fraud would have been stopped, and the damages to Colonial Bank would have been limited,” Gruenberg said in his statement.
“As noted, the settlement announced today did not include a written admission of liability by PwC,” Gruenberg added. “Given PwC's professional negligence, which contributed directly to the failure of Colonial Bank and large losses to the Deposit Insurance Fund, I voted against authorizing the settlement without a written admission of liability by PwC.”
Nevertheless, the FDIC agreed to the settlement.
“PricewaterhouseCoopers LLP and the Federal Deposit Insurance Corporation as Receiver for Colonial Bank have settled professional negligence claims brought by the FDIC-R against PwC to their mutual satisfaction,” a spokesperson for PwC said in a statement.
According to Rothstein, PwC was negligent in its audits of Colonial Bank’s business in 2003, 2004, 2005, and 2008. Rothstein ruled that PwC’s audits were not designed to detect fraud and did not fully inspect Colonial’s business in the relevant years.
According to Rothstein, PwC did not inspect any of TBW’s loan files at Colonial in 2003 or 2004, failed to follow up on the “illogical” dates on Colonial’s financial reports, failed inspect any of the supposed collateral backing the mortgages in question, and neglected to follow-up on sample loans that failed quality control checks.
TBW is one of housing crisis’ most notorious collapses.
Beginning in 2002 and stretching to 2009, Farkas and his fellow conspirators swept funds between accounts at Colonial and Ocala Funding, a TBW subsidiary that also provided funding for TBW’s mortgages to cover constant overdrafts.
By December 2003, the rolling overdraft had grown 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.
TBW also sold loans to Fannie Mae and Freddie Mac. In 2002, loans sold to Fannie represented 85% of TBW’s business, but Fannie Mae canceled its seller/servicer agreement with TBW after it learned that Farkas had personally taken out $2 million in loans that were not actually backed by homes or any other eligible collateral to pay for the buybacks on non-compliant loans that TBW sold to Fannie.
In fact, Farkas planned to sell eight fraudulent loans (totaling $2 million) to Fannie to cover the money he needed pay Fannie for other non-compliant loans.
Fannie Mae discovered this fraud when Farkas was unable to make payments on the eight fraudulent loans, but did not communicate its findings to Freddie Mac, its regulator or other interested parties.
Subsequently, Freddie considerably increased the volume of its business with TBW.
Farkas’ schemes were finally discovered when Colonial, which was on the verge of insolvency, applied for $553 million in funding from the Troubled Asset Relief Program.
According to a 2014 report from the Federal Housing Finance Agency’s Office of the Inspector General, Farkas planned to use TBW to invest $150 million in Colonial and help raise the additional $150 million because he knew that without the injection of funding, TBW’s massive fraud would be discovered.
The additional $150 million wound end up being diverted from Ocala’s books to Colonial’s, but the entire nature of Colonial’s fundraising raised a red flag with the Special Inspector General for TARP.
Investigators questioned whether the injection of funding from Farkas was a “round trip” transaction, where the $300 million from TBW would be paid back from the TARP funds.
In the process of the investigation, several of Farkas’ co-conspirators eventually revealed the details of the multi-year, multi-billion dollar fraud.
Farkas eventually received a 30-year prison sentence 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, becoming one of the only people actually jailed for financial crimes in the run-up to the housing crisis.
And this isn’t the first time that PwC has been forced to pay up over its role in the TBW collapse. Back in August 2016, the auditor settled a $5.5 billion lawsuit over the same issue.
For much more on the fall of TBW, click here.