By Carolina Bolado
Additional reporting by Jeff Overley.
Editing by Elizabeth Bowen.
All Content © 2003-2016, Portfolio Media, Inc.
Law360, New York (November 2, 2012, 10:19 PM ET) — The Federal Deposit Insurance Corp. on Wednesday sued Colonial Bank’s former auditors PricewaterhouseCoopers LLP and Crowe Horwath LLP for the $1 billion that the now-defunct bank lost in the Taylor Bean & Whitaker Mortgage Corp. mortgage fraud scheme.
The FDIC, as receiver for Colonial Bank, claims external auditor PwC and internal auditor Crowe should have learned of the fraud perpetrated by Taylor Bean, the bank’s largest client, by 2007 or early 2008, well before the August 2009 federal raid on Taylor Bean’s headquarters.
“All the time that TBW was carrying out an increasingly brazen and costly fraud against Colonial, PwC and Crowe never realized that many hundreds of millions of dollars of bank assets did not exist, had been sold to others, or were worthless,” the FDIC said.
Montgomery, Ala.-based Colonial, a subsidiary of Colonial BancGroup Inc., operated nearly 350 branches in Alabama, Florida, Georgia, Nevada and Texas when it collapsed in 2009. The failure was blamed in large part on the purchase of more than $1 billion in fraudulent mortgages from Taylor Bean.
Taylor Bean’s former Chairman Lee Farkas and other executives, meanwhile, have been convicted of defrauding banks of $2.9 billion.
In the suit, the FDIC alleges Taylor Bean said it would pay Colonial for the loans, but instead pledged or sold them to third parties without paying the bank.
The audits by PwC and Crowe “fell short of governing professional standards,” according to the FDIC. Had the auditors performed their jobs well, they would have found the fraud and avoided the bank’s $1 billion loss — and possibly its demise — according to the suit.
The FDIC is claiming professional malpractice, gross negligence, breach of contract and negligent misrepresentation against the auditing firms.
“The FDIC’s claims are without merit, and Crowe stands behind our work and the people who performed it,” a Crowe spokeswoman said.
A PwC representative could not immediately be reached for comment Friday.
In its role as receiver, the FDIC has also targeted other major lenders for allegedly duping Colonial into buying doomed mortgage-backed securities.
In August, the FDIC filed five lawsuits in Alabama, New York and California seeking $741 million in damages from Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc., Morgan Stanley, Credit Suisse Group AG, Barclays PLC and Deutsche Bank AG, among others. The complaints allege that leading banks took bundles of shaky loans and marketed them as rock-solid securities to Colonial.
The FDIC is represented by James B. Perrine of Bailey & Glasser LLP and David Mullin, John M. Brown and Clint Latham of Mullin Hoard & Brown LLP.
Counsel information for the defendants was not immediately available.
The case is Federal Deposit Insurance Corp. v. PricewaterhouseCoopers LLP et al., case number 2:12-cv-00957, in the U.S. District Court for the Middle District of Alabama.