PwC faces largest ever auditor malpractice damages verdict
Published: Apr 6, 2018 9:36 a.m. ET
Even PwC’s offer of $306 million would be the largest-ever accounting malpractice final verdict amount
The Federal Deposit Insurance Corp. could collect the largest damage award ever against a global public accounting firm when a federal judge decides what to award the agency after a verdict against PricewaterhouseCoopers.
The FDIC, acting as receiver for the failed Colonial Bank that collapsed in 2009, has asked Judge Barbara Rothstein to award it $625 million in compensation for the bank’s alleged net losses from a fraud with mortgage originator Taylor Bean and Whitaker, which also failed in 2009.
Even PwC’s estimate of damages based on the judge’s decision, per court filings, of $306 million would result in the largest-ever final judgment or jury verdict for accounting malpractice, and the fifth-largest accounting malpractice award ever, according to data compiled by research firm Audit Analytics.
Rothstein is not required to accept either version of the damage estimates.
The potential damage award comes after Rothstein issued a decision at the end of 2017 that PwC had been professionally negligent in not detecting the criminal fraud that led to the failure of Colonial Bank Group in 2009.
An FDIC spokesman declined to comment on pending litigation.
Rothstein issued a decision on Dec. 28 that gave the FDIC a win on one of three claims it brought against PwC after a full bench trial that ran for several weeks in Alabama and Washington, D.C.
Taylor Bean & Whitaker and Colonial Bank collapsed in 2009, after federal regulators, not the auditors, found a $3 billion fraud involving fake mortgage assets. In 2012, the trustee of the Taylor Bean & Whitaker Bankruptcy Plan sued both TBW’s auditor, Deloitte LLP, and Colonial’s auditor, PwC, for negligence, seeking $7 billion in damages from Deloitte and $5.5 billion in damages from PwC.
In 2013, just weeks before starting a trial, Deloitte agreed to settle; the parties mutually agreed not to disclose the amount. On August 16, 2016, three weeks into a jury trial for the TBW Trustee’s claims, PwC stopped the proceedings by agreeing to settle. Again, the amount was not disclosed.
This time the public will find out how much PwC has to pay for allegedly not detecting the fraud at Colonial Bank that led to its failure. That’s because federal law prohibits the FDIC from entering into a confidential settlement.
Rothstein held a three-day hearing on the Colonial Bank damages in March and is expected to render a decision in the next month on how much the FDIC, as receiver of failed Colonial Bank, can collect from PwC.
The $319 million difference in the two damage experts’ estimates is the result of a difference in opinion between the two parties in whether several hundred millions of dollars of “junk” loans dumped into Colonial Bank’s warehouse lending facility were also part of the fraud between the bank and TBW.
According to a court filing made by PwC after the damages hearing, there was no “junk” loan fraud, given that every warehouse lines lender experienced significant losses from loans it could not sell or securitize because of insufficient or missing documentation and other violations of representations and warranties made by mortgage originators during the financial crisis.
The FDIC said in its court filing after the damages hearing that every other one of TBW’s warehouse lender except Colonial Bank “put back,” that is returned for full refund, the faulty loans it could not sell or securitize. Only Colonial Bank allowed TBW’s loans to age on its books and lose value over time, therefore increasing the eventual loss to the bank and now the FDIC.
The FDIC presented evidence at the hearing that the two Colonial executives who decided to keep the loans on the books were the ones who later pleaded guilty for their part in the fraud. If they had sent the bad loans back to TBW, the fraud would have been stopped earlier, the FDIC said. The FDIC alleged that PwC did not detect this part of the fraud in addition to missing the other parts of the fraud the accounting firm does agree the FDIC should be now compensated for.
On April 4, the FDIC also settled its claims of professional malpractice and breach of contract against Crowe Horwath LLP, another public accounting firm that acted as Colonial Bank’s internal audit services consultant. That settlement amount will also be made public and could impact the amount PwC will have to pay to make the FDIC whole for its losses.
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