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Published On: Fri, Jan 12th, 2018

PwC Liable to Only FDIC in Colonial Fraud

Accounting giant PwC is liable to the Federal Deposit Insurance Corp. (FDIC), according to a recent ruling by a federal judge in Washington. The judge found that PwC is liable for failing to catch fraud related to the closure of Colonial Bank.

The decision, spanning 92 pages, was handed down by U.S. District Judge Barbara Rothstein.

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The ruling raises questions on how the FDIC can collect money from PwC, who is accused of being complicit in the fraud. Rothstein claims that the bank and its holding company cannot recover money from fraud because employees knew or perpetrated the crime.

The FDIC is the receiver for the failed bank.

PwC was found to be negligent in their audits of Colonial, which failed in 2009. The FDIC blames PwC for failing to account for certain transactions properly. PwC allowed Colonial to account for certain transactions as mortgages rather than loans secured by mortgages from Taylor, Bean & Whitaker Mortgage Corp.

PwC reached an undisclosed settlement with Taylor Bean’s trustee.

“PwC breached the professional duties it owed CBG as CBG’s independent, external auditor. However, CBG’s professional negligence claim is barred by: (a) the in pari delicto doctrine, (b) the Hinkle rule, and (3) the audit interference rule. Therefore, CBG’s professional negligence claim against PwC is denied,” writes Judge Rothstein.

The judge’s ruling is not expected to result in substantial damages against PwC.

PwC’s statement following the ruling claims that the company is happy with the rejection of claims by Colonial BancGroup. The bank also reasserts that employees at Colonial knowingly interfered with PwC audits to hide the multi-billion fraud that was taking place.

Law firms, including Gassman Legal, P.C., expect that PwC will appeal the decision.

The company has come out claiming that they will appeal the decision at the earliest time possible. PwC claims that the bank is prepared and looking forward to the damages phase of the trial that will require the FDIC to bear the burden of proof in proving the “inflated damages claim” against the bank.

The FDIC incurred $2.8 billion in costs related to the collapse of Colonial.

Taylor, Bean & Whitaker reportedly overdrew their bank accounts over a period of years and sold Colonial mortgages that were already sold to cover up their financial struggles. The mortgage company filed for bankruptcy in August 2009, with Colonial filing for bankruptcy shortly after.

The conspiracy spanned from 2002 – 2009, where several senior executives committed fraud and were jailed.

Lee Farkas, founder and chairman of Taylor Bean, was found guilty and handed a 30-year sentence in 2011.

Judge Rothstein claims that PwC may have been duped during the scheme, but also claims that the audit company failed to see red flags from mortgages with illogical dates. If the judge finds that PwC is liable for damages, the bank may be held liable for billions in damages.

Taylor Bean was seeking $5.5 billion from PwC before the two parties settled out of court for an undisclosed sum.

Colonial Bank was the sixth largest bankruptcy in the United States with assets of $25 billion.

Author: Jacob Maslow

About the Author

- Outside contributors to the Dispatch are always welcome to offer their unique voices, contradictory opinions or presentation of information not included on the site.

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