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Colonial Bank Collapse Will Cost PwC $625 Million, Reports Say

[Updated with statement from Bartlit Beck Herman Palenchar & Scott]

Reports are hitting the interwebs this afternoon that a federal judge has ordered PwC to pay the Federal Deposit Insurance Corp. $625 million in damages for failing to uncover a long-running fraud scheme between its client Colonial Bank and the now-defunct mortgage lender Taylor, Bean & Whitaker.

A PwC spokesperson emailed to Going Concern a statement from Phil Beck of Bartlit Beck Herman Palenchar & Scott, the law firm that represented the Big 4 firm, which said, “PwC US is disappointed by today’s ruling and we don’t believe the FDIC is entitled to the recovery of any damages in this case in light of the court’s prior findings that numerous employees at Colonial actively and substantially interfered with our audits. We intend to pursue an appeal of this matter at the earliest opportunity.”

The judgment, one of the largest-ever awards for accounting malpractice, was assessed against PwC over the 2009 failure of Alabama’s Colonial Bank—one of the biggest bank failures of the financial crisis—in a lawsuit brought by the FDIC, wrote Michael Rapoport of the Wall Street Journal.

The FDIC, acting as receiver for Colonial Bank, sued the Big 4 firm for failing to detect the fraud at the root of the bank’s 2009 collapse.

From Reuters:

The FDIC … said Colonial reported owning significant stakes in mortgages, including some bought from Taylor Bean, when they had been sold to other investors or had other problems, including defaults.

It said the fraud began in 2002 when Taylor Bean began overdrawing its accounts and Colonial, at the urging of Taylor Bean Chairman Lee Farkas, began manipulating those accounts to conceal the overdrafts.

The FDIC accused PwC of negligently auditing Colonial from 2003 to 2005 and in 2008.

Late last year, Judge Barbara Jacobs Rothstein ruled that PwC was negligent in its audit of Colonial Bank. She said that PwC “did not design its audits to detect fraud” and its “failure to do so constitutes a violation of the auditing standards.”

Rothstein said on July 2 that the FDIC was entitled to $625.3 million in damages from PwC.

[Reuters] [WSJ]

Image: Wikimedia Commons/Bjørn Erik Pedersen