Well, this was some news I really wasn’t expecting today.
FDIC as Receiver for Colonial Bank, Montgomery, AL, reached a $335 million settlement with PricewaterhouseCoopers LLP related to professional negligence claims. Colonial Bank failed on August 14, 2009. https://t.co/W2ohFNCvRe
— FDIC (@FDICgov) March 15, 2019
Here is the full statement from the FDIC:
The Federal Deposit Insurance Corporation as Receiver for Colonial Bank (FDIC) has announced a $335 million settlement with PricewaterhouseCoopers LLP (PwC) related to professional negligence claims brought by the FDIC against PwC arising out of the audits of the failed Colonial Bank.
On December 28, 2017, the United States District Court for the Middle District of Alabama held PwC liable for professional negligence in its audit of Colonial Bank and, on July 2, 2018, the district court awarded damages to the FDIC on its claims. Previously, on April 3, 2018, the FDIC settled professional negligence claims against Crowe Horwath LLP arising out of its internal audits of Colonial Bank for $60 million.
Colonial Bank of Montgomery, Alabama failed on August 14, 2009, with $25.5 billion in assets and a loss to the Deposit Insurance Fund estimated at $2.958 billion as of December 31, 2017.
Last July, U.S. District Judge Barbara Rothstein ordered PwC to pay the FDIC $625 million in damages for failing to uncover a long-running fraud between Colonial Bank and the now-defunct mortgage lender Taylor, Bean & Whitaker.
Rothstein said PwC “did not design its audits to detect fraud” and its “failure to do so constitutes a violation of the auditing standards.”
Phil Beck of Bartlit Beck Herman Palenchar & Scott, the law firm that represented PwC, argued at the time that the FDIC wasn’t entitled to any damages because numerous Colonial Bank employees “actively and substantially” interfered with PwC’s audits, and that the firm would appeal the judge’s decision.
The judgment, one of the largest-ever awards for accounting malpractice, was assessed against the Big 4 firm over the 2009 failure of Colonial Bank—one of the biggest bank collapses stemming from the financial crisis—in a lawsuit filed by the FDIC.
The FDIC, acting as receiver for Colonial Bank, sued the Big 4 firm for failing to detect the fraud at the center of the bank’s collapse.
The fraud reportedly began in 2002 when Taylor Bean began overdrawing its accounts and Colonial, at the urging of Taylor Bean Chairman and now-convicted fraudster 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, and making “reckless and grossly inaccurate” reports to the bank’s board.
FDIC board member and former chairman Martin Gruenberg voted against the settlement because it didn’t include a written admission of liability by PwC. He released the following statement:
The FDIC as receiver for the failed Colonial Bank announced today a settlement with PricewaterhouseCoopers LLP (PwC) of $335 million. This settlement resolves professional negligence claims brought by the FDIC against PwC arising out of audits of Colonial Bank of Montgomery, Alabama. Colonial Bank failed on August 14, 2009, with $24.455 billion in assets and a loss to the Deposit Insurance Fund estimated at $2.958 billion as of December 31, 2017.
I voted against authorizing the settlement because the settlement did not include a written admission of liability by PwC.
In the lawsuit, the FDIC alleged that PwC failed to follow required auditing standards which, if followed, would have led PwC to detect a massive multi-year fraud perpetrated on Colonial by the bank’s biggest customer, Taylor Bean & Whitaker Mortgage Corporation, a large mortgage originator. 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.
On December 28, 2017, the U.S. District Court for the Middle District of Alabama, following a four-week bench trial, concluded that PwC did not design its audits to detect fraud and PwC’s failure to do so constituted a violation of auditing standards. On July 2, 2018, the district court awarded damages to the FDIC of $625 million on its claims.
As noted, the settlement announced today did not include a written admission of liability by PwC. 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.
In a statement released by PwC on Friday, the firm said the FDIC’s professional negligence claims against PwC have been settled “to their mutual satisfaction.”