FDIC Renews Effort to Sue Auditors Over Colonial Bank Failure
By Patrick Fitzgerald
The Federal Deposit Insurance Corp. is bolstering its efforts to recover $1 billion from a pair of accounting firms
that failed to catch massive fraud that brought down Colonial Bank, the bank regulator's sole effort to sue the auditors
of a failed bank since the onset of the financial crisis.
The FDIC, the government agency in charge of managing the receiverships of failed banks, is suing the two firms--
PricewaterhouseCoopers LLP and Crowe Horwath LLP--for professional malpractice, gross negligence and negligent
misrepresentation for failing to detect the long-running fraud at Colonial's largest client, Taylor Bean & Whitaker
The FDIC lawsuit, which survived a recent legal challenge from the accounting firms, blames the auditors for missing "
huge holes in Colonial's balance sheet" and other serious gaps without ever detecting the multi-billion dollar fraud at
The agency filed an amended lawsuit Friday in U.S District Court in Montgomery, Ala., after a federal judge earlier
this month rejected the accounting firms' bid to dismiss the case. The new suit buffers the FDIC's claim that Colonial
lost at least $1 billion due to the firms' failure to uncover the Taylor Bean fraud.
The Taylor Bean fraud "would have been prevented had PwC and Crowe properly performed their audits in compliance with
applicable professional standards," said the FDIC's lawyers in the amended suit.
Both PwC and Crowe Horwath have denied any wrongdoing.
A PwC spokeswoman declined to comment, but the accounting firm's lawyers have previously argued the FDIC's suit is
without merit because Colonial's own management and largest customer--Taylor Bean--lied to regulators, internal auditors
and to PwC itself.
Crowe Horwath spokeswoman Amanda Shawaluk said the firm plans to defend itself to the fullest possible extent. "We
stand behind our work and the people who performed it, and we believe that all claims against Crowe are totally without
merit," Ms. Shawaluk said.
The FDIC has been left with remnants of hundreds of failed banks in recent years, the result of the wave of bank
closures by regulators in the aftermath of the bursting of the housing bubble. Although the FDIC transfers a failed
bank's deposits to a stronger company--to BB&T Corp. (BBT) in Colonial's case--it is left as a receiver for what is
The collapse of Colonial, which had $25 billion in assets and $20 billion in deposits, was the biggest bank failure of
2009. The FDIC estimates Colonial's collapse will cost its insurance fund $5 billion, making it one of the most
expensive bank failures in U.S. history.
The FDIC, however, hadn't made a point of targeting the professional firms who advised the failed banks until filing
the original Colonial lawsuit last fall.
The mastermind behind fraud at Taylor Bean was the company's top executive, Lee Farkas, now serving a 30-year prison
sentence. Mr. Farkas is the Florida businessman who built Taylor Bean into one of the nation's biggest mortgage lenders-
-the biggest not owned by a bank--by orchestrating a seven-year, multibillion-dollar fraud.
His scheme involved Colonial "purchasing" mortgage loans from Taylor Bean that already had been sold to other
investors, such as Freddie Mac. He wasn't caught until after federal authorities raided Colonial's and Taylor Bean's
offices in August 2009.
PwC served as Colonial's external auditor and Crowe provided internal auditing service to the bank. If the two
auditors had done their jobs properly, the FDIC argues, the Taylor Bean fraud would have been uncovered as early as 2007
and more than $1 billion in estimated losses at the bank would have been avoided. The FDIC wants to recover those
Colonial was founded more than 20 years ago by Bobby Lowder, who built Colonial into a regional banking power largely
through mortgage-lending activities in the southeast. The bank suffered big losses as the housing market cratered, but
its fate was sealed with the collapse of Taylor Bean, which filed for bankruptcy in August 2009.
Colonial's mortgage-warehouse lending division played a critical role in the Taylor Bean fraud. Two Colonial
officials, Catherine Kissick and Teresa Kelly, each received prison sentences for their roles in the fraud.
Mr. Farkas, whom federal prosecutors described as a "consummate fraudster," was convicted in the spring of 2011 of
misappropriating about $3 billion and trying to fraudulently obtain more than $550 million from the government's
Troubled Asset Relief Program in a failed effort to prop up Colonial.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to
Write to Patrick Fitzgerald at email@example.com
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