MIAMI – Accounting giant PricewaterhouseCoopers squared off Tuesday in court with lawyers for a defunct mortgage company's creditors and investors over a $5.5 billion lawsuit, which claimed the Big Four firm failed through years of audits to uncover massive fraud at a failed Alabama bank.
The estimated $21 billion fraud at Colonial Bank of Montgomery, Alabama, was orchestrated by top executives at the shuttered mortgage firm Taylor, Bean and Whitaker of Ocala, Florida. Six Taylor Bean senior executives and two Colonial employees were convicted of federal fraud crimes and went to prison. Colonial was shut down in 2009.
Steven Thomas, attorney for a trustee representing Taylor Bean creditors and investors, said PricewaterhouseCoopers did seven audits while the scheme was ongoing and failed to find it. That means, he told a jury in opening statements, the firm should be held liable for billions of dollars in damages.
"PricewaterhouseCoopers had a job: detect fraud. And the second thing I'm going to prove to you is that PricewaterhouseCoopers failed to do its job," Thomas said. "When you don't do your job and people get hurt, it matters."
PricewaterhouseCoopers attorney Beth Tanis countered that the lawsuit was essentially an attempt to get the firm to pay for money stolen in the fraud scheme by Taylor Bean, now represented by the trustee. She said the perpetrators, who were insiders, took elaborate steps to cover up their crimes and that other audits at the bank and mortgage company also missed it.
"The criminals were so successful at hiding these transactions that nobody found the fraud," Tanis told jurors. "You can do an audit just right and not detect a fraud."
The scheme didn't come to light until a Colonial employee went to the FBI in July 2009, she added.
The trial before Miami-Dade Circuit Judge Jacqueline Hogan Scola is expected to last about six weeks. The plaintiffs seeking $5.5 billion in damages, plus possible punitive damages, include government-backed mortgage enterprises Freddie Mac and Ginnie Mae.
Taylor Bean was once one of Colonial's biggest customers but began encountering financial difficulties, according to court documents. Taylor Bean's top executive, Lee Farkas, worked out a deal with a Colonial banker to use improper overdrafts to meet expenses and payroll. That later morphed into a scheme in which Colonial was buying billions of dollars in fake, non-existent mortgages from Taylor Bean.
"This made these falsified transactions, these fraudulent transactions, look just like legitimate transactions at Colonial Bank," Tanis aid. "Those fraudulent transactions just blended right in."
But Thomas said he would prove that PricewaterhouseCoopers didn't look hard enough to uncover the scam at Colonial. That negligence, he said, allowed the fraud to flourish for years.
"They needed the gross negligence of an accountant," he said. "The evidence will show that accountant was the defendant, PricewaterhouseCoopers."
All those involved in the criminal fraud pleaded guilty except Farkas, 63, who opted for trial and was convicted of 14 fraud and conspiracy charges in 2011. He is serving a 30-year prison sentence.
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