In another lawsuit involving accounting firms, PricewaterhouseCoopers (PwC) and Crowe Horwath will face claims accusing them of professional malpractice and breach of contract. It’s alleged that the firms failed to catch a fraud that led to the 2009 collapse of Colonial Bank. The lawsuit, filed in 2011 by the bank’s parent Colonial BancGroup Inc. and its trustee, accused the accounting firms of making “reckless and grossly inaccurate” reports to the bank’s board, allowing Colonial to conceal a seven-year fraud that drained it of $1.8 billion.
U.S. District Judge Keith Watkins rejected the accounting firms’ motion to dismiss the complaints, saying the bank made “plausible” claims that PwC and Crowe breached their contract with Colonial. PwC was the public auditor for Montgomery, Ala.-based Colonial before its collapse. Crowe provided internal audit services. Judge Watkins’ order will allow the case to go forward.
Crowe said it, an audit firm, was hired to help Colonial with internal services but did not serve as the bank’s internal auditor. The fraud, one of the largest arising out of the last decade’s mortgage crisis, went undetected until a raid by federal authorities on Aug. 3, 2009. One of the largest U.S. regional banks, Colonial was seized by regulators and filed for bankruptcy protection later that month.
PwC and Crowe are facing a similar lawsuit by the Federal Deposit Insurance Corporation (FDIC), receiver for the bank. The 2012 FDIC lawsuit said that PwC and Crowe missed “huge holes” in Colonial’s balance sheet caused by the diversion of money to now bankrupt Taylor Bean & Whitaker Mortgage Corp. Lee Farkas, former chairman of Taylor Bean, was sentenced to 30 years in prison in 2011 for his role in the fraud. Several other officers of Taylor Bean and Colonial pleaded guilty for their roles in the scheme.
In his order, Judge Watkins rejected Crowe’s argument that it had no professional duty to Colonial because it was not the bank’s internal auditor but merely a provider of services, calling that a “reed thin” distinction. He also rejected PwC’s argument that the negligence claim against it must be dismissed because Colonial’s own negligence played a role in its fate, saying that is a question of fact for a jury to decide. The case is in the U.S. District Court, Alabama Middle District.
Source: Insurance Journal
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