Colonial’s Claim of Reckless Accounting Worth Hearing, Judge Rules

Accounting firms PricewaterhouseCoopers and Crowe Horwath must deal with a lawsuit accusing them of professional malpractice and breach of contract for not catching the fraud that led to Colonial Bank’s 2009 collapse, a federal judge has ruled.

The lawsuit accuses 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. The suit was filed in 2011 by parent Colonial BancGroup Inc. and its trustee.

In an opinion issued last month, U.S. District Judge Keith Watkins rejected the auditors’ motion to dismiss the complaints, saying Colonial made “plausible” claims that PwC and Crowe breached their contract with the Montgomery-based bank.

Two Colonial Bank employees, Catherine Kissick and Teresa Kelly, conspired with employees of Taylor Bean & Whitaker Mortgage Corp., Colonial Bank’s mortgage warehouse lending division’s largest customer, and Taylor Bean & Whitaker President Lee Farkas, according to the ruling. “The fraud primarily consisted of TBW selling to CBG interests in qualifying pools of mortgages that did not exist. When the fraud was finally detected, the FDIC closed and sold Colonial Bank; CBG filed for bankruptcy; and the fraudsters were convicted for their crimes, ” the ruling states.

PwC was the public auditor for Colonial before its collapse. Crowe provided internal audit services. Spokespeople for both companies have expressed that the claims are without merit.

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When Colonial Bank failed in 2009, it was the sixth-largest U.S. bank failure and the largest in Alabama’s history. The case will now go forward in U.S. District Court in Montgomery.

Text by Dave Helms

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