Accounting Firm Sued for $7.6B, Accused of Missing Lender Fraud

By Kevin Gray | September 27, 2011

Deloitte Touche Tohmatsu Ltd , the world’s largest accounting and consulting firm, was accused Monday of failing to detect fraud during its audits of one of the biggest private mortgage firms to collapse during the U.S. housing crash.

A trust overseeing the bankruptcy of Taylor, Bean & Whitaker Mortgage Corp., or TBW, and one of the company’s subsidiaries, filed complaints in a Miami Circuit Court claiming a combined $7.6 billion in losses.

Deloitte “certified TBW as a solvent, viable company with accurate financial statements every year from 2001 to 2008,” one of the complaints said.

“Despite Deloitte’s credentials and expertise as one of the ‘Big 4’ accounting firms, those statements — and the rosy picture they depicted of TBW — were completely false,” it said.

Deloitte spokesman Jonathan Gandal said the “claims are utterly without merit.”

It was the latest lawsuit to hit one of the major accounting firms over their role in the credit crisis.

Pricewaterhouse Coopers, KPMG and Ernst & Young are also facing accusations about their auditing standards by investors who collectively seek to recoup billions of dollars lost in the financial meltdown.

Lee Farkas, the former chairman of Taylor, Bean and Whitaker, was sentenced to 30 years in prison in April for masterminding what U.S. officials described as one of the biggest bank frauds ever.

U.S. Justice Department officials said Farkas ran a $2.9 billion fraud scheme that led to TBW’s downfall and the collapse of one of the largest U.S. regional banks, Colonial Bank.

The complaint filed by Neil F. Luria, a plan trustee of Taylor, Bean & Whitaker Trust, claims losses of approximately $6 billion. A second complaint by Ocala Funding, a wholly owned TBW subsidiary which served as a lending facility, claims losses of $1.6 billion.

Farkas was accused of running a wide-ranging scheme to cover up large losses at Taylor, Bean, which was based in Ocala, Florida, by moving funds between accounts at Colonial Bank and also by selling mortgage loans that either did not exist, were worthless or had already been sold.

“Deloitte missed this fraud because it simply accepted management’s conflicting, incomplete and often last-minute explanations of highly-questionable transactions, even though those explanations made no sense and were flatly contradicted by the documents in Deloitte’s possession,” the complaint by Ocala Funding said.

“Ocala relied on Deloitte to detect material misstatements in the financial statements due to error or fraud,” the complaint said.

Gandal said the plaintiffs in the cases were “companies through which convicted felon Lee Farkas and his co-conspirators committed their crimes.”

“The bizarre notion that his engines of theft are entitled to complain of injury from their own crimes and to sue the outside auditors they lied to defies common sense, not to mention the law,” he said in a statement.

Several other Taylor, Bean and Colonial Bank employees who pleaded guilty for their roles in the fraud were also sentenced earlier this year.

(Editing by Bernard Orr)

Latest Comments

  • September 27, 2011 at 3:18 pm
    SWFL Agent says:
    Not sure how Deloitte can be held accountable when the CEO was convicted of fraud. They can only audit what they're given. With the exception of a few bright people, the whole... read more
  • September 27, 2011 at 2:13 pm
    Longtime Agent says:
    Accounting firms are supposed to dig for info. It is pretty hard to think they did due diligence when auditing the books of this firm. They probably need to go the way of so... read more
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