The trustee's lawsuit and a second action, filed against Deloitte on Monday by a Taylor Bean subsidiary known as Ocala Funding, seek a total of at least $7.6 billion in damages. Deloitte was Taylor Bean's auditor from 2002 until it resigned from the assignment in 2009, a move that helped trigger the lender's collapse.
The lawsuits filed Monday seek to recover some of the billions of dollars owed investors. By the time the fraud came to light, Taylor Bean had lost more than $6 billion, according to the trustee's lawsuit. "If Deloitte had done their job … this fraud would never have caused the $6 billion loss," said Steven W. Thomas, an attorney representing both plaintiffs.
"These claims are utterly without merit," a Deloitte & Touche spokesman said.
The lawsuits against Deloitte are the latest in a handful of attempts to hold audit firms responsible for problems arising from the financial crisis. Last December, for example, the New York attorney general's office filed a civil fraud lawsuit against Ernst & Young LLP, alleging the auditor stood by while its client, Lehman Brothers Holdings Inc., misled investors about its true financial condition prior to the company's 2008 collapse. Ernst & Young has denied the allegations.
In addition, the bankruptcy trustee for Colonial Bancgroup, the holding company for Colonial Bank, last month sued accounting firms PricewaterhouseCoopers LLC and Crowe Horwath LLP, alleging they failed to catch fraud. Colonial, based in Alabama, failed after getting caught up in the Taylor Bean fraud. In a statement, Crowe Horwath called that lawsuit "totally without merit"; PwC said it wouldn't comment.
Few criminal or civil cases have been pursued against auditing firms in the aftermath of the financial crisis, though each of the Big Four accounting firms had clients that blew up, required huge government bailouts or had other problems leading up to the crisis.
Once the nation's 12th-largest mortgage company, Taylor Bean used short-term loans to originate and purchase billions of dollars in home loans that were then sold to investors, including government-sponsored housing companies such as Freddie Mac.
Taylor Bean's collapse eventually led to one of the few successful criminal prosecutions relating to the housing crisis. In June, a federal judge sentenced former Taylor Bean Chairman Lee Farkas to 30 years in prison for running a multibillion dollar fraud scheme that led to the collapse of the mortgage lender and Colonial.
He was accused of covering up a funding shortfall at a Taylor Bean lending facility, called Ocala Funding, that resulted in Taylor Bean pledging an undivided ownership interest in thousands of the same mortgage loans to three different investors: Freddie Mac, Colonial Bank and Ocala Funding.
In a lawsuit filed in state court in Florida, bankruptcy trustee Neil F. Luria alleged that Deloitte's audits allowed Taylor Bean to continue to raise funds from investors including Ocala. "Deloitte's negligence, and willful blind eye, was the fuel without which" efforts to defraud the company "would have sputtered out long before it resulted in the multibillion debt under which TBW collapsed," the lawsuit said.
The fraud unraveled in 2009 after auditors at Deloitte balked at some of Taylor Bean's accounting and regulators accused the company of improper lending practices. But the fraud could have been brought to a halt earlier had auditors not "willfully" ignored "numerous red flags," the lawsuit said.
The Ocala lawsuit alleges that Deloitte's auditors failed to dig into discrepancies in the company's financial statements and struggled to understand some of Taylor Bean's business operations "right up until and even after the date it certified them as correct."
In an email sent at noon the day one audit was due, a Deloitte partner in charge of the audits said he didn't understand the treatment of $6 billion in transactions on the company's books, according to the lawsuit. Sixteen minutes before the deadline, Deloitte was still trying to determine how the $6 billion should be treated, the lawsuit added. "Despite these glaring open issues as to billions of dollars," Deloitte certified the financial statements at midnight, the lawsuit said.
The Ocala lawsuit also alleges that auditors ignored or missed other red flags. For instance, the auditors failed to dig into evidence that Taylor Bean was breaching its contracts regarding how billions of dollars of mortgage loans would be paid for, the lawsuit said. In addition, according to the lawsuit, auditors ignored warning signs that could have led them to discover that mortgages sold by Taylor Bean to Ocala—and used by Ocala as collateral for notes it issued—were nonexistent.
"The plaintiffs in these cases, Taylor Bean & Whitaker and Ocala Funding, were the wholly owned private companies through which convicted felon Lee Farkas and his co-conspirators committed their crimes," the Deloitte spokesman said. "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."