Deloitte sued for $7.6B in mortgage fraud case (AP)

By CURT ANDERSON, AP Legal Affairs Writer Curt Anderson, Ap Legal Affairs Writer – Mon Sep 26, 7:53 pm ET

MIAMI – A pair of lawsuits filed Monday claim that Deloitte & Touche LLP, one of the nation's largest accounting firms, should pay $7.6 billion in damages for failing through years of audits to detect massive fraud at a now-defunct Florida mortgage company.

"They certainly did not do their job," said attorney Steven Thomas, who represents those suing Deloitte. "This is one of those cases where the red flags are staring you in the face, and you've got to do a lot, and they did not."

Deloitte spokesman Jonathan Gandal responded that the company rejects the claims, calling them "utterly without merit."

The lawsuits were filed in Miami-Dade Circuit Court on behalf of the bankruptcy trustee for the fraudulent mortgage firm, Taylor Bean & Whitaker, and by Ocala Funding LLC, a company that purchased hundreds of millions of dollars' worth of mortgages from Taylor Bean. The bankruptcy trustee is attempting to recover money for Taylor Bean creditors.

The fraud began in 2002 and took multiple forms until Taylor Bean collapsed two years ago. The Ocala-based company shut down after federal agents raided its headquarters in August 2009, which led to the failure of Alabama-based Colonial Bank — the sixth-largest bank failure in U.S. history.

At its peak, Taylor Bean had about 2,500 employees and had originated some $30 billion in loans as of 2009.

Seven Taylor Bean executives were convicted of federal criminal charges, including former chairman Lee B. Farkas, who was sentenced in June to 30 years in federal prison. Federal prosecutors called the criminal case one of the most significant to arise out of the nation's financial meltdown.

Gandal said the blame for the fraud and losses should rest squarely on Taylor Bean, Ocala Funding and Farkas.

"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," Gandal said on behalf of Deloitte.

According to the lawsuits, Deloitte's certifications of Taylor Bean's books were critical to maintaining its appearance as a legitimate, profitable mortgage business. In fact, the lawsuits contend, Taylor Bean was selling fake or grossly overvalued mortgages, misstating its liabilities and hiding overdrawn bank accounts, among other misdeeds.

"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 documents in Deloitte's possession," one of the lawsuits says.

Deloitte quit as Taylor Bean's auditor in 2009, just as the federal investigations were ramping up.

The Ocala lawsuit includes an e-mail exchange in which Deloitte auditors are raising questions about various financial transactions, including one involving $6 billion that was just being analyzed for the first time a few hours before the deadline for the audit's completion. This "rush to certify" in the face of possible financial irregularities was another symptom of Deloitte's negligence, the lawsuit contends.

"These accounting firms have a public watchdog duty," Thomas said. "You have a duty to the public. When is that going to actually happen?"

_____

Follow Curt Anderson on Twitter: http://twitter.com/Miamicurt

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Analysis: Auditor defense may have holes in Deloitte case (Reuters)

NEW YORK (Reuters) – A favorite defense of auditors against securities lawsuits may have some holes when applied to a massive case against Deloitte Touche Tohmatsu Ltd stemming from the subprime mortgage crisis.

The world's largest accounting and consulting firm, Deloitte on Monday was accused of failing to detect fraud during its audits of Taylor, Bean & Whitaker Mortgage Corp, one of the biggest private mortgage firms to collapse during the U.S. housing crash.

The complaints were brought by a trustee overseeing Taylor Bean's bankruptcy and one of the company's subsidiaries in a Miami Circuit Court, claiming a combined $7.6 billion in losses.

"It's always difficult to believe that an auditor that's been auditing for seven years or more during an alleged ongoing fraud had no red flags," said Andrea Kim, a partner at Diamond McCarthy LLP in Houston.

The lawsuit is just the latest of a spate of troubles for Deloitte and the other big four auditors -- Ernst & Young, KPMG and PwC. They also face a threat to their business model as the European Commission mulls a plan to force them to split off their consulting business and rotate clients.

Auditors have been favorite targets of plaintiffs trying to recoup money lost on alleged frauds during the global financial meltdown, though such cases have run up against an array of legal hurdles, with many being dismissed or settled for relatively small amounts.

Plaintiffs' lawyers have argued that as gatekeepers, auditors have a duty to be vigilant at rooting out fraud.

RED FLAGS BRING LEGAL DUTY

"If they see something they need to report it," said Jacob Zamansky, founder of Zamansky & Associates, a law firm specializing in securities fraud. "If they consciously ignore red flags, they could be held responsible as an aider or abettor to the fraud."

A key defense is the so-called "in pari delicto," or equal fault principle, used when a company being audited was equally to blame for wrongdoing.

"It is very fast becoming a law of this nation, which is a tremendous protection for the Big Four," said Kim of Diamond McCarthy.

However, Steven Thomas, an attorney for the plaintiffs, said his case rests on solid legal ground. He said that a key bankruptcy decision holds that under Florida law, the in pari delicto defense does not apply in cases in which the auditor has a duty to detect fraud and in which there were innocent board members who could have been alerted about the fraud.

"They (Deloitte) had a public duty to detect the fraud," Thomas said. "They didn't do their job, and that's what we're going to prove."

Jonathan Gandal, a spokesman for Deloitte, said on Monday the plaintiffs in the case were "companies through which convicted felon Lee Farkas and his co-conspirators committed their crimes."

Lee Farkas, the former chairman of Taylor, Bean and Whitaker, was sentenced to 30 years in prison in April for his role in the bank fraud.

"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.

The in pari delicto principle, which has led to dismissals of some big auditor lawsuits in New York, "is alive and well in Florida," said Thomas Tew, a defense lawyer at the law firm Tew Cardenas in Miami.

In cases involving fraud, "I personally believe that it's almost impossible to say that an accounting firm, for instance, should be held liable for audits that were manipulated by crooks," he said.

DELOITTE NAMED IN OTHER SUITS

One complication for trustees is that when they bring a lawsuit, they "step into the shoes of the allegedly wrongdoing corporation," said Michael Young, a partner at Willkie Farr & Gallagher who specializes in accounting-related cases.

"So a trustee lawsuit against an auditor boils down to the contention that the auditor didn't tell the wrongdoing company that it was doing something wrong," Young said.

A key issue will be whether the Taylor Bean trustee can present itself as separate from the company, said Jeffrey Davis, a bankruptcy professor at the University of Florida's law school.

"It may be that the trustee can re-characterize their claim to get around the in pari delicto defense," said Davis. "That's the game that's afoot right now."

The EU's proposal to force the Big Four to split off their consulting business and rotate clients would affect all of the Big Four firms, but would be especially harsh for Deloitte, which just edged ahead of PwC as the biggest of the Big Four on the strength of its consulting revenues.

Deloitte has also been named in other big lawsuits stemming from the credit crisis, including one involving its audits of Bear Stearns, which collapsed after suffering enormous mortgage losses, and another involving Washington Mutual, the biggest bank to fail during the credit crisis.

Deloitte spokesman Gandal said the firm intends to defend the Bear Stearns case vigorously.

"These hindsight claims asserting that the independent auditors should have predicted the dramatic and unprecedented decline in the housing market that shocked the entire industry are meritless and illogical," Gandal said.

The Washington Mutual case has been settled in principle, he said.

(Additional reporting by Jonathan Stempel; Editing by Howard Goller)

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Deloitte sued for $7.6 billion, accused of missing fraud (Reuters)

(Reuters) – Deloitte Touche Tohmatsu Ltd (DLTE.UL), the world's largest accounting and consulting firm, was accused on 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)

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Deloitte sued for $7.6B in mortgage fraud case (AP)

By CURT ANDERSON, AP Legal Affairs Writer Curt Anderson, Ap Legal Affairs Writer – Mon Sep 26, 7:53 pm ET

MIAMI – A pair of lawsuits filed Monday claim that Deloitte & Touche LLP, one of the nation's largest accounting firms, should pay $7.6 billion in damages for failing through years of audits to detect massive fraud at a now-defunct Florida mortgage company.

"They certainly did not do their job," said attorney Steven Thomas, who represents those suing Deloitte. "This is one of those cases where the red flags are staring you in the face, and you've got to do a lot, and they did not."

Deloitte spokesman Jonathan Gandal responded that the company rejects the claims, calling them "utterly without merit."

The lawsuits were filed in Miami-Dade Circuit Court on behalf of the bankruptcy trustee for the fraudulent mortgage firm, Taylor Bean & Whitaker, and by Ocala Funding LLC, a company that purchased hundreds of millions of dollars' worth of mortgages from Taylor Bean. The bankruptcy trustee is attempting to recover money for Taylor Bean creditors.

The fraud began in 2002 and took multiple forms until Taylor Bean collapsed two years ago. The Ocala-based company shut down after federal agents raided its headquarters in August 2009, which led to the failure of Alabama-based Colonial Bank — the sixth-largest bank failure in U.S. history.

At its peak, Taylor Bean had about 2,500 employees and had originated some $30 billion in loans as of 2009.

Seven Taylor Bean executives were convicted of federal criminal charges, including former chairman Lee B. Farkas, who was sentenced in June to 30 years in federal prison. Federal prosecutors called the criminal case one of the most significant to arise out of the nation's financial meltdown.

Gandal said the blame for the fraud and losses should rest squarely on Taylor Bean, Ocala Funding and Farkas.

"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," Gandal said on behalf of Deloitte.

According to the lawsuits, Deloitte's certifications of Taylor Bean's books were critical to maintaining its appearance as a legitimate, profitable mortgage business. In fact, the lawsuits contend, Taylor Bean was selling fake or grossly overvalued mortgages, misstating its liabilities and hiding overdrawn bank accounts, among other misdeeds.

"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 documents in Deloitte's possession," one of the lawsuits says.

Deloitte quit as Taylor Bean's auditor in 2009, just as the federal investigations were ramping up.

The Ocala lawsuit includes an e-mail exchange in which Deloitte auditors are raising questions about various financial transactions, including one involving $6 billion that was just being analyzed for the first time a few hours before the deadline for the audit's completion. This "rush to certify" in the face of possible financial irregularities was another symptom of Deloitte's negligence, the lawsuit contends.

"These accounting firms have a public watchdog duty," Thomas said. "You have a duty to the public. When is that going to actually happen?"

_____

Follow Curt Anderson on Twitter: http://twitter.com/Miamicurt

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Analysis: Auditor defense may have holes in Deloitte case (Reuters)

NEW YORK (Reuters) – A favorite defense of auditors against securities lawsuits may have some holes when applied to a massive case against Deloitte Touche Tohmatsu Ltd stemming from the subprime mortgage crisis.

The world's largest accounting and consulting firm, Deloitte on Monday was accused of failing to detect fraud during its audits of Taylor, Bean & Whitaker Mortgage Corp, one of the biggest private mortgage firms to collapse during the U.S. housing crash.

The complaints were brought by a trustee overseeing Taylor Bean's bankruptcy and one of the company's subsidiaries in a Miami Circuit Court, claiming a combined $7.6 billion in losses.

"It's always difficult to believe that an auditor that's been auditing for seven years or more during an alleged ongoing fraud had no red flags," said Andrea Kim, a partner at Diamond McCarthy LLP in Houston.

The lawsuit is just the latest of a spate of troubles for Deloitte and the other big four auditors -- Ernst & Young, KPMG and PwC. They also face a threat to their business model as the European Commission mulls a plan to force them to split off their consulting business and rotate clients.

Auditors have been favorite targets of plaintiffs trying to recoup money lost on alleged frauds during the global financial meltdown, though such cases have run up against an array of legal hurdles, with many being dismissed or settled for relatively small amounts.

Plaintiffs' lawyers have argued that as gatekeepers, auditors have a duty to be vigilant at rooting out fraud.

RED FLAGS BRING LEGAL DUTY

"If they see something they need to report it," said Jacob Zamansky, founder of Zamansky & Associates, a law firm specializing in securities fraud. "If they consciously ignore red flags, they could be held responsible as an aider or abettor to the fraud."

A key defense is the so-called "in pari delicto," or equal fault principle, used when a company being audited was equally to blame for wrongdoing.

"It is very fast becoming a law of this nation, which is a tremendous protection for the Big Four," said Kim of Diamond McCarthy.

However, Steven Thomas, an attorney for the plaintiffs, said his case rests on solid legal ground. He said that a key bankruptcy decision holds that under Florida law, the in pari delicto defense does not apply in cases in which the auditor has a duty to detect fraud and in which there were innocent board members who could have been alerted about the fraud.

"They (Deloitte) had a public duty to detect the fraud," Thomas said. "They didn't do their job, and that's what we're going to prove."

Jonathan Gandal, a spokesman for Deloitte, said on Monday the plaintiffs in the case were "companies through which convicted felon Lee Farkas and his co-conspirators committed their crimes."

Lee Farkas, the former chairman of Taylor, Bean and Whitaker, was sentenced to 30 years in prison in April for his role in the bank fraud.

"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.

The in pari delicto principle, which has led to dismissals of some big auditor lawsuits in New York, "is alive and well in Florida," said Thomas Tew, a defense lawyer at the law firm Tew Cardenas in Miami.

In cases involving fraud, "I personally believe that it's almost impossible to say that an accounting firm, for instance, should be held liable for audits that were manipulated by crooks," he said.

DELOITTE NAMED IN OTHER SUITS

One complication for trustees is that when they bring a lawsuit, they "step into the shoes of the allegedly wrongdoing corporation," said Michael Young, a partner at Willkie Farr & Gallagher who specializes in accounting-related cases.

"So a trustee lawsuit against an auditor boils down to the contention that the auditor didn't tell the wrongdoing company that it was doing something wrong," Young said.

A key issue will be whether the Taylor Bean trustee can present itself as separate from the company, said Jeffrey Davis, a bankruptcy professor at the University of Florida's law school.

"It may be that the trustee can re-characterize their claim to get around the in pari delicto defense," said Davis. "That's the game that's afoot right now."

The EU's proposal to force the Big Four to split off their consulting business and rotate clients would affect all of the Big Four firms, but would be especially harsh for Deloitte, which just edged ahead of PwC as the biggest of the Big Four on the strength of its consulting revenues.

Deloitte has also been named in other big lawsuits stemming from the credit crisis, including one involving its audits of Bear Stearns, which collapsed after suffering enormous mortgage losses, and another involving Washington Mutual, the biggest bank to fail during the credit crisis.

Deloitte spokesman Gandal said the firm intends to defend the Bear Stearns case vigorously.

"These hindsight claims asserting that the independent auditors should have predicted the dramatic and unprecedented decline in the housing market that shocked the entire industry are meritless and illogical," Gandal said.

The Washington Mutual case has been settled in principle, he said.

(Additional reporting by Jonathan Stempel; Editing by Howard Goller)

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Deloitte sued for $7.6 billion, accused of missing fraud (Reuters)

(Reuters) – Deloitte Touche Tohmatsu Ltd (DLTE.UL), the world's largest accounting and consulting firm, was accused on 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)

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