Deloitte & Touche LLP agreed Wednesday to pay $149.5 million to settle potential False Claims Act liability for failing to stop a long-running fraud at a mortgage company that went bust during the financial crisis.
Deloitte was the outside auditor of Taylor Bean & Whitaker Mortgage Corp. In that role, Deloitte “knowingly deviated” from auditing standards, the DOJ said. That allowed the fraud to continue until Taylor Bean filed for bankruptcy in 2009.
Taylor, Bean & Whitaker originated federally insured mortgage loans. It could recoup losses on defaulted mortgages from the government. To be eligible for federal reimbursement, the firm had to submit annual audit reports on its financial statements, and reports on its internal controls and its compliance with certain federal mortgage requirements.
Deloitte served as Taylor, Bean & Whitaker’s independent outside auditor for fiscal years 2002 through 2008.
During that time, Taylor Bean covered up its failing financial condition by engaging in fraud. For example, it sold “fictitious or double-pledged mortgage loans,” the DOJ said.
As a result, Taylor, Bean & Whitaker’s financial statements failed to reflect its severe financial distress, according to the DOJ.
Deloitte’s audit reports “allegedly enabled [Taylor Bean] to continue originating” federally insured mortgage loans until it collapsed and declared bankruptcy in 2009.
Taylor Bean’s collapse contributed to the failure in 2009 of Alabama’s Colonial Bank. Taylor Bean had overdrawn its credit lines at the bank and covered up the overdrafts.
Lee Farkas, Taylor Bean’s chairman, was sentenced to 30 years in prison and ordered to forfeit $38.5 million for the fraud. He was convicted in 2011 after a ten-day trial.
At least six others, including two executives from Colonial Bank, pleaded guilty in the scandal.
Deloitte told the Wall Street Journal Wednesday it was “pleased to have resolved this matter to avoid the risk and uncertainty of protracted litigation.”
The firm said the Taylor Bean fraud was “specifically aimed at misleading our organization and investors,” and Deloitte stands behind the work it did for Taylor Bean, according to the WSJ.
The DOJ said the claims settled Wednesday “are allegations only, and there has been no determination of liability.”
Richard L. Cassin is the publisher and editor of the FCPA Blog.