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Something unexpected just happened… A tiny piece of earth was lobbed into a very deep regulatory black hole.
The Senior Judge of the U.S. District Court for the Western District of Washington, Judge Barbara Jacobs Rothstein, ruled last week that the accounting giant PricewaterhouseCoopers was liable for failing to uncover a multibillion-dollar fraud that sank Alabama-based Colonial Bank in 2009.
Allowing the FDIC to try and collect the $2.5 billion Colonial's demise cost the FDIC's insurance fund puts the accounting industry on notice – especially Deloitte, Ernst & Young, KPMG, and PwC, who collectively audit companies that account for 98% of the value of U.S. stock markets. Auditors may be liable for inadequate or fraudulent audit reports they typically rubber stamp with gold stars.
Unfortunately, it's only a shovelful of earth that probably won't hit the bottom of the deep regulatory hole accounting giants swim freely in. Still, there's a potential here for a ripple effect that could end up changing the broken system that allows this level of fraud to happen under auditors' noses.
Here's how deep the regulatory gap is and the odds on PwC being held accountable or settling…
First, Just the Facts
Catherine Kissick, the head of Colonial Bank's mortgage lending department, aided and abetted an insane fraud perpetrated by Colonial's biggest mortgage banking customer, Lee Farkas, the former chairman of bankrupt mortgage lender Taylor, Bean & Whitaker.
Kissick "bought" hundreds of millions of dollars in mortgages from TBW that they didn't own or had previously pledged to other lenders. She also allowed the failing business to freely "sweep" money from Colonial accounts into a TBW overdraft account to keep insolvent TBW afloat in the financial crisis.
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Taylor, Bean & Whitaker collapsed. Farkas was sentenced to 30 years in prison. Six other TBW executives went to jail for their roles in the scheme, and Catherine Kissick was sentenced to eight years for fraud.
Deloitte, TBW's external auditor, settled with TBW's bankruptcy trustee for an undisclosed sum in 2013.
Colonial Bank collapsed in 2009 when it was discovered there wasn't any collateral behind the loans it made to TBW.
That's the straight and narrow view of what happened, and it's incriminating enough. But now it gets even more complicated.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
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Shah is a frequent guest on CNBC, Forbes, and Marketwatch, and you can catch him every week on Fox Business's "Varney & Co."
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