In a ruling that exposes the Big Four firm to heavy potential damages, a federal judge found that PricewaterhouseCoopers was negligent in its audits of Colonial Bank, which failed in 2009 in the midst of the financial crisis.

The case involved a lawsuit by the Federal Deposit Insurance Corp., which sued the firm for failing to detect a multi-billion-dollar fraud against Colonial Bank and its parent Colonial BancGroup by Taylor, Bean & Whitaker Mortgage Corp., another financial firm that collapsed in 2009. The FDIC faulted PwC for letting Colonial account for certain transactions as sales of mortgages from Taylor Bean to Colonial, rather than as loans from Colonial to Taylor Bean that were secured by mortgages. Last year, PwC reached a confidential settlement with Taylor Bean’s bankruptcy trustee for an undisclosed sum (see PwC reaches settlement in Taylor Bean lawsuit).

U.S. District Judge Barbara Jacobs Rothstein agreed with the negligence claim against PwC by the FDIC, but rejected claims by the bankruptcy trustee for Colonial BancGroup, as the bank itself was responsible. “The FDIC’s professional negligence claim against PwC is granted,” she wrote Sunday. “PwC breached the professional duties it owed CBG as CBG’s independent, external auditor. However, CBG’s professional negligence claim is barred by: (a) the in pari delicto doctrine, (b) the Hinkle rule, and (3) the audit interference rule. Therefore, CBG’s professional negligence claim against PwC is denied.”

PricewaterhouseCoopers LLP's building stands in the financial district of Toronto, Ontario, Canada
Brent Lewin/Bloomberg

The judge also rejected breach of contract and wantonness claims against PwC. Overall, the firm said it was pleased with the judge’s ruling and does not anticipate the judge will impose substantial damages in the case.

“PricewaterhouseCoopers is pleased that the court properly rejected all of the claims asserted by Colonial BancGroup as well as several of the key claims asserted by the FDIC,” said PwC in a statement. “The court’s ruling recognizes that in addition to those CBG employees who perpetrated the fraud, numerous other employees at Colonial Bancgroup actively and substantially interfered with PricewaterhouseCoopers’ audit. The FDIC was only able to prevail on the claim that it did based on an earlier novel ruling by the court that immunized the FDIC from imputation-based defenses. PricewaterhouseCoopers intends to appeal that novel ruling at the earliest possible opportunity. PricewaterhouseCoopers is also pleased with the court’s finding that it did not cause a substantial portion of the damages the FDIC is seeking. PricewaterhouseCoopers looks forward to the damages phase where the FDIC will bear the burden of proof on what remains of their inflated damages claim.”

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