Multimillion-Dollar Award Against PwC Is Window Into Typically Secret Auditor Settlements

A federal judge’s decision on Monday that global audit firm PricewaterhouseCoopers LLP must pay $625 million to the Federal Deposit Insurance Corporation provides a rare look into the typically secret settlements between global audit firms and bankruptcy trustees.

Judge Barbara Rothstein’s decision in the case of Colonial BancGroup Inc. and the FDIC v. PricewaterhouseCoopers LLP, is the largest ever judgment against an audit firm in the United States. It will compensate the FDIC for its losses as the receiver of Colonial, a crisis-era bankruptcy.

The only reason the public knows about this $625 million whack back at PwC for an allegedly negligent audit is because the FDIC is restricted by law from agreeing to a confidential settlement. That’s not the case with private plaintiffs. On a regular basis, bankruptcy courts and trustees — and their attorneys — cooperate with Big 4 global audit firms and their defense attorneys to hide the size of the settlements in high profile multibillion-dollar bankruptcy cases from public view.

PwC was the auditor of Colonial Bank Group and the judge said in January that PwC “did not design its [Colonial Bank] audits to detect fraud and PwC’s failure to do so constitutes a violation of the auditing standards.”

TBW and Colonial Bank collapsed in 2009, after federal regulators found a $3 billion fraud involving fake mortgage assets. Several executives from both firms went to prison.

Money-losing investors, and receivers like bankruptcy trustees and the FDIC, bring the largest global audit firms — PwC, Deloitte, KPMG and Ernst & Young — to court quite often. However, the Big 4 rarely went to trial in the past. All that changed in the last two years when PwC went to trial for three different multibillion-dollar cases that came close to delivering jury verdicts.

In 2012, the Colonial Bank bankruptcy trustee and the Federal Deposit Insurance Corp. sued PwC for negligence as the auditor of Colonial Bank. That claim was for $1 billion in damages.

The same year, the trustee of the Taylor Bean & Whitaker Bankruptcy Plan sued TBW auditor Deloitte, and also Colonial auditor PwC, for negligence, seeking $7 billion in damages from Deloitte and $5.5 billion in damages from PwC.

In 2013, weeks before starting a trial Deloitte agreed to settle the TBW case; the parties mutually agreed not to disclose the amount. On Aug. 16, 2016, three weeks into a jury trial, PwC stopped the TBW proceedings by also agreeing to settle. Again, the amount was not disclosed.

In March of 2017, PwC agreed to another confidential settlement to shut down a trial before a jury verdict. The firm was facing the $1 billion claim of negligence brought by the bankruptcy trustee of brokerage firm MF Global, PwC’s audit client, which failed on October 31, 2011.

The audit firms argue for confidentiality for these settlements using the “Arthur Andersen pass,” claiming they are systemically important to the capital markets because of the legal mandate for public company audits. They fear that public awareness of potentially large settlement amounts might undermine confidence in an audit firm’s continued financial viability and/or prompt clients to abandon it.

Regulators, however, can’t control private litigation.

Steve Jakubowski, an attorney and author of the Bankruptcy Litigation Blog, told MarketWatch, “Given that the primary goal of the estate and the liquidating trustee is to maximize the value of the estate’s litigation assets, confidential settlements are favored on the theory that the defendant is paying more in settlement because it’s not having to signal what the amount of the litigation settlement is.”

In 2008 a bankruptcy trustee sued PwC for malpractice related to the bankruptcy of SemGroup. The $1.1 billion claim was settled confidentially right before trial in Tulsa in 2011.

KPMG was sued by the bankruptcy trustee for New Century, an early crisis-era mortgage originator that collapsed in bankruptcy. The settlement, reached in August of 2010 before a trial, was also sealed from public scrutiny.

“While there is a good argument that there should be transparency in matters as important as auditor competence in financial reporting,” Jakubowski told MarketWatch, “that policy objective will generally take a back seat to the bankruptcy objective of maximizing the value of the bankruptcy estate.”

PwC’s lead attorney in the case, Phil Beck of the law firm Bartlit Beck, told MarketWatch via a spokeswoman on Monday, “PwC US is disappointed by today’s ruling and we don’t believe the FDIC is entitled to the recovery of any damages in this case in light of the Court’s prior findings that numerous employees at Colonial actively and substantially interfered with our audits. We intend to pursue an appeal of this matter at the earliest opportunity.”

A spokeswoman for the FDIC said it does not comment on litigation.