The court battle between Freddie Mac and Deloitte & Touche over allegations of fraud involving the spectacular collapse of Taylor, Bean & Whitaker is now over after the two sides agreed to dismiss Freddie Mac’s $1.3 billion lawsuit against Deloitte.
Freddie Mac initially sued Deloitte & Touche in 2014, alleging that Deloitte had been “grossly negligent” in its auditing of the financials of Taylor, Bean & Whitaker, which Freddie Mac relied upon as part of its seller/servicer agreement with TBW.
Law360.com first reported the settlement, which was disclosed in a Wednesday court filing.
The two sentence filing states that Freddie Mac and Deloitte agree to the dismissal of the suit, with prejudice. The filing also states that each party will “bear its own costs and fees.”
When contacted by HousingWire, a Freddie Mac spokesperson said that the two sides reached a settlement on “mutually agreeable terms.”
Attempts to contact Deloitte were unsuccessful as of publication.
According to court filings, Deloitte served as TBW’s independent auditor from 2002-2007 and was contracted to provide an “unqualified opinion” on TBW’s financial statements and to certify that the financial statements were “free of material misstatement due to error or fraud.”
Freddie Mac accused Deloitte of failing in its duties after TBW collapsed.
The story of TBW is one of the most notorious from the fallout of the financial crisis.
TBW was, at one time, the largest privately held mortgage company in the U.S., employing over 2,000 people. TBW originated, serviced and sold mortgages in pools to Freddie Mac.
Its funding was provided by Colonial Bank and later, by a TBW subsidiary, Ocala Funding.
Beginning in 2002 and stretching to 2009, TBW chairman Lee Farkas and his fellow conspirators swept funds between accounts at Colonial and Ocala to cover constant overdrafts. By December 2003, the rolling overdraft had grown to more than $120 million and sweeping the funds back and forth became too complex, so Farkas and others began selling mortgages that didn’t exist to cover the shortages.
By 2009, Colonial Bank had more than $500 million in nonexistent loans on its books.
At the same time, Farkas had also set up Ocala Funding to provide commercial paper to investor banks. According to a 2014 report from the Federal Housing Finance Agency’s Office of the Inspector General, BNP Paribas and Deutsche Bank purchased $1.7 billion in commercial paper from Ocala. The commercial paper was supposedly backed by mortgages originated or purchased by TBW.
But that was not the case.
Farkas and his fellow conspirators diverted nearly all of the funds and when TBW went belly up in 2009, BNP Paribas and Deutsche Bank lost nearly $1.5 billion.
Freddie Mac also filed a $1.78 billion proof of claim in TBW’s subsequent bankruptcy.
At one point, TBW also sold loans to Fannie Mae. In 2002, loans sold to Fannie represented 85% of TBW’s business. Fannie Mae canceled its seller/servicer agreement with TBW when it learned that Farkas had personally taken out eight loans, totaling $2 million and not actually backed by homes or any other eligible collateral, to pay for the repurchase of non-compliant loans that TBW had sold to Fannie.
Farkas intended to sell the eight fraudulent loans to Fannie to obtain the funds he needed to pay Fannie for the other non-compliant loans. Fannie discovered this fraud when Farkas was unable to make payments on the eight loans. Fannie did not communicate its findings to Freddie, its regulator or other interested parties.
Subsequently, Freddie considerably increased the volume of its business with TBW.
Farkas’ schemes were finally discovered when Colonial, which was on the verge of insolvency, applied for $553 million in funding from the Troubled Asset Relief Program. Colonial’s application was tentatively approved on the condition that it raise $300 million from outside investors.
According to the FHFA-OIG report, Farkas agreed to invest $150 million in the failing bank through TBW and help raise the additional $150 million because he knew that without the investment, TBW’s fraud would be discovered.
The additional $150 million would end up being diverted from Ocala’s books to Colonial’s, but the entire nature of Colonial’s fundraising raised a red flag with the Special Inspector General for TARP. Investigators questioned whether the injection of funding from Farkas was a “round trip” transaction, where the $300 million from TBW would be paid back from the TARP funds.
In the process of the investigation, several of Farkas’ co-conspirators eventually revealed the details of the multi-year, multi-billion dollar fraud.
Farkas was sentenced to 30 years in prison in 2011 and ordered to forfeit $38.5 million in ill-gotten gains for the $2.9 billion scheme after he was found guilty on 14 counts of bank, wire and securities fraud. Six of his co-conspirators also served (or are serving) significant jail time.
In its lawsuit, Freddie Mac accused Deloitte of failing in its duties at TBW’s auditor be repeatedly certifying that TBW’s financial statements were accurate and free of fraud.
In one instance, Freddie Mac alleged that Edward Corristan, Deloitte’s auditor-in-charge of the TBW audits from 2006 to 2009, assigned an “inexperienced and insufficiently qualified” manager, Jeffrey Bauman, to oversee the audit.
According to an earlier court filing, Freddie Mac told the court that Bauman’s “inexperience allegedly made it difficult for him to stand up to Melissa Henry of TBW, and led to ‘Deloitte’s continued rubber stamping of completely inaccurate and misleading financial statements.’”
In March 2015, Reuters reported that Freddie Mac had added an unknown amount of punitive damages to its claims against Deloitte, but now those claims and all others by Freddie Mac against Deloitte are over, settled quietly on “mutually agreeable terms.”
