The terms of the settlement are confidential, according to Thomas Alexander & Forrester, the lawyers representing TBW’s bankruptcy trustee, Deutsche Bank and Ocala Funding, the three plaintiffs in the law suits. Deutsche Bank had invested in asset-backed promissory notes from Ocala which was a wholly-owned TBW subsidiary.
TBW, which was the largest privately-owned mortgage company in the US, collapsed in 2009 with debts of $7.6bn after the FBI raided the business and the Federal Housing Association stopped it issuing FHA mortgage loans and Ginnie Mae mortgage-backed securities.
Two years later, TBW’s majority owner Lee Farkas was convicted on 14 counts of securities fraud, bank fraud and wire fraud, as well as conspiracy to commit fraud, and was sent to prison for 30 years.
According to the case against him, the fraud started in 2002 and arose from a process called “sweeping”. TBW overdrew its account with Colonial Bank by millions of dollars and then promised to repay the amount at the end of the day. Eventually the overdraft reached more than $100m at which point TBW sold the bank $1bn in mortgages that it did not own.
Not surprisingly, the fraud at TWB led to the collapse of Colonial Bank as well.
Other company executives, including the former chief executive and lead manager for Ocala Funding and the former CFO of TBW, were also found guilty and sent to prison.
Deloitte, which had audited the company from 2001, uncovered the fraud during the 2009 audit.
The law suits against the firm alleged gross negligence: they accused it of failing to inspect TBW’s books properly and of missing the fraud “because it simply accepted managements conflicting, incomplete and often last minute explanations to highly questionable transactions”.
At one point, the law suits alleged, the firm signed off the 2008 audit even though the lead partner admitted in an email that he wasn’t sure that he understood the accounting treatment TBW had applied to $6bn worth of transactions.
The Deutsche Bank and Ocala law suits were due to be heard in the Florida State Court on 21 October, while the bankruptcy trustee case had been sent to arbitration. All three were settled, Deloitte said, to the “mutual satisfaction” of all the parties.