Law360, New York (March 10, 2015, 7:26 PM ET) — Freddie Mac has expanded accusations that Deloitte & Touche LLP failed to flag the fraud that brought down Taylor Bean & Whitaker Mortgage Corp., according to a complaint unsealed Monday that demands punitive damages on top of the $1.3 billion Freddie Mac allegedly lost.
An unsealed complaint in Florida federal court revealed that Freddie Mac has brought an additional claim for punitive damages over Deloitte’s allegedly negligent auditing work for Taylor Bean, the mortgage lender felled by a massive employee fraud that sent several executives to prison.
The lawsuit, filed in Florida state court and subsequently removed to federal jurisdiction, claims that Deloitte bears responsibility for losses that Freddie Mac suffered in Taylor Bean’s 2009 bankruptcy.
Freddie Mac added a demand for punitive damages in an amended complaint that it filed under seal in February, according to court records. The lawsuit only surfaced publicly when U.S. District Judge Ursula Ungaro ordered its unsealing on Friday, finding no legitimate grounds to justify the continued secrecy.
Deloitte had raised concerns that posting the document would air confidential information that the firm produced during discovery, but it dropped its opposition to unsealing the complaint after Judge Ungaro’s decision.
“Plaintiff has not provided any reason as to why its amended complaint … should be filed under seal other than defendant’s designation that certain material quoted or paraphrased in the amended complaint is confidential,” the judge said. “This does not demonstrate good cause as to why the public’s right of access should be denied to such a central and important document in this case.”
The amended complaint says that Deloitte committed “gross negligence” by submitting clean audit reports for Taylor Bean even as senior officers at the mortgage lender offered “inconsistent, incomplete and often last-minute explanations” for certain transactions. Until the judge approves the amended complaint, the previous version controls.
Just after the complaint appeared on the docket, Deloitte filed papers asking for the suit to be dismissed, calling Freddie Mac’s punitive damages demand “both procedurally improper and substantively meritless.”
“To the extent that Freddie Mac takes issue with Deloitte’s conduct, the amended complaint alleges nothing more than Freddie Mac’s disagreement with Deloitte’s professional judgments,” the firm said.
Once the largest mortgage lender in the U.S. not owned by a deposit-taking bank, Taylor Bean sought bankruptcy protection in August 2009 after federal officers raided its headquarters in Ocala, Florida. Prosecutors discovered a fraud that led to several long prison sentences, including a 30-year term for former Chairman Lee Bentley Farkas. Taylor Bean allegedly overstated its assets and income and understated its liabilities after Farkas and other executives created fake, worthless mortgage assets and triple-sold other mortgage assets, which allowed them to profit off their sales and issue billions more in FHA-backed securities
In October, Deloitte settled three lawsuits seeking billions in damages for failing to detect the Taylor Bean fraud. The details of the deals were confidential.
The deals avert a consolidated trial in two of the suits, filed by Taylor Bean bankruptcy trustee Neal F. Luria and Deutsche Bank AG, that was set to start in Miami late last year. The third suit was filed by Taylor Bean subsidiary Ocala Funding LLC.
The three suits claimed that Deloitte certified the company’s annual financial statements while ignoring “obvious red flags” indicating fraud and allowed Taylor Bean to borrow billions of dollars that it could never repay.
Freddie Mac is represented by Pamela A. Chamberlin and Isaac J. Mitrani of Mitrani Rynor Adamsky & Toland PAand Paul D. Moak, Joshua Newcomer and Kyle A. Lonergan ofMcKool Smith PC.
Deloitte is represented by Peter Prieto, John Gravante III and Matthew Weinshall ofPodhurst Orseck PA and Miles N. Ruthberg and Peter A. Wald of Latham & Watkins LLP.
The case is Federal Home Loan Mortgage Corp. v. Deloitte & Touche LLP, case number1:14-cv-23713, in the U.S. District Court for the Southern District of Florida.
–Editing by Kelly Duncan.