Colonial Execs, Investors Settle Fraud Suit For $10.5M
Law360, New York (August 12, 2011) -- Colonial BancGroup Inc. shareholders reached a $10.5 million settlement in a putative class action Friday in Alabama to resolve claims the company's executives engineered a multipart fraud that gutted investors and drove the company into bankruptcy.
In a motion requesting preliminary approval of the settlement, the shareholders called the agreement an "outstanding result" for the class, which was battling a company with limited resources.
"Although lead plaintiffs and their counsel believe their case to be strong, their ability to construct a case would be hampered by the fact that Colonial was in bankruptcy," the plaintiffs said.
The latest consolidated complaint, filed in April, alleges that Colonial's officers misled investors and drove the company into bankruptcy in 2009.
Investors also claim that its former auditor PricewaterhouseCoopers LLP engaged in fraud and that underwriters Banc of America Securities LLC, Deutsche Bank Securities Inc. and Morgan Stanley & Co. Inc. are liable for shareholder losses.
Colonial BancGroup was the holding company for Colonial Bank, a regional bank that aggressively and, investors say, unscrupulously expanded its lending operations. Colonial executives also allegedly conspired with their largest client, Taylor Bean & Whitaker Corp., to inflate Colonial's warehouse lending assets.
Taylor Bean’s former Chairman Lee Farkas and other executives, meanwhile, have been convicted of defrauding banks of $2.9 billion. The securities that Colonial held on its books for Taylor Bean were in reality backed by fictitious or unmarketable loans and contributed to the bank’s collapse, according to the complaint.
On Aug. 1, the underwriter defendants moved to dismiss claims that they misled Colonial investors about the quality of Colonial Bank's mortgage portfolio and business practices. The underwriters maintain the Colonial investors lack standing to bring claims against the financial firms and are unable to tie their losses to the alleged misstatements in connection with Colonial's note and stock offerings.
PwC also urged the court to let the auditor exit the arena, contending that the investors are asserting securities fraud by hindsight and disregarding the fact that the auditor had limited involvement with Colonial.
While PwC audited Colonial’s financial statements in 2007 and 2008, the company cannot be held liable for failing to detect the fraud perpetrated by the head of Colonial’s mortgage warehouse lending arm and Taylor Bean executives.
Representatives for the parties could not immediately be reached for comment on Friday.
The plaintiffs are represented by liaison counsel Tyrone Means, H. Lewis Gillis and Gerald Brooks of Thomas Means Gillis & Seay PC, and proposed lead counsel Thomas Dubbs, James Johnson and Matthew Moehlman of Labaton Sucharow LLP, among others.
The director and officer defendants are represented by Larry B. Childs and William C. Athanas of Waller Lansden Dortch & Davis LLP.
The case is In re: Colonial BancGroup Inc. Securities Litigation, case number 2:09-cv-00104, in the U.S. District Court for the Middle District of Alabama.
--Additional reporting by Samuel Howard. Editing by Andrew Park.
