ELLIS V. GRANT THORNTON LLP
530 F.3d 280 (4th Cir. 2008)
NATURE OF THE CASE:
FACTS: An OCC investigation revealed that Keystone's books overstated the value of the
loans Keystone owned by over $515 million. Keystone was declared insolvent and was closed on
September 1, 1999. In 1992, Keystone began to engage in an investment strategy that involved
the securitization of high risk mortgage loans. All told, Keystone acquired and securitized
over 120,000 loans with a total value in excess of $2.6 billion. Keystone's assets grew from
$107 million in 1992 to over $1.1 billion in 1999. In reality, the securitization program
proved highly unprofitable. Due to the risky nature of many of the underlying mortgage
loans, the failure rate was excessive. As a result, the residual interests retained by
Keystone proved highly speculative and, in actuality, they did not perform well. Keystone's
irregular bank records drew the attention of the OCC, which began an investigation into
Keystone's banking activities. In May 1998, the OCC required Keystone to enter into an
agreement obligating Keystone to take specific steps to improve its regulatory posture and
financial condition. Keystone was required to retain a nationally recognized independent
accounting firm 'to perform an audit of the Bank's mortgage banking operations and determine
the appropriateness of the Bank's accounting for purchased loans and all securitizations.'
In August 1998, Keystone retained Grant Thornton (D) as its outside auditor. Keystone's 1998
financial statements reflected ownership of more than $515 million in loans that it did not
own. Due to negligence on the part of both Quay and Buenger, employees of D, D's audit did
not uncover the $515 million discrepancy. On March 24, 1999, Quay presented several members
and prospective members of Keystone's board and Keystone's shareholders with draft copies of
Keystone's 1998 financial statements and told them that Keystone was going to get an
unqualified or 'clean' audit opinion on its 1998 financial statements. At the shareholders
meeting the next day, Quay also distributed copies of Keystone's financial statements. At
that time, Quay reiterated that Keystone was going to get a clean audit opinion on its 1998
financial statements. On April 19, 1999, D issued and delivered to Keystone's board its
audit opinion stating that Keystone's financial statements were fairly stated in accordance
with the GAAP and reflecting a shareholder's equity of $184 million. Keystone was in fact
insolvent. The intent of the report was plainly stated on the first page of the report:
'This report is intended for the information and use of the Board of Directors and
Management of The First National Bank of Keystone and its regulatory agencies and should not
be used by third parties for any other purpose.' In 1984, Ellis (P) was President of the
Bank of Dunbar. Dunbar was later merged into United National Bank (United) at which time P
joined the management team at United, eventually becoming its president. In 1998, United
merged with George Mason Bankshares of Virginia. In the spring of 1999, following the
merger, P voluntarily began looking for employment outside United. P began to seriously
consider Keystone. P discussed the financial condition of the bank with Quay and other
Keystone insiders with the understanding that the information be kept confidential. Quay
spoke with P and the two outside directors because Keystone did not have a chief financial
officer, thus making Quay the only person capable of going over the financial statements
with the others. P met with his attorneys to draft a proposed employment agreement with
Keystone. On April 19, 1999, at a Keystone board meeting, P reviewed D's final audit report
on Keystone for 1998. The board voted to approve P's hiring as president of Keystone. P
relied on D's audit, in deciding to accept the job as president of Keystone. Keystone was
shut down a few months later. P was named as a defendant in a class action lawsuit and filed
a cross complaint against D for negligent misrepresentation. The court ruled in favor of P
as Quay intended that P rely on the reports. This appeal resulted.
ISSUE:
RULE OF LAW:
HOLDING AND DECISION:
LEGAL ANALYSIS:
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