Ellis v. Grant Thornton Llp

530 F.3d 280 (4th Cir. 2008)

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Nature of the Case

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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 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.