Petition for Writ of Certiorari — Ellis v. Grant Thornton LLP (No. 08-542)

VUPTCHIG UUUIL, U.o.

\\ ve. Q) 99-542 Oct 20 2008

In the OFFICE OF THE CLERK

Supreme Court of the United States

GARY ELLIS,

Petitioner,

Vv.

GRANT THORNTON LLP,

Respondent.

On Petition for Writ of Certiorari

to the U.S. Court of Appeals

for the Fourth Circuit

PETITION FOR WRIT OF CERTIORARI

Benjamin L. Bailey

Counsel of Record

Eric B. Snyder

Rodney A. Smith

BAILEY & GLASSER LLP

209 Capitol Street

Charleston, WV 25301

(304) 345-6555

(304) 342-1110 Facsimile

October 20, 2008 Counse/ for Petitioner

—— =

GibsonMoore Appellate Services, LLC

421 East Franklin Street ¢ Suite 230 ¢ Richmond, VA 23219

814-249-7770 #¢ www.gibsonmoore.net

Questions Presented

I. Did the Fourth Circuit violate Federal

Rule of Civil Procedure 52(a) by making factual

findings that conflicted with the District Court’s

detailed findings made after a bench trial without

finding clear error?

If. Did the Fourth Circuit ignore this

Court’s precedent and depart from the usual course

of judicial proceedings by failing to remand even

though it predicted state law differently than the

District Court and did not have the full record?

ll

Parties to the Proceeding

The caption of the case contains the names of

all the parties. FDIC was a party in the consolidated

trial but was severed after trial for appellate

purposes.

1

Table of Contents

Page

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Reasons for Granting the Petition .....................6..0006 7 :

1. The Fourth Circuit overruled

factual findings without finding clear error,

in violation of Federal Rule of Civil

REE RE ee a eS NS AR ee 7

A. Rule 52(a) requires appellate

courts to find clear error before overruling

i sda caliaindadelenionseene 7

B. The Fourth Circuit stated the

clearly erroneous standard, but applied a

de novo standard of review when it made

factual findings that conflicted with

findings made by the District Court................ 8

iV

C. Making matters worse, the Fourth

Circuit conducted its de novo review with

ek fe een 10

2. The Panel fundamentally erred by

failing to remand to the District Court............... 12

A. The Fourth Circuit applied a

different legal standard that required

NS BE I a sis ncnescccsccevevactascavenssesi 13

B. This Court has required remand in

closely analogous cases where a new

standard was applied and there was more

than one possible resolution ............. clobcanmaial 15

REE ACRE MIE DSR RE Ae NORE EN OR Ne OT 17

Appendix:

Opinion, U.S. Court of Appeals

for the Fourth Circuit

ET NR i TEN A-l

Judgment, U.S. Court of Appeals

for the Fourth Circuit

NE i II os cvcciccccssesccssscsscesseseneeen A-27

Order Denying Rehearing

ee A-28

Judgment Order of

The Honorable David A. Faber

LE . ) Se A-29

Findings of Facts and

Conclusions of Law

I I FOIE oo occcccvccccccccccovccccsccenccss A-30

Letter to District Court from

Court of Appeals

Re: Transcript

I SEIT «isu crndiccccetncdgeeccnesnbepseonsinel A-161

Table of Authorities

Page(s)

Cases

Anderson v. City of Bessemer City,

470 U.S. 564 (1985)

Bank of Bluetield v. Crawford,

386 S.E.2d 310 (W. Va. 1989) passim

Bose Corp. v. Consumers Union,

466 U.S. 485 (1984) .......................... Pa Se 8,11

Comm Tr of Internal Revenue v. Duberstein,

363 U.S. 278 (1960)

DeMarco v. United States,

415 U.S. 449, 450 (1974) ...............................2. 7,16

Ellis v. Grant Thornton,

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

Icicle Seafoods, Inc. v. Worthington,

475 U.S. 709 (1986)

Logan Bank & Trust Co. v.

The Letter Shop, Inc.,

437 S.E.2d. 271 (W. Va. 1993)

North American Specialty Ins. Co. v. Lapalme,

258 F.3d 35 (1st Cir. 2001)

Pullman-Standard v. Swint,

456 U.S. 273 (1982)

State ex rel Elish v. Wilson,

434 S.E.2d. 411 (W. Va. 1993)

United States v. United States Gypsum Co.,

I i 5 eatin 8, 10

Statutes

28 U.S.C. § 1254(1)

SLE E OD 1,3

Rule

TIRE SEAS EE RR RO PCT! 6,9, 11

FED. R. Civ. P. 5 passim

FED. R. Civ. P.

Other

4h Cir. L.R. & IOP 30(b)

Restatement (Second) of Torts § 552

W. VA. CONST. ART. 8, § 4

Opinions Below

The judgment order of the District Court entering

judgment in favor of Gary Ellis and against Grant

Thornton is unpublished and printed at Pet. App. A-

29. The 132-page Findings of Fact and Conclusions

of Law in support of the Judgment Order is

unpublished and printed at Pet. App. A-30 to A-160.

The opinion and judgment order of the United States

Court of Appeals for the Fourth Circuit reversing the

District Court is published at 530 F.3d 280 (4th Cir.

2008) and reprinted at Pet. App. A-1 to A-27. The

Fourth Circuit order denying Mr. Ells’ petition for

rehearing or rehearing en banc is unpublished and

printed at Pet. App. A-28.

Jurisdiction

Gary Ellis, Petitioner, seeks review of a published

opinion and order reversing the District Court

judgment in favor of Mr. Ellis that was entered by

the Fourth Circuit on June 25, 2008. Pet. App. A-1 -

A-27. The Fourth Circuit denied the Petitioner’s

petition for rehearing and rehearing en banc on July

22, 2008. Pet. App. A-28. The statutory provision

conferring jurisdiction to review the judgment is 28

U.S.C. § 125401). The District Court had diversity

jurisdiction pursuant to 28 U.S.C. § 1332.

Statutes Involved

No statutes are involved in this Petition for a

Writ of Certiorari.

Statement of the Case

Petitioner and plaintiff below, Gary Ellis, seeks

review of a published opinion of the United States

Court of Appeals for the Fourth Circuit which

overturned the factual findings of the District Court

without finding clear error, announced a new and

more restrictive test for his theory of liability, made

its own factual findings on an incomplete record,

applied the new factual findings to the new test, and

then reversed the district court’s nearly $2.5 million

judgment in favor of Mr. Ellis without even

considering remand. The District Court reached its

verdict, set out in a 132-page memorandum opinion

and order, after a three-and-a-half-week bench trial.

In usurping the fact-finding role of the district court,

the Fourth Circuit set precedent, in a published

opinion, expressing outright antagonism toward

what appeared, until now, to be two fundamental

and well-settled elements of federal law. First,

Federal Rule of Civil Procedure 52(a) prohibits an

appeals court from substituting its view of the facts

for that of the district court without finding clear

error.) Second, and related, a court of appeals that

lays down additional elements of proof for a cause of

action must always remand unless the entire record

permits only one resolution. See Pullman-Standard

v. Swint, 456 U.S. 273 (1982); Icicle Seafoods, Inc. v.

Worthington, 475 U.S. 709 (1986).

' Federal Rule of Civil Procedure 52(a)(6) specifically

provides: “Findings of fact, whether based on oral or other

evidence, must not be set aside unless clearly erroneous, and

the reviewing court must give due regard to the trial court's

opportunity to judge the witnesses’ credibility.”

The Fourth Circuit’s refusal to follow Rule 52(a)’s

requirements presents this Court with a simple yet

important question: whether a court of appeals may

reverse a district court’s findings of fact made after a

lengthy bench trial without finding clear error. The

Fourth Circuit’s willingness to retry the facts of Mr.

Ellis’ case on appeal, based on an incomplete record,

injects frightening unpredictability and uncertainty

into the bench trial process.

In addition, and just as important, the Fourth

Circuit ignored this Courts precedent by

establishing a new legal standard and failing to

remand even though the appellate record was

incomplete. Following the reasoning of the Fourth

Circuit, which is now law, any appeal panel may

simply add elements to a cause of action, find a

partial record “devoid of evidence” on the new

elements, and then enter judgment for the

defendant. And, making matters worse, the Fourth

Circuit has refused to police itself. Indeed, only the

district court judge sitting by designation on the

appeal panel voted to rehear this case when

presented with Mr. Ellis’ petition for rehearing or

rehearing en banc drawing the Fourth Circuit’s

attention to the Panel’s extreme departure from

established review standards and precedent. This

Court’s review and the exercise of its supervisory

powers are thus necessary to prevent courts of

appeal from following the Fourth Circuit’s lead away

from the black letter mandate of Rule 52(a).

1. Summary of facts

This is a diversity case, brought pursuant to 28

U.S.C. § 1332, in which Gary Ellis, Petitioner,

asserted causes of action for accountant negligence

and negligent misrepresentation against Grant

Thornton LLP, Respondent, based on its work

auditing and preparing quarterly financial reports

for the First National Bank of Keystone. The

negligence respecting Mr. Ellis occurred from March

24, 1999, through April 19, 1999. During that

period, Mr. Ellis, a prominent figure in West

Virginia’s banking industry, was invited by Keystone

to consider taking the job as president of the bank.

Pet. App. A-71 - A-72, 4§ 88-90. In deciding whether

to take the job, Mr. Ellis requested that he be

permitted to review Keystone’s financial and

regulatory situation. Pet. App. A-9. On March 24,

1999, Keystone’s Board voted to authorize a

confidentiality agreement, which—among other

things—permitted Stan Quay, Grant Thornton’s lead

partner on the Keystone engagement, to share with

Mr. Ellis Grant Thornton’s opinions regarding the

financial condition of the bank. Jd. On March 24,

25, 30 and April 19, 1999, in the presence of several

eyewitnesses at a bar and at meetings at the bank,

Mr. Quay reviewed the financial health and financial

statements of Keystone with Mr. Ellis and assured

him that all was well at Keystone and that Grant

Thornton would give Keystone a clean audit opinion.

Pet. App. A-9 - A-10. As the District Court found,

Mr. Ellis relied on Grant Thornton’s ora] and written

representations and accepted a _ position as

Keystone’s president. Pet. App A-10 - A-11; Pet.

App. A-73 - A-74, 44 93-96.

Four months later, an investigation revealed that

Keystone was hopelessly insolvent for want of half a

billion dollars of loan inventory, which was

repeatedly overlooked by Grant Thornton. Pet. App.

A-3, A-87. Grant Thornton does not dispute in its

appeal that its monumental oversight was negligent.

Pet. App. A-6, n.l. On September 1, 1999, the

regulators closed Keystone, and Mr. Ellis lost his

long and exemplary career in banking by being

associated with the failure of Keystone. Pet. App. A-

3, A-87,A-94 - A-95, A-109.

2. Procedural history

Keystone’s collapse generated waves of criminal

investigations and lawsuits. On November 8, 1999,

Mr. Ellis was sued in a securities class action arising

out of Keystone’s failure. Pet. App. A-11. Mr. Ellis

asserted cross-claims for negligence and negligent

misrepresentation against Grant Thornton. /d.

Mr. Ellis’ claims against Grant Thornton went to

trial in the summer of 2004, along with claims

brought by the FDIC against Grant Thornton. Pet.

App. A-ll. Judge Faber, the Chief Judge of the

Southern District of West Virginia, presided over the

more-than-three-week bench trial and ruled in favor

of Mr. Ellis on March 14, 2007. Pet. App. A-29. In

his 132-page Findings of Fact and Conclusions of

Law, Judge Faber cited and relied upon the single

syllabus point of the West Virginia Supreme Court's

decision in Bank of Bluefield v. Crawford, 386 S.E.2d

310 (W. Va. 1989), for the standard for accountant

lability. Pet. App. A-106. The Syllabus in Bank of

Bluefield articulated the following straightforward

test: “In the absence of privity of contract, an

accountant 1s liable for the negligent preparation of

a financial report only to those he knows will be

receiving and relying on the report.” Syl. Pt. 1, Bank

of Bluefield, 386 S.E.2d at 310. The District Court

properly concluded that the syilabus was the law in

West Virginia and never cited to, or applied, any

part of the Restatement (Second) of Torts (the

“Restatement”) or the law from any other state. Pet.

App. A-30 - A-160.

Despite the concise and sufficient statement of

state law in Bank of Bluefield, the Fourth Circuit

panel (the “Pane!”), in an opinion authored by Senior

Circuit Judge Hamilton, found that it had to predict

West Virginia law and, as a result, adopted an

entirely new test for accountant liability. Pet. App.

A-1 - A-26. The Panel promulgated for West

Virginia a six-factor test for accountant liability set

forth by the First Circuit predicting that

Massachusetts would adopt the Restatement

(Second) of Torts. Jd; see also North American

Specialty Ins. Co. v. Lapalme, 258 F.3d 35 (1st Cir.

2001). The new test was much more demanding

than the test applied by the District Court and, as a

result, required additional fact finding.

After adopting this new and more rigorous test,

the Panel broke with this Court’s precedent, as well

as Fourth Circuit precedent, by failing to remand for

further factual development even though the Panel

did not have the entire record from the lengthy trial.

Instead of remanding, or even discussing the

possibility of remand, the Panel undertook a de novo

review of the incomplete record before it and made

factual findings. In so doing, the Panel ignored

District Court findings that conflicted with the

Panel’s new findings, and failed to find that the

District Court’s findings were in clear error, which

disregarded Federal Rule of Civil Procedure 52’s

express requirements. The Panel’s procedural error

resulted in the dismissal of Mr. Ellis’ claims, which

the District Court had found meritorious after the

lengthy trial.

Mr. Ellis petitioned the Fourth Circuit for

rehearing or rehearing en banc. Pet. App. A-28.

Interestingly, the District Court judge who sat on

the Panel voted to grant panel rehearing, but no

Fourth Circuit judge requested a poll on the petition

for rehearing en banc. Id.

Reasons for Granting the Petition

The Fourth Circuit’s disregard of appellate

review standards and this Court’s jurisprudence

resulted in an appellate review process that lacked

fundamental fairness and ignored basic appellate

review standards. Mr. Ellis petitions this Court to

reverse the Fourth Circuit’s decision and to require

remand to the District Court for further proceedings.

1. The Fourth Circuit overruled factual

findings without finding clear error, in violation

of Federal Rule of Civil Procedure 52(a).

A. Rule 52(a) requires appellate courts to

find clear error before overruling factual

findings.

Federal Rule of Civil Procedure 52(a) requires

appellate courts to uphold district courts’ factual

findings unless those findings are “clearly

erroneous.” As recognized by this Court, Rule 52(a)’s

deferential standard is based on the premise that

“factfinding is the basic responsibility of district

courts, rather than appellate courts... .” DeMarco

v. United States, 415 U.S. 449, 450 (1974). Such

deference is given because of the trial court’s unique

position to determine witnesses’ demeanor,

credibility, and inferences from documentary

evidence. See Bose Corp. v. Consumers Union, 466

U.S. 485, 500 (1984).

This Court has found that a trial court’s factual

findings are clearly erroneous, even where there is

some evidence to support them, only when “the

reviewing court on the entire evidence 1s left with

the definite and firm conviction that a mistake has

been committed.” United States v. United States

Gypsum Co., 233 U.S. 364, 395 (1948). However, an

appellate court may not reverse a district court’s

factual findings simply because the reviewing court

would have reached a different conclusion in the first

instance. See Anderson v. City of Bessemer City,

470 U.S. 564, 573 (1985). When findings are based

on oral evidence rather than factual evidence, the

“clearly erroneous” presumption becomes even more

difficult for appellate courts to reach because they do

not have the benefit of observing witnesses’

demeanor. See Bose Corp., 466 U.S. at 500.

“Similarly, the standard does not change as the trial

becomes longer and more complex, but the likelihood

that the appellate court will rely on the presumption

tends to increase when trial judges have lived with

the controversy for weeks or months instead of just a

few hours.” Jd.

B. The Fourth Circuit stated the clearly

erroneous standard, but applied a de novo

standard of review when it made factual

findings that conflicted with findings made by

the District Court.

In this case, the Panel acknowledged that the

standard of review for the District Court’s factual

findings is clear error, but inexplicably made its own

findings that contradicted the District Court without

applying the Rule 52. standard or even

acknowledging that the Panel's findings contradicted

the District Court’s findings. Pet. App. A-1 - A-26.

After an extended trial and an opportunity to judge

the credibility of all witnesses, the District Court

found that “Keystone’s board of directors and Gary

Ellis reasonably relied on Grant Thornton’s report,”

and that “Ellis relied on the financial statements

Quay gave him, and Quay’s oral representations to

Ellis and others that Keystone was going to get a

clean audit opinion.” Pet. App. A-70, A-73. The

District Court also found that “Quay intended and

knew that Ellis would rely on his statements, and

Ellis did, in fact, rely on them” and that “Grant

Thornton knew that Gary Ellis, as a potential officer

and director of Keystone, would be relying on its

audit of Keystone.” Pet. App. 4-74, A-106.

Without holding that any of these findings of the

District Court were clear error, the Panel applied its

new test and made the following, contradictory

findings: “Unquestionably, given that the audit

report stated that it was not intended for use by

third parties, Ellis could not justifiably rely on the

audit report in signing his employment contract with

Keystone.” Pet. App. A-25. As to Grant Thornton's

knowledge, the Fanel found that “Quay’s statements

concerning the clean audit opinion were offered by

Quay to the board and the shareholders to apprise

the board and the OCC of Keystone’s financial

condition. They were not offered to induce

individuals to accept employment with Keystone.”

Id. The Pane} also held, contrary to the District

Court and the evidence, that Mr. Quay knew

precisely why he was talking to potential president

10

Mr. Ellis about Keystone’s financial condition, that

“Grant Thornton was not aware that any potential

employee of Keystone was going to base their

decision to seek employment with Keystone on the

outcome of the audit. Rather ... Grant Thornton was

aware that its audit opinion may be relied upon by

shareholders, investors, and perhaps potential

employees such as Ellis.” Pet. App. A-22. Finally,

and perhaps most egregiously, the Panel made the

following finding without the benefit of observing

any witness’ demeanor during trial: “A person as

sophisticated and experienced in the banking

business as Ellis is, he knew he could not justifiably

rely on Quay’s statements when the report itself

stated otherwise.” Pet. App. A-25.

The Panel’s factual findings clearly contradict the

District Court’s explicit findings. Yet, the Panel

made these findings without any discussion of how

these findings contradicted the District Court’s

findings. The Panel’s failure to apply the “clearly

erroneous” standard ignored Rule 52(a)’s express

requirements and impermissibly resulted in a de

novo review of the record before the Panel.

C. Making matters worse, the Fourth

Circuit conducted its de novo review with only

part of the record.

The Fourth Circuit compounded its review

standard error by making its conflicting findings

without the benefit of the full trial record. This

Court has steadfastly held that only after a review of

the “entire evidence” an appellate court can find

clear error. See, e.g., United States v. United States

Gypsum Co., 333 U.S. 364, 395 (1948) (“A finding is

‘clearly erroneous’ when although there is evidence

11

to support it, the reviewing court on the entire

evidence is left with the definite and firm conviction

that a mistake has been committed”) (emphasis

added); Comm’r of Internal Revenue v. Duberstein,

363 U.S. 278, 291 (1960) (same); Bose Corp. v.

Consumers Union of United States, Inc., 466 U.S.

485 (1984) (stating that this Court’s Rule 52

jurisprudence “expressly contemplate[s] a review of

the entire record”).

In this case, the Fourth Circuit only had the Joint

Appendix provided by the parties and not the entire

transcript from the lengthy trial. See Fourth Circuit

L.R. & Internal Operating Proc. 30 (requiring that

the Joint Appendix only contain “the parts of the

record which are vital to the understanding of the

basic issues on appeal”)?; Pet. App. A-162. The Joint

Appendix, which was assembled by the parties

before the Fourth Circuit predicted its new, more

rigorous six-part standard for accountant liability, in

no way reflects “the entire record,” or even all of the

portions of the record relevant to the additional

factual findings made by the Fourth Circuit. Despite

only having a portion of the record, the Fourth

Circuit erroneously concluded that “the record

simply is devoid of evidence suggesting that Ellis

proved the fourth, fifth, and sixth elements” of its

new six-part test. Pet. App. A-18. Because it only

had a portion of the trial record, .owever, the Fourth

Circuit had no basis to conclude that the record

“simply is devoid” of such evidence. Nor could it

2 Fourth Circuit Local Rule and Operating Procedure Rule

30(b) further provides: “The use of a selectively abridged

record allows the judges to refer easily to relevant parts of the

record and saves the parties the considerable expense of

reproducing the entire record.”

12

reasonably have been left with the “definite and firm

conviction” that the District Court had erred in its

findings.

If the Panel concluded that the District Court’s

factual findings, made after observing more than

three weeks of trial testimony, were unsupported by

the record and therefore “clearly erroneous,” then

the Panel should have addressed that issue.

Instead, the Panel elected to ignore the findings of

the District Court and conduct its own de novo

review of the incomplete record before it. In

reviewing the case in this manner, the Panel

violated Rule 52(a)’s requirements and this Court’s

precedent, which reversed the outcome of the case.

2. The Panel fundamentally erred by failing

to remand to the District Court.

In addition to the strictures imposed by Rule

52(a), this Court has further limited the scope of

permissible appellate fact finding where the

appellate court applies a different legal standard

than the district court and that standard requires

additional fact finding or calls into question fact

finding made under an incorrect legal standard. See

Pullman-Standard v. Swint, 456 U.S. 273 (1982);

Icicle Seafoods, Inc. v. Worthington, 475 U.S. 709

(1986). In such circumstances, the appellate court

must remand to allow the district court to engage in

additional fact finding unless there is only one

possible resolution of the factual issue. Swint, 415

U.S. at 292. In this case, the Panel ignored this

limitation on appellate review by adopting a more

rigorous legal standard and engaging in fact finding

even though the factual issues could be resolved in

more than one way.

13

A. The Fourth Circuit applied a different

legal standard that required additional fact

finding.

The Fourth Circuit Panel applied a much more

demanding standard than the District Court, which

resulted in the need for additional fact finding. As

noted, the District Court adopted the single syllabus

point from Bank of Bluefield v. Crawford, which

provides: “In the absence of privity of contract, an

accountant is liable for the negligent preparation of

a financial report only to those he knows will be

receiving and relying on the report.” 386 S.E.2d 310

(W. Va. 1989). In West Virginia, syllabus points are

written by the Supreme Court of Appeals and are,

constitutionally, the law of the state. W. Va. Const.

art. 8, § 4. The Bank of Bluefield court surveyed the

law and favorably considered the Restatement

(Second) of Torts but did not adopt it wholesale in

the Syllabus, as it has in other cases.

On the other hand, the Fourth Circuit narrowly

construed the holding of Bank of Blueficld and

predicted the adoption of, and then applied, a six-

factor test established by the First Circuit predicting

that Massachusetts would adopt Restatement

(Second) of Torts § 552. Pet. App. A-18. Under the

new six-factor standard, a finding of liability

requires the injured party to establish: (1)

inaccurate information; (2) negligently supplied; (3)

in the course of an accountant’s professional

endeavors; (4) to a third person or limited group of

3 Compare Syllabus, Bank of Bluefield, 386 S.E.2d 310 (W.

Va. 1989), with Syl. Pt. 3, State ex re] Elish v. Wilson, 434

S.E.2d. 411 (W. Va. 1993), and Syl. Pt. 3, Logan Bank & Trust

Co. v. The Letter Shop, Inc., 437 S.E.2d. 271 (W. Va. 1993).

14

third persons for whose benefit and guidance the

accountant actually intends or knows will receive the

information; (5) for a transaction (or for a

substantially similar transaction) that the

accountant actually intends to influence or knows

that the recipient so intends; (6) with the result that

the third party justifiably relies on such information

to his detriment. Jd.

As applied by the Panel, the new test differs from

the Bank of Bluefield test in at least three material

respects. First, as part of the fourth element, the

Panel concluded that Mr. Ellis was required to show

that Grant Thornton knew that Mr. Ellis was one

member of a “limited group of persons for whose

benefit the audit report was prepared” when Grant

Thornton decided to give Keystone a clean audit

opinion. Pet. App. A-18 - A-22. This temporal

requirement is not stated anywhere in Bank of

Bluefield, much less in the Syllabus relied upon by

the District Court.

Second, with regard to the fifth element, the

Panel concluded that this element could only be met

if the original “transaction” contemplated reliance on

the audit opinion by third parties, and that Mr. Ellis’

decision regarding accepting the Presidency of

Keystone was not such a transaction. Pet. App. A-22

- A-25. As with the fourth element, this rigid

interpretation of the fifth element introduces a

temporal requirement that was not considered in

Bank of Bluefield. In other words, the Bank of

Bluefield court never considered or held that an

accountant could be shielded from liability in

circumstances where the accountant affirmatively

made negligent assurances to a_ third-party

15

regarding the accountant’s opinions after the

accountant was originally engaged, as occurred here.

Yet the Panel’s conclusion completely exonerated

Grant Thornton, and Mr. Quay, from. the

consequences of their admittedly negligent oral

representations—made to Mr. Ellis’ face—that the

bank would receive a clean audit, and their

subsequent final written audit opinion which did the

same.

Third, as applied by the Fourth Circuit, the sixth

element of the new test requires that reliance must

be justified. Pet. App. A-25. Again, the Bank of

Bluefield Syllabus does not include this requirement.

Instead, Bank of Bluefield only requires that the

accountant know that a third party “will be receiving

and relying on the report.” Syl. Pt. 1, Bank of

Bluefield, 386 S.E.2d at 310. The district court

specifically found, as required by Bank of Bluefield,

that Quay and Grant Thornton knew Mr. Ellis would

be receiving and relying on their representations,

and that such reliance was “reasonable.” As a result

of the Panel’s new legal requirements, additional

factual findings were apparently required regarding

“justification,” but neither the parties nor the district

court have had an opportunity to address this

requirement.

B. This Court has required remand in

closely analogous cases where a new standard

was applied and there was more than one

possible resolution.

This Court addressed the issue of remand under

similar circumstances in /fPullman-Standard Vv.

Swint, 456 U.S. 273 (1982), and found that remand

was required. In Swint, the Fifth Circuit corrected

16

legal standards applied by a district court and made

factual findings related to the corrected legal

standards, some of which conflicted with the factual

findings made by the district court. Jd. at 279-285.

Upon review, this Court held: “When an

appellate court discerns that a district court has

failed to make a finding because of an erroneous

view of the law, the usual rule is that there should

be a remand for further proceedings to permit the

trial court to make the missing findings.” /d. at 291.

The Court further held, “Where findings are infirm

because of an erroneous view of the law, a remand is

the proper course unless the record permits only one

resolution of the factual issue.” Swint, 415 U.S. at

292. In reversing the Fifth Circuit’s decision and

requiring remand, this Court reasoned that

“factfinding is the basic responsibil‘ty of district

courts, rather than appellate courts, and .. . the

Court of Appeals should not have resolved in the

first instance this factual dispute which had not

been considered by the District Court.” Jd. at 291-

292 (quoting DeMarco v. United States, 415 U.S. 449

(1974)).

This Court again addressed closely analogous

circumstances in TIcicle Seafoods, Ince. V.

Worthington, 475 U.S. 709 (1986), and held that

remand was required. In Icicle Seafoods, the Ninth

Circuit, like the Panel here, stated that the standard

of review for factual issues was clear error, but then

engaged in a de novo review of the record before it

and failed to discuss or analyze the district court's

factual findings. Jd. at 713-14. Also analogous to

this case, the Court of Appeals in Jcicle Seafoods

applied a new legal standard and made

17

determinative factual findings instead of remanding

to the district court. Jd. at 714. This Court found

that the Court of Appeals was mistaken to engage in

such fact finding, reversed the Court of Appeal’s

opinion, and required remand. In so doing, this

Court stated: “If the Court of Appeals believed that

the District Court had failed to make findings of fact

essential to a proper resolution of the legal question,

it should have remanded to the District Court to

make those findings.” /d. at 714.

In this case, the Panel ignored the holdings of

both Swint and Jcicle Foods by failing to remand

even though there clearly was more than one

possible resolution to the factual issues addressed by

the Panel. Importantly, the Panel could not possibly

have known whether the District Court’s factual

conclusions were flawed because the Panel did not

have the entire record. Pet. App. A-161 - A-162.

Moreover, it is axiomatic that there was more than

one possible resolution of the factual issues because

the Trial Court and the Panel reached different

conclusions on several determinative factual issues.

As explained, the District Court—after observing

weeks of trial testimony and having access to all

relevant documents—made factual findings that

were inconsistent with findings made by the Panel.

Based on these inconsistent findings alone, the

Panel should have applied the holdings of Swint and

Icicle Foods and remanded for further fact finding.

Conclusion

The Panel’s decision to engage in de novo fact

finding instead of remanding—despite predicting a

new legal standard and not having the entire

record—constitutes a dramatic failure to abide by

18

fundamental rules of appellate review. This error

deprived Mr. Ellis of a predictable and fair review

process and usurped the fact-finding authority

vested in the District Court. The result, if allowed to

stand, establishes new precedent that will deter

litigants from considering bench trials as more

efficient alternatives to jury trials and_ will

undermine confidence in the appellate process. For

these reasons, this Court should exercise its

supervisory powers and grant this Petition for a Writ

of Certiorari.

Age

ae

Benjamin L. Bailey*

Eric B. Snyder

Rodney A. Smith**

BAILEY & GLASSER LLP

209 Capitol Street

Charleston, WV 25301

(304) 345-6555

(304) 342-1110 Facsimile

*Counsel of Record

** Admission Pending

October 20, 2008 Counsel for Petitioner

A-1

PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

GARY ELLIS,

Plaintiff-Appellee,

Vv. 07-1352

GRANT THORNTON LLP,

Defendant-Appellant.

Appeal from the United States District Court for the

Southern District of West Virginia, at Bluefield.

David A. Faber, Chief District Judge.

(1:04-cv-00043)

Argued: March 19, 2008

Decided: June 25, 2008

[Entered: June 25, 2008]

Before DUNCAN, Circuit Judge, HAMILTON,

Senior Circuit Judge, and William L. OSTEEN, Jr.,

United States District Judge for the Middle District

of North Carolina, sitting by designation. Reversed

by published opinion. Senior Judge Hamilton wrote

the opinion, in which Judge Duncan and Judge

Osteen joined.

A-2

COUNSEL

ARGUED: Stanley Julius Parzen, MAYER BROWN,

L.L.P., Chicago, Illinois, for Appellant. Benjamin Lee

Bailey, BAILEY & GLASSER, L.L.P., Charleston,

West Virginia, for Appellee. ON BRIEF: John H.

Tinney, Kimberley R. Fields, THE TINNEY LAW

FIRM, P.L.L.C., Charleston, West Virginia; Bradley

J. Andreozzi, AYER BROWN, L.L.P., Chicago,

Illinois; Mark W. Ryan, Andrew J. Morris, MAYER

BROWN, L.L.P., Washington, D.C., for Appellant.

Eric B. Snyder, BAILEY & GLASSER, L.L.P.,

Charleston, West Virginia, for Appellee.

OPINION

HAMILTON, Senior Circuit Judge: The principal

issue presented in this appeal is whether Grant

Thornton LLP (Grant Thornton), an accounting firm

retained by First National Bank of Keystone

(Keystone), in response to an investigation by the

Office of the Comptroller of the Currency (OCC) into

Keystone’s banking activities, owed a duty of care

under the West Virginia law of negligent

misrepresentation to Gary Ellis, who allegedly relied

on oral statements made by Stan Quay (Quay), a

Grant Thornton partner, and a Grant Thornton

audit report of Keystone’s 1998 financial statements

in deciding to accept the job as president of

Keystone. We hold that Grant Thornton owed Ellis

no such duty under West Virginia law. Accordingly,

we reverse the judgment of the district court, which

found in favor of Ellis on his negligent

misrepresentation claim against Grant Thornton.

I

In late June 1999, the OCC began to intensify its

ongoing investigation into Keystone’s banking

activities. The OCC’s investigation revealed that

Keystone’s books overstated the value of the loans

Keystone owned by over $515 million. Based on

these overstatements, Keystone was declared

insolvent and was closed on September 1, 1999. This

case is yet another case that com’ s before this court

in the wake of Keystone’s collapse. See Gariety v.

Vorono, No. 06-2248, 2008 WL 110906 (4th Cir.

January 8, 2008) (unpublished) (civil action filed by

individuals who purchased Keystone stock between

September 28, 1998 and September 1, 1999); FDIC

v. Bakkebo, 506 F.3d 286 (4th Cir. 2007) (civil action

brought by FDIC); Gariety v. Grant Thornton, LLP.

368 F.3d 356 (4th Cir. 2004) (securities class action

by persons who purchased stock prior to Keystone’s

failure); United States v. Cherry, 330 F.3d 658 (4th

Cir. 2003) (criminal appeal); United States v.

Church, 11 Fed. App’x. 264 (4th Cir. 2001)

(unpublished) (same). This case concerns Ellis, who

took the job as president of Keystone in April 1999.

According to Ellis, he took the position only because

he relied on negligent misrepresentations made by

Quay and made by Grant Thornton in the audit

report.

A

Prior to 1992, Keystone was a small community

bank providing banking services to clients located

primarily in McDowell County, West Virginia.

Before its collapse, Keystone was a national] banking

association within the Federal Reserve System, the

deposits of which were insured by the FDIC.

In 1992, Keystone began to engage in an

investment strategy that involved the securitization

of high risk mortgage loans. Between 1992 and 1998,

Keystone originated nineteen securitizations. In

general, Keystone would acquire Federal Housing

Authority or high loan to value real estate mortgage

loans from around the United States, pool a group of

these loans, and sell interests in the pool through

underwriters to investors. The pooled loans were

serviced by third-party loan servicers, including

companies like Advanta and Compu-Link. Keystone

retained residual interests (residuals) in each loan

securitization. The residuals were subordinated

securities that would receive payments only after all

expenses were paid and all investors in each

securitization pool were paid. Thus, Keystone stood

to profit from a securitization only after everyone

else was paid in full. The residuals were assigned a

value that was carried on the books of Keystone as

an asset. Over time, the residual valuations came to

represent a significant portion of Keystone’s book

value.

From 1993 until 1998, when the last loan

securitization was completed, the size and frequency

of these transactions expanded from about $33

million to approximately $565 million for the last

one in September 1998. All told, Keystone acquired

and securitized over 120,000 loans with a total value

in excess of $2.6 billion.

The loan securitization business appeared to be

quite profitable. On paper, Keystone’s assets grew

from $107 million in 1992 to over $1.1 billion in

1999. In reality, however, 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 valuation of the residuals was greater

than their market value. J. Knox McConnell,

Keystone’s largest shareholder until his death, Terry

Church (Church), another Keystone director, and

others concealed the failure of the securitizations by

falsifying Keystone’s books. Bogus entries and

documents hid the true financial condition of

Keystone from the bank’s directors, shareholders,

depositors, and federal regulators.

Keystone’s irregular bank records drew the

attention of the OCC, which began an investigation

into Keystone’s banking activities. This investigation

revealed major errors in Keystone’s accounting

records that financially jeopardized Keystone. 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. This agreement required Keystone to,

among other things, 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." (J.A. 3043). In August 1998,

Keystone retained Grant Thornton as its outside

auditor.

Under the agreement between Grant Thornton

and Keystone, Grant Thornton was to, among other

things, perform for Keystone, in accordance with

Generally Accepted Auditing Standards (GAAS), an

audit of Keystone’s consolidated financial statements

as of December 31, 1998. Quay was the lead Grant

Thornton partner on the Keystone audit. Susan

Buenger (Buenger), a junior manager, performed

substantial work on the audit as well.

Grant Thornton performed the audit on

Keystone’s 1998 financial statements. 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, Grant Thornton’s audit did not uncover the

$515 million discrepancy.!! In fact, 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

! Grant Thornton does not challenge the district court’s

finding of negligence in this appeal, electing to assume, for the

sake of argument, that Quay and Buenger were negligent in

preparing the audit and making any statements concerning the

soundness of Keystone’s financial condition. Given Grant

Thornton’s position, we, too, will assume, without deciding,

that Quay and Buenger were negligent in preparing the audit

and making any statements concerning the soundness of

Keystone’s financial condition.

“clean” audit opinion on its 1998 financial

statements. (J.A. 2701).2 At the shareholders

2 Although accountants provide a variety of services to

clients, their primary function is auditing. Samuel S. Paschall,

Liability to Non-Clients: The Accountant's Role and

Responsibility, 53 Mo. L. Rev. 693, 698 (1988). In a typical

audit, the financial statements of an entity, usually a

corporation, are verified by examining the corporation's

accounting records and supporting evidence. Jd. After

examining such records and evidence, the accountant expresses

an opinion as to whether such statements fairly represent the

corporation’s actual financial position in accordance with the

Generally Accepted Accounting Principles (GAAP). Jd. at 698-

99. For practical reasons of cost and time, an accountant is

rarely able to examine every accounting transaction of a

corporation. Denise M. Orlinsky, Note, An Accountant's

Liability to Third Parties: Bily v. Arthur Young & Co., 43

DePaul L. Rev. 859, 862 (1994). Therefore, the performance of

an audit requires a high degree of professiona)] skill and

judgment, as the accountant can only test the output of the

corporation’s accounting systems. Jd. In performing an audit,

an accountant follows procedures outlined in the GAAS. Jd. The

end result of an audit is the audit report or opinion, which

evaluates the information obtained to determine whether the

corporation’s financial statements fairly represent the financial

position of the corporation in accordance with the GAAP. Jd. at

863-64. The audit opinion is usually expressed in a letter

addressed to the client and can be one of four types: an

unqualified audit opinion, a qualified audit opinion, an adverse

audit opinion, or a disclaimer audit opinion. /d. at 864. An

unqualified audit opinion is an expression of opinion by the

accountant without any exceptions, reservations, or

qualifications that the financial statements of the corporation

represent its financial position and the results of its operations.

Id. A qualified audit opinion, on the other hand, states that

improper accounting treatment has been applied to one or more

items and that, consequently, the financial statements are not

in compliance with the GAAP. 7d. at 865. An adverse audit

opinion is issued if any items have a material and pervasive

A-8

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, even though Keystone was, in

fact, insolvent as of the end of 1998, Grant Thornton

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. 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." (J.A. 2903).

The audited financial statements provided by

Quay to the board on April 19, 1999 were

substantially the same as the financial statements

Quay had provided board members and shareholders

in March 1999. Based on Grant Thornton’s audit

report, Keystone’s board continued to declare

dividends and operate the bank.

effect on the financial statement, thus destroying their fairness

of presentation. Jd. A disclaimer audit opinion is issued if the

accountant is unable to form an opinion because of serious

limitations on the scope of the examination of the audit. Jd. at

866. Typically, the corporation then uses this audit opinion for

its own business planning, and the audit opinion is used to

inform outside parties as to the financial health of the audited

company. Paschall, Liability to Non-Clients: The Accountant's

Role and Responsibility, 53 Mo. L. Rev. at 699.

A-9

B

In 1984, Gary Ellis was President of the Bank of

Dunbar. The Bank of Dunbar was later merged into

United National Bank (United) at which time Ellis

joined the management team at United, eventually

becoming its president. From the time of the merger

with the Bank of Dunbar until the time Ellis left

United, United more than doubled in size. In 1998,

United merged with George Mason Bankshares of

Virginia. In the spring of 1999, following the merger,

Ellis voluntarily began looking for employment

outside United. Ellis had dealt with Keystone in the

past, and, on March 19, 1999, Billie Cherry (Cherry),

chairman of Keystone’s board, called Ellis and

invited Ellis to attend Keystone’s annual

shareholders meeting on March 25, 1999. During the

call, Cherry suggested that Ellis should consider

becoming president of Keystone.

Ellis was not fired or told to leave United, had no

deadline for J icaving United, and could have

remained at United rather than leaving for the

Keystone position. Ellis attended Keystone’s board

meeting on March 24, 1999, at which the board

granted Ellis’ request to review, upon the signing of

a confidentiality agreement, the financial condition

of the bank. Although it is not clear from the record

whether a confidentiality agreement was signed, the

Keystone board permitted Ellis to discuss the

financial condition of the bank with Quay and other

Keystone insiders with the understanding that the

information be kept confidential. Consequently,

following the Keystone board meeting on March 24,

A-10

1999, Ellis met Quay and two other outside directors

at a bar at the Fincastle Country Club. Quay spoke

with Ellis 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. At the

country club, Quay told Ellis and the two outside

directors that Keystone was going to receive a "clean

[audit] opinion." (J.A. 401). Ellis also attended the

March 25, 1999 shareholders’ meeting at which

Quay informed the group that Grant Thornton was

going to give Keystone a clean audit opinion for

1998. On March 30, 1999, Ellis visited Keystone.

During this visit, Quay told Ellis once again that

Keystone would receive a clean audit opinion for

1998.

On April 2, 1999, Ellis met with his attorneys to

draft a proposed employment agreement with

Keystone. During the first two weeks of April 1999,

Ellis met with Church and others regarding

their expectations for him. It was decided that

Ellis would be responsible for the "“banking"

business at Keystone as opposed to the mortgage

loan securitizations. On April 19, 1999, at a

Keystone board meeting, Ellis reviewed Grant

Thornton’s final audit report on Keystone for

1998. The board voted to approve Ellis’ hiring

as president of Keystone. Ellis officially resigned

from United by letter dated April 20, 1999.

Ellis’ employment contract was signed on April 26,

A-1l

1999.3 According to Ellis, he relied on Grant

Thornton’s audit, which was consistent with Quay’s

earlier March 1999 statements that Grant Thornton

was going to issue a clean audit opinion for 1998, in

deciding to accept the job as president of Keystone.

C

After being named as a defendant in the Gariety

v. Grant Thornton, LLP securities class action, Ellis

filed a cross-claim against Grant Thornton for

negligent misrepresentation under West Virginia

law in which he sought to recover damages in the

form of lost earnings. The district court consolidated

Ellis’ negligent misrepresentation claim for trial

with the claims asserted by the FDIC in FDIC v.

Grant Thornton, LLP. 1:00-cv-0655, (S.D.W.Va.

January 15, 2004) (order). The case was tried in the

summer of 2004. In March 2007, the district court

ruled in favor of Ellis on his _ negligent

misrepresentation claim and found that he was

entitled to $2,419,233 in damages. The district court

found that, in accepting the job as president of

Keystone, "Ellis relied on the financial statements

Quay gave him," "Quay’s oral representations," and

the Grant Thornton audit report. (J.A. 2706). The

district court also found that "Quay intended and

knew that Ellis would rely on his statements." (J.A.

2707). In view of these findings of fact, the district

court concluded that Grant Thornton, as the auditor

3 Ellis signed a two-year contract at a base salary of

$375,000, plus benefits including the use of a corporate vehicle

and a country club membership. He also purchased $49,500 in

Keystone stock.

A-12

of Keystone, was liable to Ellis under the West

Virginia law of negligent misrepresentation, citing

First National Bank of Bluefield v. Crawford, 386

S.E.2d 310 (W. Va. 1989), because Grant Thornton

(through Quay’s oral statements and the audit °

report) made negligent misrepresentations

concerning the financial condition of Keystone

knowing that Ellis would receive and rely upon those

representations in making his decision to accept or

reject employment with Keystone. After ruling in

favor of Ellis, the district court deconsolidated Ellis’

negligent misrepresentation claim from the FDIC's

claims against Grant Thornton and _ entered

judgment in favor of Ellis in the amount of

$2,419,233. Grant Thornton noted a timely appeal.

II

On appeal from a bench trial, we may set aside

the district court’s findings of fact only if they are

clearly erroneous. Minyard Enter., Inc. _ v.

Southeastern Chem. & Solvent Co., 184 F.3d 373,

380 (4th Cir. 1999); Fed. R. Civ. P. 52(a). In

determining whether a finding of fact is clearly

erroneous, we must give due regard to the

opportunity of the district court to judge the

credibility of the witnesses. Fed. R. Civ. P. 52(a). A

finding of fact is clearly erroneous when, "although

there is evidence to support it, the reviewing court

on the entire evidence is left with the definite and

firm conviction that a mistake has been committed.”

United States v. United States Gypsum Co., 333 U.S.

364, 395 (1948). As a federal court sitting in

diversity, we have an obligation to apply the

A-13

jurisprudence of West Virginia’s highest court, the

Supreme Court of Appeals of West Virginia. Wells v.

Liddy, 186 F.3d 505, 527-28 (4th Cir. 1999). In a

situation where the state’s highest court has spoken

neither directly nor indirectly on the particular issue

before us, we are called upon to predict how that

court would rule if presented with the issue. /d. In

this case, we are called upon to predict whether,

under the facts of this case, Grant Thornton owed

Ellis a duty of care under the West Virginia law of

misrepresentation.

In Bank of Bluefield, the Supreme Court of

Appeals of West Virginia addressed the question of

whether the lack of privity of contract between an

accountant and a bank was a complete defense to the

bank’s suit against the accountant for professional

negligence in preparing a financial statement. 386

S.E.2d at 310-11. The court answered that question

in the negative. Jd. at 315. In Bank of Bluefield, the

bank alleged that the accountamt had been

professionally negligent in preparing a financial

statement for a construction cOmpany upon which

the bank had relied in determining whether to give

the construction company a loan. The parties

stipulated that: (1) the bank informed the

accountant that it would need the financial

statement prior to the October 5, 1984 closing of the

loan; (2) the financial statement was delivered to the

bank before the closing date; (3) the bank alleged

that it reasonably relied on the financial statement

in making the loan to the construction company; and

(4) there was no privity of contract between the bank

and the accountant. The state trial court in Bank of

A-14

Bluefield held that, in the absence of contractual

privity between the parties, the bank could not

recover from the accountant. Jd. at 311.

In resolving the issue before it, the court in Bank

of Bluefield discussed the four approaches to

resolving the question of under what circumstances

an accountant can be liable to third parties for a

negligent misrepresentation. Jd. at 311-13. The first

of these approaches was announced in Ultramares

Corp. v. Touche, 174 N.E. 441 (N.Y. 1931), which

held that negligence actions were only permitted by

parties in privity of contract or in a situation so close

as to approach that of privity. Jd. at 182-83. The

second approach was also developed by the New

York Court of Appeals, which slightly modified the

Ultramares Corp. approach in 1985. See Credit

Alliance Corp. v. Arthur Andersen & Co., 483 N.E.2d

110 (N.Y. 1985) (relaxing the strict Ul/tramares Corp.

privity doctrine by requiring a_ relationship

"sufficiently approaching privity").4 The third

4 Credit Alliance Corp. announced the following three-prong

test for determining whether an accountant can be held liable

for negligence to a third party who has detrimentally relied on

inaccurate financial statements: (1) the accountant must have

been aware that the financial reports were to be used for a

particular purpose or purposes; (2) in the furtherance of which

a known party or parties was intended to rely; and (3) there

must have been some conduct on the part of the accountant

linking him to that party or parties, which evinces the

accountant’s understanding of that party or parties’ reliance.

483 N.E.2d at 118. The Credit Alliance Corp. approach is often

referred to as the “near-privity" approach. First Nat? Bank of

Commerce v. Monco Agency, Inc., 911 F.2d 1053, 1058 (5th Cir.

1990).

A-15

approach is set forth in § 552 of the Restatement

(Second) of Torts. Under this approach, a person or a

limited class of persons who the auditor can foresee

as parties who will (and do) rely upon financial

statements are allowed to recover. Restatement

(Second) of Torts § 552(1)-(2). The fourth approach is

the reasonably foreseeable approach, which permits

all parties who are reasonably foreseeable recipients

of financial statements for business purposes to

recover as long as they rely on the statements for

those business purposes. See, e.g., H. Rosenblum,

Inc. v. Adler, 461 A.2d 138, 142-46 (N.J. 1983).5

After summarizing these four approaches, the court

in Bank of Bluefield adopted the Restatement § 552

approach for West Virginia, finding that the rule

5 Although it is sometimes difficult to discern the

differences between the four approaches, appropriate lines can

be drawn between the restrictive UlJtramares Corp., Credit

Alliance Corp., and Restatement approaches and the

nonrestrictive foreseeability approach. For example, although

the Restatement’s approach expands liability to a larger

potential class of third parties than do the U/tramares Corp.

and Credit Allianeve Corp. approaches, it does not extend

liability beyond an identified third party, 7 known third party,

or third parties who enter into the same type of transaction as

originally contemplated. In other words, under the U/tramares

Corp. and Credit Alliance Corp. approaches, "the precise

identity of the informational consumer [must] be foreseen by

the auditor," Monco Agency, Inc., 911 F.2d ai 1059, but, under

the Restatement approach, the precise “informational

consumer” need not be known, /d.; rather the Restatement

approach “contemplates identification of a narrow group, not

necessarily the specific membership within that group." Jd.

Moreover, unlike the foreseeability approach, the Restatement

approach does not extend to “every reasonably foreseeable

consumer of financial information.” /d. at 1060.

A-16

stated therein was "more appropriate because it

imposes a standard of care only to known users who

will actually be relying on the information provided

by the accountant." 386 S.E.2d at 313; see also id. at

310 Syllabus of the Court ("In the absence of privity

of contract, an accountant is liable for the negligent

preparation of a financial report only to those he

knows will be receiving and relying on the report.").®

In view of the court’s adoption of the Restatement

approach in Bank of Bluefield, the court answered

the certified question—was privity a defense—in the

negative. Jd. at 315. Consequently, other than the

adoption of the Restatement approach, the Bank of

Bluefield court gave no further meaningful guidance

concerning under what circumstances an accountant

can be liable to third parties for negligent

misrepresentations under § 552. Restatement

(Second) of Torts § 552 provides in relevant part:

(1) One who, in the course of his business,

profession or employment, or in any other

transaction in which he has a pecuniary

interest, supplies false information for the

guidance of others in their business

transactions, is subject to liability for

6 We note that the Bank of Bluefield court did not identify

what constitutes a "known" user, the definition of which is

important to separate the third parties entitled to recover

under the Restatement approach and not entitled to recover

under the Ul/tramares Corp. and Credit Alliance Corp.

approaches. Such a demarcation, however, was not essential to

the Bank of Bluefield court's rejection of these approaches, so

its failure to employ precise cabining language is

understandable.

A-17

pecuniary loss caused to them by their

justifiable reliance upon the information, if he

fails to exercise reasonable care or competence

in obtaining or communicating’ the

information.

(2) [T]he liability stated in Subsection (1) is

limited to loss suffered (a) by the person or .

one of a limited group of persons for whose

benefit and guidance he intends to supply the

information or knows that the recipient

intends to supply it; and

(b) through reliance upon it in a transaction

that he intends the information to influence or

knows that the recipient so intends or in a

substantially similar transaction.

Restatement (Second) of Torts § 552(1)-(2). The

Restatement approach is deliberately restrictive to

encourage the free flow of commercial information.

See id. § 552, cmt. ("By limiting the liability for

negligence of a supplier of information to be used in

commercial transactions to cases in which he

manifests an intent to supply the information for the

sort of use in which the plaintiffs loss occurs, the

law promotes the important social policy of

encouraging the flow of commercial information

upon which the operation of the economy rests."). It

also seeks to protect suppliers of commercial

information from liability in instances in which they

oblige themselves to provide information but the

terms of the obligation are unknown to them. See id.

(‘A user of commercial information cannot

A-18

reasonably expect its maker to have undertaken to

satisfy this obligation unless the terms of the

obligation were known to him.").

Although the West Virginia Supreme Court of

Appeals in Bank of Bluefield did not set forth what

must be proven by an injured third party proceeding

under § 552 against an accountant for the

accountant’s negligent misrepresentations, other

courts have set forth six elements that essentially

track the language of the Restatement. See, e.g., N.

Am. Specialty Ins. Co. v. Lapalme, 258 F.3d 35, 41-

42 (1st Cir. 2001) (setting forth six elements). Under

this authority, a finding of liability requires the

injured party to prove (1) inaccurate information, (2)

negligently supplied, (3) in the course of an

accountant’s professional endeavors, (4) to a third

person or limited group of third persons for whose

benefit and guidance the accountant actually intends

or knows will receive the information, (5) for a

transaction (or for a _ substantially similar

transaction) that the accountant actually intends to

influence or knows that the recipient so intends, (6)

with the result that the third party justifiably relies

on such misinformation to his detriment. Jd. The

third party has the burden of proving each of these

elements. Jd. at 42. Moreover, the accountant’s

“actual knowledge . . . should be ascertained at the

time the audit report or financial statement is

issued." Jd. at 39, 42.

In this case, the record simply is devoid of

evidence suggesting that Ellis proved the fourth,

fifth, and sixth elements. With regard to the fourth

A-19

element, it is clear that Ellis failed to show that

Grant Thornton knew (or intended) that potential

employees, like Ellis, were intended to receive the

audit report for their benefit and guidance. The

audit report was delivered to the board of directors

of Keystone. The audit report plainly states that the

audit report was not intended for use by third

parties. Rather, the audit report was prepared for

the benefit of Keystone and the OCC, which is

entirely consistent with the agreements between

Keystone and the OCC and between Keystone and

Grant Thornton. Thus, Ellis, or any other potential

employee, was not a member of any limited group of

persons for whose benefit the audit report was

prepared.

Perhaps recognizing the tenuousness of relying

on the audit report itself, especially since he signed

his employment contract a week after the audit

report was issued to the board, Ellis relies heavily on

Quay’s statements in March 1999 indicating that

Grant Thornton was going to give Keystone a clean

audit opinion.? Of course, reliance on Quay’s

statements improves the position of Ellis, as Quay’s

statements did not include a disclaimer. However,

the Restatement approach instructs that we should

7 Grant Thornton claims that oral statements can never

form the basis of liability under § 552 when such statements

are made before the release of the final audit opinion. We need

not decide this issue because, even assuming as we do for

purposes of this appeal that oral statements made before the

release of the final audit opinion can form the basis of auditcr

liability under § 552, Ellis cannot prevail.

A-20

assess cases in light of "[t]he ordinary practices and

attitudes of the business world." Restatement

(Second) of Torts § 552, cmt. j. Viewed in this light, it

is clear that Grant Thornton was Keystone’s auditor

and was hired to conduct an audit for the benefit of

Keystone and the OCC. Grant Thornton was not

hired to go over with each potential employee the

soundness of Keystone’s financial condition. Indeed,

throughout most of the course of the audit report’s

preparation, Ellis was an unknown, unidentified

potential employee of Keystone. Grant Thornton was

not aware of the existence of the potential

employment transaction between Ellis and Keystone

until after Grant Thornton reached its decision to

give Keystone a clean audit opinion. If the scope of

the audit involved potential employees, one would

expect at least some knowledge on the part of Grant

Thornton before they formed their audit opinion.

Moreover, Quay first informed the board of

directors on March 24, 1999 that Grant Thornton

was going to give Keystone a clean audit opinion.

Thus, the clean audit opinion information was

disclosed for the benefit of Keystone’s board and not

potential employees such as Ellis. Ellis’ attempt at

turning Quay’s clean audit opinion statements into

ones for his benefit, by virtue of his meetings with

Quay, ignores the business reality that Grant

Thornton was hired and performed the audit for the

benefit of Keystone and the OCC. It also ignores the

fact that any release of information to Ellis was done

at the behest of Keystone, not Grant Thornton.

There is no evidence in the record to support the

conclusion that Ellis was a member of any limited

A-21

group of persons for whose benefit Quay’s

statements were made.

Our conclusion concerning the fourth element is

buttressed by Illustration 10 in § 552. That

illustration provides:

A, an independent public accountant, is

retained by B Company to conduct an annual

audit of the customary scope for the

corporation and to furnish his opinion on the

corporation’s financial statements. A is not

informed of any intended use of the financial

statements; but A knows that the financial

statements, accompanied by an auditor's

opinion, are customarily used in a wide

variety of financial transactions by the

corporation and that they may be relied upon

by lenders, investors, shareholders, creditors,

purchasers and the like, in numerous possible

kinds of transactions. In fact B Company uses

the financial statements and accompanying

auditor's opinion to obtain a loan from X

Bank. use of A’s negligence, he issues an

unqudlifiedly favorable opinion won a

balance sheet that materially misstates the

financial position of B Company, and through

reliance upon it X Bank suffers pecuniary loss.

A is not liable to X bank.

Id. § 552, cmt. h, illus. 10. Illustration 10, we believe,

is materially indistinguishable from our case. Like

the accountant in the illustration, Grant Thornton

was not aware of an intended use of its audit opinion

A-22

beyond the customary business planning use of an

audit opinion by a corporation such as Keystone and

the use by the OCC for oversight, as it was hired "to

conduct an annual audit of the customary scope for

[Keystone] and to furnish [its] opinion on

[Keystone’s] financial statements." Jd. Indeed, Grant

Thornton was not aware that any potential employee

of Keystone was going to base their decision to seek

employment with Keystone on the outcome of the

audit. Rather, in performing its audit function,

Grant Thornton was aware that its audit opinion

and any statements made leading up to the issuance

of the audit opinion may be rehed upon by ;

shareholders, investors, and perhaps potential |

employees such as Ellis. However, more than a

tenuous awareness of this sort is required to impose

liability on Grant Thornton. To hold otherwise would

transform the Restatement approach into the

foreseeability approach, which the court in Bank of

Bluefield clearly rejected. Ellis was required to show

that Grant Thornton knew that its audit opinion

would be used by Keystone to assist potential

employees in making their decision concerning

whether to come to work for Keystone. The record

simply does not demonstrate that Ellis made such a

showing.

,

:

With regard to the fifth element's substantiality

requirement, we examine two questions. First, we

examine, from the accountant’s standpoint, what

risks he reasonably perceived he was undertaking

when he delivered the challenged report or financial

statement. Lapalme, 258 F.3d at 41. If the

accountant is unaware of a potential risk, then

A-23

liability cannot attach. Next, we make an objective

comparison between the transaction to which the

accountant had actual knowledge and _ the

transaction that in fact occurred. Jd. This

comparison cannot be hypertechnical, but, rather,

must be conducted in light of customary business

world practices and attitudes. Restatement (Second)

of Torts § 552, cmt. j. "The goal of this inquiry is to

determine whether the two transactions share

essentially the same character. If so, the actual

transaction is substantially similar to _ the

contemplated transaction (and, therefore, liability-

inducing)." Lapalme, 258 F.3d at 41. When Grant

Thornton issued its audit report, it was not

assuming the risk that third parties would rely on

the report. As noted above, the report itself states

that it is not to be used by third parties. To the

extent that Ellis relied on Quay’s statements, it

cannot be said that Grant Thornton was assuming

the risk of being liable for Ellis’ future lost earnings.

The audit opinion was formed by the time Quay met

with Ellis, and Quay was simply repeating

information that was earlier disclosed to the

Keystone board in his presence. With regard to the

objective comparison, the liability of the maker of a

negligent misrepresentation extends "to _ all

transactions of the type or kind that the maker

intends or has reason to expect." Restatement

(Second) of Torts § 552, cmt. j. For example,

"independent public accountants who negligently

make an audit of books of a corporation, which they

are told is to be used only for the purpose of

obtaining a particular line of banking credit, are not

A-24

subject to liability to a wholesale merchant whom

the corporation induces to supply it with goods on

credit by showing him the financial statements and

the accountant’s opinion." Jd. Moreover, an

accountant who negligently conducts an audit for A

corporation knowing that A corporation is going to

show the audit to B corporation as a basis for the

extension of credit from B corporation is not liable to

B corporation if B corporation buys a controlling

interest in A corporation in reliance upon the audit.

Id. § 552, cmt. j, illus. 14. Thus, when the character

of the transaction materially changes, there is no

liability. See Lapalme, 258 F.3d at 44 ("Even if the

change involves a new transaction, rather than

merely a modification of the earlier (known)

transaction, the accounting firm might still be held

liable if the identity of the third party is unchanged,

the type of transaction pretty much the same, and

the firm’s exposure relatively constant.").

Here, Grant Thornton was hired to conduct an

audit of Keystone. It was aware at the time it was

hired and during the auditing process that the audit

was being done for the benefit of Keystone and the

OCC. It was not aware during this process that its

audit was being performed for the benefit of

potential employees of Keystone. Indeed, there

simply is no evidence in the record that Grant

Thornton cared one way or the other who Keystone

hired or whether Ellis became president of Keystone.

In fact, Ellis was not even on the radar screen until

after Grant Thornton concluded that it was going to

issue Keystone a clean audit opinion. Moreover, any

release of information to Ellis was done at the behest

A-25

of Keystone, not Grant Thornton. This fact further

suggests that Grant Thornton never intended to

deviate from its standard auditing functions. In

short, to find the fifth element satisfied, we would

have to materially change the transaction from an

audit undertaken to benefit Keystone and the OCC

to one intended to benefit potential employees of

Keystone. Such a material change to the nature of

the transaction is prohibited under the Restatement

approach.

Ellis fares no better on the sixth element.

Unquestionably, given that the audit report stated

that it was not intended for use by third parties,

Ellis could not justifiably rely on the audit report in

signing his employment contract with Keystone.

With regard to Quay’s oral assurances, likewise,

Ellis could not justifiably rely on those statements.

First, Ellis was aware at the time he signed his

employment contract that the audit report was not

to be used by third parties. A person as sophisticated

and experienced in the banking business as Ellis is,

he knew he could not justifiably rely on Quay’s

statements when the report itself stated otherwise.

Moreover, as previously noted, Quay’s statements

concerning the clean audit opinion were offered by

Quay to the board and the shareholders to apprise

the board and the OCC of Keystone’s financial

condition. They were not offered to induce

individuals to accept employment with Keystone. As

such, it is difficult to discern how an individual as

sophisticated and experienced as Ellis would

justifiably rely on this information in accepting a job

at Keystone.

Ill

For the reasons stated herein, the judgment of

the district court is reversed.

REVERSED

A-27 :

"'

:

FILED: June 25, 2008

[Entered: June 25, 2008]

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 07-1352

(1:04-cev-00043)

GARY ELLIS,

Plaintiff - Appellee

Vv.

GRANT THORNTON LLP,

Defendant - Appellant

JUDGMENT

In accordance with the decision of this Court, the

judgment of the District Court is reversed.

This judgment shall take effect upon the issuance

of this Court’s mandated in accordance with Red. R.

App. P. 41.

/s/ Patricia S. Connor, Clerk

A-28

FILED: July 22, 2008

(Entered: July 22, 2008]

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 07-1352

(1:04-cv-00043)

GARY ELLIS,

Plaintiff - Appellee

Vv.

GRANT THORNTON LLP,

Defendant - Appellant

ORDER

The Court denies the petition for rehearing and

rehearing en banc. No poll was requested on the

petition for rehearing en banc.

Entered at the direction of Senior Judge

Hamilton, with the concurrence of Judge Duncan.

Judge Osteen voted to grant panel rehearing.

For the Court

/s/ Patricia S. Connor, Clerk

A-29

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF

WEST VIRGINIA

BLUEFIELD

GARY ELLIS,

Plaintiff,

v. CIVIL ACTION NO. 1:04-0043

GRANT THORNTON, LLP,

Defendant.

[Entered: March 14, 2007]

JUDGMENT ORDER

For reasons expressed in the Findings of Fact and

Conclusions of Law filed this day in consolidated

Civil Actions Nos. 1:00-0655, 1:03-2129, and 1:04-

0043, the court hereby ENTERS JUDGMENT in

favor of Gary Ellis on his claim against Grant

Thornton in the amount of $2,419,233, with post-

judgment interest and costs.

The Clerk is directed to send a copy of this

Judgment Order to counsel of record.

IT IS SO ORDERED this 14th day of March, 2007.

ENTER:

ENTER:

/s/ David A. Faber

David A. Faber

Chief Judge

A-30

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF

WEST VIRGINIA

GRANT THORNTON, LLP,

Plaintiff,

CIVIL ACTION NO. 1:00-0655

FEDERAL DEPOSIT INSURANCE

CORPORATION,

Defendant:

and

FEDERAL DEPOSIT INSURANCE

CORPORATION,

Plaintiff,

CIVIL ACTION NO. 1:03-2129

GRANT THORNTON, LLP,

Defendant;

and

GARY ELLIS,

Plaintiff,

Vv. CIVIL ACTION NO. 1:04-0043

GRANT THORNTON, LLP,

Defendant.

[Entered: March 14, 2007]

FINDINGS OF FACT AND

CONCLUSIONS OF LAW

DAVID A. FABER, Chief Judge.

A-31

INTRODUCTION

A bench trial was held on May 17, 2004, through

June 10, 2004. Closing arguments were held on

August 20, 2904. Set forth herein are the court's

findings of fact and conclusions of law pursuant to

Fed.R.Civ.P. 52.

Because this case was tried before the court as a

bench trial, the court's findings are presumed to be

based on admissible evidence. Fishing Fleet, Inc. v.

Trident Ins. Co., Ltd., 598 F.2d 925, 929 (5th Cir.

1979); see also Chicago Title Ins. Co. v. IMG Exeter

Associates Ltd. P’ship, 985 F.2d 553, 1993 WL 27392

at *4 (4th Cir. 1993) (unpublished); see also Harris

v. Rivera, 454 U.S. 339, 346, 102 S.Ct. 460, 70

L.Ed.2d 530 (1981) (“In bench trials, judges routinely

hear inadmissible evidence that they are presumed

to ignore when making decisions.”). Accordingly, the

court finds it unnecessary to rule on each separate

objection raised by the parties. The court has

considered those objections relating to the evidence

supporting the findings contained herein and, to the

extent such objections relate to the evidence which

the court cites in support of its findings, such

objections are hereby overruled.

VINDINGS OF FACT

I. Background

1. The First National Bank of Keystone

(“Keystone” or the “Bank”) located in Keystone,

McDowell County, West Virginia, was incorporated

in 1904 under the National Banking Act. GT Ex. 22.

A-32

Prior to 1992, Keystone was a small community

bank servicing primarily McDowell County and the

surrounding area. Keystone was a national banking

association within the Federal Reserve System, the

deposits of which were insured by the Federal

Deposit Insurance Corporation (“FDIC”). Keystone's

principal place of business was in West Virginia.

Prior to his death in 1997, J. Knox McConnell, the

Bank's president and its largest shareholder,

controlled Keystone. FDIC Ex. 431 at 2-3.

2. From at least 1992 through October 1997,

Keystone's board of directors consisted of two inside

directors, J. Knox McConnell and Billie Cherry, and

outside directors Michael Gibson, a local attoraey;

Andres Rago, a local doctor; Julian Budnick, a

retired furniture salesman; and Louis Pais, a retired

beer distributor. When McConnell died in October

1997, Terry Church replaced him on the board. At

the same time, Billie Cherry became president of the

Bank, and Melissa Quizenbeury, a_ long-time

employee, became a director. Gibson, May 20, 2004,

Tr. at 7, 10; FDIC Exs. 90, 124, 248 at 2; GT Exs.

208, 625. After McConnell's death, Church controlled

every material aspect of the Bank's operations.

Carney, May 19, 2004, Tr. at 69-71; Quay, June 4,

2004, Tr. at 13-14; FDIC Ex. 417 at 3. Church was

also the executrix of McConnell's estate, giving her

control of the largest single block of Keystone stock.

FDIC Ex. 248 at 2.

3. In December 1998, Julian Budnick resigned

from the board and was replaced by his son Victor

Budnick, an attorney. Budnick, May 18, 2004, Tr. at

A-33

86-88; Gibson, May 20, 2004, Tr. at 10. In March

1999, two new directors were elected: Bernard

Kaufman, a retired attorney and investor, and

Daniel Halsey, a local car dealer. Most of the outside

directors owned sizable blocks of Keystone stock, and

outside director Gibson actually bought more stock

during the last few months of the Bank's existence.

Gibson, May 20, 2004, Tr. at 58; FDIC Ex. 248 at 2,

FDIC Exs. 263, 880.

4. This civil action arises from the fraudulent

operation and eventual collapse of Keystone. The

fraud was conceived and perpetrated by senior bank

management and continued for years until detected.

In addition to McConnell, who died in October, 1997,

before the Bank was closed, the principal

perpetrators of the fraud, all Keystone insiders, were

Terry Church, Michael Graham and Billie Cherry.

FDIC Exs. 431, 432. Church, Graham and Cherry

have all been convicted of numerous felonies, their

convictions have been affirmed on appeal, and all

three were sentenced to lengthy terms of

incarceration.! FDIC Exs. 430, 433, 434, 435, 558,

560, and 579. For several years the wrongdoers

successfully concealed the fraud from the public,

from the Bank's examiners, from the Bank's board of

directors, and even from some of Keystone's own

senior management.

5. Central to the fraud was an investment

strategy that involved securitization of high risk

1 On December 29, 2006, Cherry died of a cerebral

hemorrhage while in federal custody.

A-34

mortgage loans. Beginning in 1992, Keystone

originated nineteen securitizations over a six-year

period. GT Ex. 514. Keystone would acquire Federal

Housing Authority (“FHA”) or high loan to value real

estate mortgage loans from around the United

States, pool a group of these loans, and sell interests

in the pool through underwriters to sophisticated

investors. GT Ex. 22. The pooled loans were serviced

by third-party loan servicers; principal among these

servicers were Advania and Compu-Link. GT Ex. 22.

Keystone retained residual interests (“residuals”) in

each loan securitization. GT Ex. 22. The residuals

were subordinated securities that would receive

payments only after all expenses were paid and all

investors in each securitization pool were paid. GT.

Ex. 22. In short, Keystone stood to profit from a

securitization only after everyone else was paid. The

residuals were assigned a value that was carried on

the books of the Bank as an asset. Over time, the

residual evaluations came to represent a significant

portion of the Bank's book value. GT Ex. 22.

6. From 1993 until 1998 when the last loan

securitization was completed, the size and frequency

of these transactions expanded from about $33

million to approximately $565 million for the last

one in September 1998. FDIC Ex. 431 at 3. All told,

Keystone acquired and securitized over 120,000

loans with a total value in excess of $2.6 billion.

FDIC Ex. 431 at 3. Keystone appeared to be an

exceptionally profitable bank, whose _ assets

purportedly grew from $107 million in 1992 to over

$1.1 billion in 1999. FDIC Ex. 431 at 3; GT Ex. 22.

A-35

7. In reality, the securitization program proved

highly unprofitable. Owing to the risky nature of

many of the underlying mortgage loans, the failure

rate was excessive. As a result, the residual interests

retained by the Bank proved highly speculative and,

in actuality, they did not perform very well. Malami,

May 26, 2004, Tr. at 77-134; Potter, May 26, 2004,

Tr. at 159-60; Potter, May 27, 2004, Tr. at 34-35.

Keystone's valuation of the residuals was greater

than their market value. Quay, June 4, 2004, Tr. at

29; FDIC Ex. 286. McConnell, Church, and others

concealed the failure of the securitizations by

falsifying the Bank's books. FDIC Ex. 431. Bogus

entries hid the true financial condition of the Bank

from the Bank's directors, shareholders, depositors

and regulators. FDIC Ex. 431. Among the bogus

documents were false remittance reports prepared

by Graham and given to examiners from the Office of

the Comptroller of the Currency (“OCC”). At the

same time, the wrongdoers embezzled large sums

from the Bank, covering their theft with other false

entries in the Bank's books. FDIC Ex. 431.

8. The embezzlement of funds and _ the

falsification of Keystone's financial records were both

integral parts of the fraudulent scheme. The scheme

participants booked false credits to interest income

to make it appear that Keystone was highly

profitable and booked false debits to loans to

fraudulently inflate assets and capital-which made

this a very common (“a garden variety”) form of

fraud. These fraudulent entries, and their reflection

in the Bank's financial statements, enabled

Keystone's corrupt management to continue to

A-36

embezzle funds and _ conceal their earlier

embezzlements. Carmichael, May 24, 2004, Tr. at

36-41; Carmichael, May 25, 2004, Tr. at 30-31;

Goldman, June 9, 2004, Tr. at 83-84.

9. One of the boldest acts of fraud designed to

conceal the Bank's true financial condition occurred

when approximately $515 million in loans were sold

by Keystone, but continued to be carried on the

Bank's books as assets. FDIC Ex. 431; GT Ex. 22.

Discovery of these fraudulent entries would have

revealed at once the fraud and the Bank's

insolvency, resulting in the Bank's immediate

seizure and closure by federal regulators. Johnson,

May 17, 2004, Tr. at 148; C. Wilson, May 17, 2004,

Tr. at 240.

IT. Hiring of Grant Thornton

10. Keystone had a long history of conflict with

federal bank examiners and regulators. GT Ex. 22.

In May, 1998, the OCC sought civil money penalties

against Keystone's management and board for

repeatedly filing inaccurate call reports. Casey, June

1, 2004, Tr. at 105; Gibson, May 20, 2004, Tr. at 12;

FDIC Ex. 64 at 5; FDIC Ex 182 at 31; FDIC Ex. 183

at 48. Call reports are detailed statements of a

bank's financial condition that must be filed with the

FDIC at the end of each quarter. Carney, May 19,

2004, Tr. at 103; FDIC Exs. 106, 171, 270, 323.

11. In examinations from 1995 to 1998, the OCC

repeatedly criticized Keystone's management and

records. GT Exs. 22, 243; FDIC Exs. 182, 183. The

OCC asked for additional civil monetary penalties

b

.

j

,

,

f

A-37

when it discovered over $100 million in errors in

Keystone's accounting records. Carney, May 19,

2004, Tr. at 62-63; Goldman, June 9, 2004, Tr. at

111. In its 1998 examination report, the OCC stated

that Keystone's management had demonstrated an

unwillingness or inability to follow appropriate

accounting guidelines and comply with applicable

laws and regulations. FDIC Ex. 183 at 3; GT Ex. 22.

In the same examination, the OCC stated that

Keystone had not filed an accurate call report the

last seven quarters, that the Bank was willfully

violating brokered deposit restrictions, and that data

was being manipulated to enhance Keystone's

capital position. FDIC Ex. 183 at 22, 41, 48. At one

point, the OCC, suspecting that McConnell and

Church were involved in an illegal kickback scheme

concerning appraisal fees, made a criminal referral.

FDIC Ex. 180; Quay, June 4, 2004, Tr. at 17-20; GT

Ex. 22. The OCC discovered that Graham had made

an “input error” of $31 million while entering data

on loan’ residual evaluations, and _ criticized

numerous other actions of Bank management

designed to enhance Keystone's capital position as

reflected by the Bank's records. FDIC Ex. 183 at 48.

Over time a hostile relationship developed between

Keystone officials and the regulators. GT Ex. 22.

Church and McConnell (prior to his death) were at

the center of this conflict. GT Ex. 22.

12. By the Spring of 1998, conflict between

Keystone and the regulators had reached a critical

juncture. In May of 1998, the OCC required

Keystone to enter into a Formal Agreement

obligating Keystone to take specific steps to improve

A-38

its regulatory posture and financial condition. FDIC

Ex. 64; Gibson, May 20, 2004, Tr. at 12. This

included retaining a nationally recognized

independent accounting firm. Gibson, May 20, 2004,

Tr. at 14; Buenger, June 2, 2004, Tr. at 179-81;

FDIC Exs. 64, 228. Discussions followed between

Bank officials and defendant Grant Thornton LLP

(“Grant Thornton”) concerning the possible

employment of Grant Thornton as the Bank's

outside auditor. Grant Thornton knew that the Bank

had significant accounting problems and was aware

of the troubled relationship between the Bank and

federal regulatory authorities. Buenger, June 2,

2004, Tr. at 179-81; Quay, June 3, 2004, Tr. at 15;

FDIC Exs. 64, 228.

13. Between July 17 and August 21, 1998,

appropriate officials at Grant Thornton approved

acceptance of the Bank as a client. Quay, June 3,

2004, Tr. at 24. While the approval process was

taking place, Stanley Quay, Grant Thornton's

partner who was to be in charge of the audit, drafted

a proposal covering the services he expected Grant

Thornton to perform for the Bank. Quay, June 3,

2004, Tr. at 24-25; FDIC Ex. 75. Under this proposal,

there were two principal levels of service Grant

Thornton was to perform for the Bank: (1) An audit

of the Bank's consolidated financial statements as of

December 31, 1998; and (2) Completion of certain

“agreed-upon-procedures’ relative to elements of the

Bank's financial statements beginning quarterly as

of June 30, 1998. Quay, June 3, 2004, Tr. at 25-26.

A-39

14. On or about July 27, 1998, the OCC indicated

it had no objection to the hiring of Grant Thornton

by the Bank. Gibson, May 20, 2004, Tr. at 67-68;

FDIC Ex. 79. Grant Thornton began its work at the

Bank on or about August 12, 1998. Carmichael, May

24, 2004, Tr. at 110-11; Casey, June 1, 2004, Tr. at

99; Gibson, May 20, 2004, Tr. at 69-70; FDIC Ex. 91.

15. On September 10, 1998, Quay prepared and

signed an engagement letter by which Grant

Thornton agreed to perform an audit of Keystone's

December 31, 1998, financial statements in

accordance with Generally Accepted Auditing

Standards (“GAAS”). Quay, June 3, 2004, Tr. at 28:

FDIC Ex. 98. Billie Cherry signed the letter on

behalf of Keystone on February 5, 1999. Quay, June

3, 2004, Tr. at 28-29: FDIC Ex. 98.

16. Stan Quay was the lead Grant Thornton

partner on the engagement. FDIC Ex. 75. Susan

Buenger, a junior manager, performed substantial

work on the engagement. FDIC Ex. 75. Quay

reviewed the Formal Agreement, and was familiar

with its terms. Quay, June 3, 2004, Tr. at 18-19.

ITI. Grant Thornton's Standard of Care

17. The American Institute of Certified Public

Accountants (AICPA) is a national professional

organization for CPAs. During the time period

involved, the AICPA set the professional standards

that applied to the work of CPAs. GAAS,

promulgated by the AICPA, are the standards

applicable to auditing functions. GAAS is generally

accepted as the minimum standard of professional

A-40

conduct in performing an audit. Generally Accepted

Accounting Principles (“GAAP”) “encompass the

convention, rules, and procedures necessary to

define accepted accounting practice at a particular

time.” Carmichael, May 24, 2004, Tr. at 11-14.

18. Due professional care under GAAS requires

the auditor to exercise | rofessional skepticism.

Carmichael, May 24, 2004, Tr. at 23. Professional

skepticism is an attitude that includes a questioning

mind and a critical assessment of audit evidence.

Carmichael, May 24, 2004, Tr. at 27-29; Buenger,

June 2, 2004, Tr. at 62; Goldman, June 9, 2004, Tr.

at 19; GT Ex. 266 (AU 230.07). The auditor has the

responsibility to plan and perform the audit to

obtain reasonable assurance that the financial

statements are free of material misstatement,

whether caused by error or fraud. Carmichael, May

24, 2004, Tr. at 32-34; Buenger, June 2, 2004, Tr. at

62-63; Quay, June 3, 2004, Tr. at 151; FDIC Exs.

438, 473 (AU 110.02). “When considering the

auditor's responsibility to obtain reasonable

assurance that the financial statements are free

from material misstatement, there is no important

distinction between errors and fraud.” GT Ex. 268

(AU 312.08).

19. An auditor should have a “show me” attitude,

and not accept unsubstantiated assertions by

management. Buenger, June 2, 2004, Tr. at 63:

Carmichael, May 24, 2004, Tr. at 27-29; FDIC Ex.

728. When applying procedures to the client's

records, schedules and supporting data, the auditor

should be on guard against accepting documents at

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face value. Buenger, June 2, 2004, Tr. at 63°64;

Goldman, Jine 9, 2004, Tr. at 38-39; Carmichael,

May 24, 2004, Tr. at 25.

20. If there is a high risk of fraud, the auditor

ought to employ a_ heightened professional

skepticism. Carmichael, May 24, 2004, Tr. at 29-31.

Grant Thornton had many reasons to employ a

heightened professional skepticism in its audit of

Keystone's financial statements. Grant Thornton

rated the Keystone audit maximum risk. Buenger,

June 2, 2004, at Tr. 64; Carmichael, May 24, 2004,

Tr. at 29; FDIC Ex. 174. It was the highest risk

audit on which Buenger and Quay had ever worked.

Buenger, June 2, 2004, Tr. at 64; Quay, June 3,

2004, Tr. at 189. Quay and Buenger testified that

their “fraud antenna” were up as high as they could

get. Buenger, June 2, 2004, Tr. at 64; Quay, June 3,

2004, Tr. at 189.

IV. Grant Thornton's Failure to Check the

Remittances From Servicers

21. Due prcfessional care is to be exercised in the

performance of the audit and the preparation of the

report. GT Ex. 262 (AU 150.02); GT Ex. 266 (AU

230.01).

22. The auditor has the responsibility to plan and

perform the audit to obtain reasonable assurance

about whether the financial statements are free of

material misstatement, whether caused by error or

fraud. Carmichael, May 24, 2004, Tr. at 32-36; FDIC

Ex. 473 (AU 110.02).

r , ee

A-42 |

23. The auditor should specifically assess the risk

of material misstatement due to fraud and should

consider that assessment in designing the audit

procedures to be performed. Carmichael, May 24,

2004, Tr. at 34-36; FDIC Ex. 695 (AU 316.12).

24. As already noted, the risk of material

misstatement in Keystone's financial statements due

to error or fraud was high, and Grant Thornton had

already reached that conclusion before its year-end

1998 audit of Keystone commenced. Carmichael,

May 24, 2004, Tr. at 94.

25. Buenger was responsivle for testing

Keystone's interest income during the year-end,

1998 audit. Keystone's management was reporting

$98.8 million in interest income from loans owned by

Keystone during 1998. Buenger, June 2, 2004, Tr. at

78. Over $65 million of the interest income was

fraudulent and nonexistent. Carmichael, May 24,

2004, Tr. at 41.

26. Buenger performed the interest income

testing in March, 1999. Buenger did not perform a

test of details, which would have entailed looking for

underlying support for the recorded item.

Carmichael, May 24, 2004, Tr. at 49. Buenger did

not examine remittance records of interest income. It

would only have taken a short time to check the

remittance records to verify the interest income. By

tracking the ten remittances showing income for

1998 from loan servicer Compu-Link into Keystone's

bank statement, Buenger could have verified 80-90%

of the interest income. Buenger, June 2, 2004, Tr. at

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71-93; Carmichael, May 24, 2004, Tr. at 100-01;

Carmichael, May 25, 2004, Tr. at 23-25, 154-57; G.

Ellis, May 22, 2004, Tr. at 78-80, 86, 94-95; Johnson,

May 17, 2004, Tr. at 184-87; Quay, June 3, 2004, Tr.

at 154-56; Terry Depo., November 16, 2002, pp. 14-

15, 17-25, 21-34, 36-45 (FDIC Ex. 902).

27. GAAS requires an auditor to obtain the best

evidence available within the time constraints and

money constraints applicable to the engagement.

Buenger, June 2, 2004, Tr. at 90. In this case, it

would have been less time consuming and costly to

perform a test of details rather than the analytical

test that Buenger performed because the bulk of the

interest income came from one servicer. Grant

Thornton would only need to look at twelve

remittances to very effectively substantiate most of

the interest income. Carmichael, May 24, 2004, Tr.

at 100-01.

28. Instead, the primary procedure that Buenger

relied on to test interest income was an ineffective

“analytical test.” This test compared recorded

interest income for the annual period to the average

balance of loans outstanding during the same period,

as reflected in the quarterly average balances

reported in Keystone's call reports, to calculate an

annual yield. Carmichael, May 24, 2004, Tr. at 84-

85, 97-98. Buenger then considered’ the

reasonableness of this calculated expectation of the

yield based on her understanding of the industry

yield on the same types of loans. Buenger, June 1,

2004, Tr. at 180-81; Carmichael, May 24, 2004, Tr.

at 84-85, 97-98; FDIC Ex. 164.

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29. The analytical test that Buenger did to test

interest income only’ considered information

provided by management. Carmichael, May 24,

2004, T:. at 90. The data that Buenger obtained in

her analytical testing was not independent of the

entity, was not from a person independent of those

responsible for the amount being audited, was not

developed under a reliable system with adequate

controls, and Grant Thornton had determined that

the prior auditors were incompetent. Carmichael,

May 24, 2004, Tr. at 98-100. Buenger used only

three items of information in her analytical test.

Goldman, June 9, 2004, Tr. at 29-30; Quay, June 4,

2004, Tr. at 10-13. The first was the average balance

of owned loans reported on Keystone's call reports.

Goldman, June 9, 2004, Tr. at 30. Buenger and Quay

knew that the OCC had imposed civil money

penalties on Keystone for filing inaccurate call

reports; in fact, the OCC said that Keystone had not

filed an accurate call report in the last seven

quarters. Quay, June 4, 2004, Tr. at 10-11. Buenger

decided not to use the call report information for

March 31, 1998 because the OCC had required the

call report to be restated, but she then proceeded to

use the other 1998 call reports despite knowing that

the OCC had determined those call reports were also

inaccurate. Buenger, June 2, 2004, Tr. at 106-09.

Thus, Buenger knew the call report information she

used was of questionable reliability. Carmichael,

May 24, 2004, Tr. at 89-90, 98-99; Goldman, June 9,

2004, Tr. at 32-33; Quay, June 3, 2004, Tr. at 151.

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30. The second piece of information Buenger used

in her analytical test was a chart of Keystone's

month end loan inventories for 1998 that was

provided to her by Graham. According to Buenger's

memorandum to the file on Keystone's loan

purchasing, Keystone purchased loans throughout

the year, and then sold them into securitizations.

Buenger, June 2, 2004, Tr. at 96-98; FDIC Ex. 181.

Buenger believed Keystone was funding these

purchases with brokered deposits. Buenger, June 2,

2004, Tr. at 95. Keystone's loan inventory should

have dropped substantially at the time of the

securitizations because the loans were sold into the

securitizations. Buenger, June 2, 2004, Tr. at 97-98.

Keystone had two securitizations in 1998-one in May

for $275 million and one in September for $565

million. But according to the Graham chart, the

Keystone loan inventory only dropped slightly in

those months-with a $47 million drop in May, 1998

and a $32 million drop in September, 1998. FDIC

Ex. 164. Finally, there were large discrepancies

between the total loan inventories on Graham's

chart and the total loan inventories reflected in

Grant Thornton's workpapers on its agreed upon

procedures. FDIC Ex. 164; Buenger, June 2, 2004,

Tr. at 103-04. For example, as of June 30, 1998,

Graham's chart reflected Keystone owned $566

million in loans, but Grant Thornton's reconciliation

of loans as of the same date reflected an inventory of

only $402 million. FDIC Ex. 164; Buenger, June 2,

2004, Tr. at 103-04. Buenger realized the numbers in

Graham's chart were not reasonable, and didn't tie

to any of the other numbers of which she was aware.

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Buenger, June 2, 2004, Tr. at 95-104, 130-31; Quay,

June 4, 2004, Tr. at 8-10; FDIC Exs. 164, 915.

Nevertheless, neither Buenger nor Quay asked

Graham to explain why the loan balances that he

provided Buenger made no sense. Buenger, June 2,

2004, Tr. at 103-04; Quay, June 4, 2004, Tr. at 9-10.

Even though she had determined that Graham's

chart made “no sense,” Buenger continued to use the

January through March 1998 loan inventories in

Graham's chart in her analytical test of income.

Buenger, June 2, 2004, Tr. at 104-06, 109-10;

Goldman, June 9, 2004, Tr. at 26-27, 150; Quay,

June 3, 2004, Tr. at 150-51. Buenger violated GAAS

by failing to investigate how Graham provided her

bogus loan inventories that made “no sense,” by

failing to investigate how Graham had made the $31

million “input error” on the residual valuation, and

by using information that she knew contained

material errors in her analytical test. Goldman, June

9, 2004, Tr. at 19-29, 31-32.

31. The third piece of information used by

Buenger in her analytical test was a “remittance

report,” reflecting $10 million in income from

Compu-Link during the month of December, 1998.

FDIC Ex. 165. One of Graham's subordinates,

Debbie Watkins, provided the “remittance report” to

Buenger with a letter from Forest Krumm of Compu-

Link. Buenger, June 1, 2004, Tr. at 187; Buenger,

June 2, 2004, Tr. at 64-65. The Krumm letter states

that “enclosed is a trial balance.” FDIC Ex. 165. The

letter does not reference a “remittance report” as

being enclosed. FDIC Ex. 165. The “remittance

report” contains no identifying markings to indicate

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that it is a true Compu-Link record. FDIC Ex. 165.

Under GAAS, Buenger should have investigated

these anomalies, and could not rely on the

“remittance report” until she cleared them _ up.

Buenger violated GAAS by using data on the

remittance report in her analytical test, and hy

failing to investigate the anomalies in the

information she was provided. Buenger, June 2,

2004, Tr. at 64-65, 72-73; Carmichael, May 24, 2004,

Tr. at 102-05; Carmichael, May 25, 2004, Tr. at 158-

59, 169-70; FDIC Ex. 165.

32. Detailed testing is better and provides

stronger evidence than analytical testing. Goldman,

June 9, 2004, Tr. at 46-47. At trial, Buenger

professed not to know that there was a difference

between an analytical test and a test of details.

Buenger, June 2, 2004, Tr. at 71. An auditor with

Buenger's level of training and experience should

know the difference between an analytical test and a

test of details. Goldman, June 9, 2004, Tr. at 46.

33. After the OCC reported the $500 million of

missing loans in August, 1999, Grant Thornton's

first step was to look for check and wire remittances

showing the interest income, but they could not find

any evidence to support $500 million in loans.

Carmichael, May 24, 2004, Tr. at 85-86; Quay, June

3, 2004, Tr. at 154-56.

34. In August, 1999, Buenger and Quay asked

Graham and Church to provide proof of the income

from the loans, and they came back and said they

couldn't find it. Quay, June 3, 2004, Tr. at 154-56.

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Graham and Church had every reason to produce

whatever proof they could to support the income

from loans. If Buenger and Quay had asked for the

same proof in March, 1999, the result would likely

have been the same: Church and Graham would not

have been able to provide proof of the income.

Buenger, June 2, 2004, Tr. at 79-90; Carmichacl,

May 24, 2004, Tr. at 101.

35. When Quay tested the more than $11 million

in income from the residuals during the year-end,

1998 audit, he performed detailed testing procedures

by actually examining the remittances, the checks,

and wires from the servicers. Quay decided that the

best way to test the residual income was to trace the

actual remittances into the cash accounts. Buenger,

June 2, 2004, Tr. at 78-79; Goldman, June 9, 2004,

Tr. at 47-48; Quay, June 3, 2004, Tr. at 152-54;

Carmichael, May 24, 2004, Tr. at 96; FDIC Ex. 188.

The fact that Quay used detailed testing procedures

to test the residual income is further evidence that

Buenger should have done the same when she tested

the interest income, especially given the fact that the

amount of interest income Keystone was reporting

was $98 million.

36. Under GAAS, AU 329.16 states the following

concerning the reliability cf data used in analytical

procedures:

The auditor should assess the reliability of the

data by considering the source of the data and the

conditions under which it was gathered, as well as

other knowledge the auditor may have about the

A-49

data. The following factors influence the auditor's

consideration of the reliability of data for purposes

of achieving audit objectives:

Whether the data was obtained from

independent sources outside the entity or from

sources within the entity.

Whether sources within the entity were

independent of those who are responsible for

the amount being audited.

Whether the system was developed under

a reliable system with adequate controls.

Whether the data was subjected to audit

testing in the current or prior year.

Whether the expectations were developed

using data from a variety of sources.

FDIC Ex. 715.

37. In Grant Thornton's audit of Keystone,

potential misstatements in interest income would be

apparent in the remittance records-as they were in

August, 1999. Detailed evidence was _ readily

available and was not voluminous. Carmichael, May

24, 2004, Tr. at 91-92; Johnson, May 17, 2004, Tr. at

184-87; FDIC Ex. 548.

38. Quay and Buenger had rated the Keystone

audit a “C” or “comprehensive” audit. Carmichael,

May 24, 2004, Tr. at 92-94, 96-97; FDIC Ex. 436.

Although Grant Thornton's audit manual states that

a “C” rated audit generally concentrates on tests of

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details for income statement accounts, Quay and

Buenger did not use tests of details for a majority of

the accounts, and instead only used tests of details

for two of the accounts. Goldman, June 9, 2004, Tr.

at 51-52.

39. In March, 1999, given the high risk of

material misstatement in Keystone's financial

statements, and the fact that Keystone's $98 million

in interest income was more than 90% of Keystone's

reported income, Buenger should have tested

Keystone's interest income for 1998 by reviewing the

remittance records of interest income for 1998. Her

failure to do so was a violation of GAAS. Carmichael,

May 24, 2004, Tr. at 30, 84-85, 94-96.

40. If Buenger had followed GAAS by testing

Keystone's interest income for 1998 by reviewing the

remittance records of interest income for 1998, it is

more likely than not she would have discovered the

loan inventory fraud in March, 1999, reported it to

Keystone's board, Keystone's president Owen

Carney, and the OCC, and Keystone would have

been closed by March 30, 1999. Budnick, May 18,

2004, Tr. at 122; Buenger, June 2, 2004, Tr. at 79-80;

Carney, May 19, 2004, Tr. at 101; Carmichael, May

24, 2004, Tr. at 31, 41-42; Carmichael, May 25, 2004,

Tr. at 30-31; Gibson, May 20, 2004, Tr. at 34-37:

Johnson, May 17, 2004, Tr. at 138-44, 148, 184-87;

Potter, May 27, 2004, Tr. at 13; Quay, June 3, 2004,

Tr. at 167-68; C. Wilson, May 17, 2004, Tr. at 240;

FDIC Exs. 408, 548.

A-51

V. Grant Thornton's Failure to Properly Prepare

for the Confirmation Process

41. Keystone’s December 31, 1998 financial

statements wepresented Keystone owned loans held

for sale and loans receivable of approximately $579

million. FDIC Ex. 291 at 4. Approximately $548

million of the $579 million was ostensibly located at

large loan servicing organizations. The loans

serviced by Compu-Link and Advanta were recorded

at $469.7 million, but this amount was fraudulently

overstated by $431.8 million. Of this amount, $236

million in loans being serviced by Advanta were

recorded as assets on Keystone's books, when in fact

the loans were owned by United National Bank

(“United”). The $236 million were loans that United

was to have sold to Keystone for inclusion in the

December 1998 _ securitization that Keystone

abruptly cancelled. Carmichael, May 24, 2004, Tr. at

41; Hale Depo., August 27, 2002, 51-55, 138-39, 155-

59 (FDIC Ex. 889); J. Wilson, May 21, 2004, Tr. at

23-27.

42. The confirmation process was primary and

critical to the Keystone audit. Buenger, June 2,

2004, Tr. at 131-32; Carmichael, May 24, 2004, Tr.

at 46°47. Buenger was tasked with doing the

confirmations. Buenger, June 2, 2004, Tr. at 6-23.

43. Professional skepticism is important in

performing confirmation procedures, and evaluating

the results of the confirmation procedures. Buenger,

June 2, 2004, Tr. at 132; Carmichael, May 24, 2004,

Tr. at 48; FDIC Exs. 439, 483 (AU 330.15).

A-52

44. Buenger had never worked on an audit of a

bank involved in the securitization business before

Keystone; she had no experience regarding the

securitization business. Buenger, June 2, 2004, Tr.

at 133-34.

45. The auditor's understanding of the client's

arrangements and transactions with third parties is

key to determining the information to be confirmed.

The auditor should obtain an understanding of the

substance of such arrangements and transactions to

determine the appropriate information to include in

the confirmation request. Buenger, June 2, 2004, Tr.

at 134-35; Carmichael, May 24, 2004, Tr. at 54-55;

FDIC Ex. 439 (AU 330.25); FDIC Ex. 483 (AU

330.15).

46. An understanding of the substance of the

client's arrangements and transactions with third

parties is an important factor in determining the

information to be confirmed. Buenger, June 2, 2004,

Tr. at 135; FDIC Ex. 436 at 133.

47. Buenger violated GAAS, including AU 330.25,

by failing to obtain an adequate understanding of

Keystone's arrangements and transactions with

United, Compu-Link and Advanta. Carmichael, May

24, 2004, Tr. at 47-48, 52-56; Carmichael, May 25,

2004, Tr. at 18-21. Indeed, Buenger testified that she

had no idea Keystone had a relationship with

United. Buenger, June 2, 2004, Tr. at 135. Buenger

did not investigate the details of that relationship,

nor did she review or ask to review the written

agreements between United and Keystone. Buenger

> —_—___

A-53

knew little or nothing of the details concerning the

Bank's relationship with United. Buenger, June 2,

2004, Tr. at 135-40.

VI. Grant Thornton Failed to Confirm $85 Million in

Loans that Were Allegedly in Transit

48. In order to conduct the audit in accordance

with GAAS, Grant Thornton was required to confirm

Keystone's loans in the manner prescribed by GAAS.

Confirmation is the process of obtaining and

evaluating a direct communication from a third

party in response to a request for financial

information about a particular item affecting

financial statement assertions. Goldman, June Q,

2004, Tr. at 52-53. The confirmation response must

come to the auditor directly from the third party,

and must be in_ response to the _ auditor's

confirmation request. Goldman, June 9, 2004, Tr. at

53-54.

49. According to Keystone's books, as of

December 31, 1998, and the lead sheet of supposed

Keystone-owned loans that Buenger was trying to

confirm, the Bank owned $85 million in loans that

were being serviced by Compu-Link, but were

transferred to Advanta for servicing effective

January 15, 1999. These loans were in fact non-

existent. Neither Advanta nor Compu-Link ever

confirmed to Buenger that the $85 million in loans

existed, that the loans were owned by Keystone, or

that servicing of the loans was transferred from

Compu-Link to Advanta. Buenger did nothing to

investigate this discrepancy, but improperly relied

A-54

upon the dubious remittance statement that was

given to her with the Forrest Krumm letter,

discussed above. Buenger, June 2, 2004, Tr. at 66-67,

141-44; Quay, June 3, 2004, Tr. at 127-32; FDIC Ex.

500. Buenger failed to confirm the $85 million in

loans in accordance with GAAS. Goldman, June 9,

2004, Tr. at 52-57.

VII. Grant Thornton's Failure with Respect To the

Advanta Confirmation

50. The first confirmation response from Advanta

was received by Grant Thornton on or about January

24, 1999, and went into a folder in the confirmation

drawer in Grant Thornton's Cincinnati office. That

confirmation showed only $6 million in loans owned

by Keystone were being serviced by Advanta, rather

than the $242 million in loans Keystone was

reporting. Burke Depo., December 13, 2002, 16-21,

34-36, 129-30 (FDIC Ex. 898); Gunter Depo.,

December 20, 2002, 260-64 (FDIC Ex. 913);

Carmichael, May 24, 2004, Tr. at 58-61; French

Depo., November 19, 2002, 85-86 (FDIC Ex. 907);

Ramirez Depo., September 26, 2002, 165-71, 197-98

(FDIC Ex. 896); FDIC Exs. 175, 176, 177, 255, 500.

51. Buenger did not know she had the first

January confirmation response in the confirmation

drawer, and on March 16, 1999, she asked Advanta

to send another confirmation. Carmichael, May 24,

2004, Tr. at 61-62; FDIC Exs. 255, 500. On March

17, 1999, Buenger received another confirmation

response from Advanta, which again showed only $6

million in loans owned by Keystone being serviced by

A-55

Advanta. Burke Depo., December 13, 2002, 20-25,

32-36, 129-40 (FDIC Ex. 899); Gunter Depo.,

December 20, 2002, 260-64 (FDIC Ex. 913);

Carmichael, May 24, 2004, Tr. at 61-62; FDIC Exs.

169, 176, 177, 257, 500.

52. Both Advanta confirmation responses

identified Keystone as Investor 405. FDIC Exs. 176,

177, 500. Buenger never made any inquiry about

what the investor numbers meant. She was not

aware of the significance of the investor numbers.

Buenger, June 2, 2004, Tr. at 66.

53. The “investor” is the owner. Buenger, June 2,

2004, Tr. at 152; Carmichael, May 24, 2004, Tr. at

63; Johnson, May 17, 2004, Tr. at 180. The number

following “investor” identifies the owner of the loans.

Investor 405 was Keystone and Investor 406 was

United. Ramirez Depo., September 26, 2002, 141-42

(FDIC Ex. 896).

54. The independent auditor should be thorough

in his or her search for evidential matter and

unbiased in its evaluation. FDIC Ex. 480 (AU

326.25). A thorough and skeptical auditor would

have determined what the investor numbers meant.

Carmichael, May 25, 2004, Tr. at 65-66.

55. There was a $236 million discrepancy

between the amount of Keystone-owned loans

Advanta confirmed it was servicing in its two

confirmation responses and what Keystone's books

said. Carmichael, May 24, 2004, Tr. at 61; French

Depo., November 19, 2002, 87-92 (FDIC Ex. 907);

FDIC Exs. 176, 177, 235, 379, 500.

A-56

56. Buenger reviewed the second Advanta

confirmation response on or about March 17, 1999.

Buenger, June 2, 2004, Tr. at 155; FDIC Exs. 169,

176, 177, 500. Buenger did not notify Keystone's

management, the OCC, or even Quay of the $236

million discrepancy. Buenger testified it kind of got

put on the “backburner.” Buenger, June 2, 2004, Tr.

at 155-57; Goldman, June 9, 2004, Tr. at 58;

Carmichael, May 24, 2004, Tr. at 61-62.

57. Buenger can't tell what she was doing during

the 91 hours she billed to Keystone during the last

two weeks of March, 1999 that was more important

than resolving the $236 million discrepancy issue

with Advanta. Buenger, June 2, 2004, Tr. at 156-57;

FDIC Ex. 210. |

58. Buenger's failure to pursue the $236 million

discrepancy was a violation of GAAS. If Buenger had

followed GAAS and promptly investigated the $236

million discrepancy, she would have discovered the

fraud, which would have led to the closure of the

Bank. Budnick, May 18, 2004, Tr. at 122, 138-39,

145-46; Carmichael, May 24, 2004, Tr. at 30°31, 41-

42, 66-69; Carmichael, May 25, 2004, Tr. at 30-31;

Gibson, May 20, 2004, Tr. at 35-37, 59; Johnson,

May 17, 2004, Tr. at 148; Kaufman, May 18, 2004,

Tr. at 205-07; C. Wilson, May 17, 2004, Tr. at 240.

Buenger's evaluation and investigation of the

Advanta confirmation response demonstrated a lack

of professional skepticism and due care. Her actions

were an extreme departure from GAAS. Carmichael,

May 24, 2004, Tr. at 68-69.

|

A-57

59. Quay saw and initialed the Advanta

confirmation response on March 23, 1999. Quay,

June 3, 2004, Tr. at 133-34; FDIC Exs. 169, 176, 177,

500.

60. On April 7, 1999, Buenger called Patricia

Ramirez, the Investor Reporting Manager for

Advanta, and talked with her for three minutes. The

word “United” was not used during the Buenger-

Ramirez conversation. Buenger, June 2, 2004, Tr. at

67; Gunter Depo., December 20, 2002, 269-74 (FDIC

Ex. 913); Ramirez Depo., September 26, 2002, 182-83

(FDIC Ex. 896); FDIC Ex. 282.

61. On April 7, 1999, one minute after the phone

call between Buenger and Ramirez concluded,

Ramirez sent an e-mail to Buenger reflecting that

United, Investor No. 406, owned $236 million in

loans being serviced by Advanta. The e-mail does not

reflect that the $236 million in loans are owned by

Keystone. Gunter Depo., December 20, 2002, 269-74,

294-95 (FDIC Ex. 913); Carmichael, May 24, 2004,

Tr. at 70; FDIC Exs. 169, 500. There is nothing in

Keystone's records reflecting that Keystone owned

loans under Investor No. 406, or under the name

United National Bank, and there is nothing in the e-

mail reflecting the $236 million in loans are owned

by Keystone. Goldman, June 9, 2004, Tr. at 52-61.

62. All of the documentary information provided

by Advanta to Grant Thornton was true and

accurate. Buenger, June 2, 2004, Tr. at 162;

Carmichael, May 25, 2004, Tr. at 144-45; Goldman,

June 9, 2004, Tr. at 75; Johnson, May 17, 2004, Tr.

A-58

at 179-81; C. Wilson, May 18, 2004, Tr. at 62-63.

That information showed that United, not Keystone,

owned the $236 million in loans, and the inevitable

conclusion from that is that Keystone's financial

statements were materially misstated as a result of

fraud. Carmichael, May 24, 2004, Tr. at 72-73;

Johnson, May 17, 2004, Tr. at 121-26; FDIC Exs.

169, 178, 379, 500.

63. Buenger violated GAAS by failing to carefully

evaluate and investigate the Advanta confirmation

responses-especially the e-mail from Ramirez. If

Buenger had followed GAAS, she would have found

the fraud on April 7, 1999, and the Bank would have

been closed in April, 1999. Budnick, May 18, 2004,

Tr. at 122; Carney, May 19, 2004, Tr. at 101:

Carmichael, May 24, 2004, Tr. at 30-31, 79;

Carmichael, May 25, 2004, Tr. at 30-31; Gibson, May

20, 2004, Tr. at 34-37; Johnson, May 17, 2004, Tr. at

148; C. Wilson, May 17, 2004, Tr. at 240.

64. To comply with GAAS's requirements of

professional skepticism, Buenger should have called

Ramirez back after receipt of the e-mail to determine

why the e-mail reflected that the loans were owned

by United and requested that Ramirez cor®rm in

writing that the $236 million in loans were owned by |

Keystone. Carmichael, May 24, 2004, Tr. at 70-71,

75-76; Carmichael, May 25, 2004, Tr. at 21-22; Quay,

June 3, 2004, Tr. at 135-39. Buenger failed to take

either step; in fact, she never spoke with Ramirez

again after receipt of the e-mail. Buenger, June 2,

2004, Tr. at 66-69; Goldman, June 9, 2004, Tr. at 62.

a ea

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65. In any event, the court does not believe

Buenger's testimony about the telephone call with

Ramirez for the following reasons. First and most

importantly, the physical evidence, i.e., the email,

contradicts Buenger's account of the phone call.

According to Buenger, Ramirez told her “[t]hese

belonged to Keystone at 12/31/98.”Buenger, June 2,

2004, Tr. at 28. However, one minute later, Ramirez

sent Buenger an email which stated:

“Below is the information requested from

investor 406 as of 12/31/98. Investor number

406, investor name United National Bank,

number of loans, 6,283, month end balances

$236,221,923.07.”

FDIC Exs. 754, 777. Ramirez's email is

completely at odds with the statements Buenger

attributes to her. For this reason alone, Buenger's

testimony on this point is not credible.

66. Second, Joey Johnson, an OCC examiner,

testified that, on August 25, 1999, he and other OCC

examiners met with Grant Thornton to apprise them

of the OCC's discovery of major discrepancies in the

loan balances serviced by Compu-Link and Advanta.

Johnson, May 17, 2004, Tr. at 112; FDIC Ex. 379. At

tnat meeting, Stan Quay told the OCC they had

confirmed those balances for the year ended 1998

and they all reconciled. Johnson, May 17, 2004, Tr.

at 112; FDIC Ex. 379. Thereafter, Grant Thornton

retrieved copies of the confirmations and the

confirmation requests from their Cincinnati office.

Johnson, May 17, 2004, Tr. at 112; FDIC Exs. 379,

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754, 755. According to Johnson, the examiners

questioned Buenger about why she added the $236

million owned by United to the $6 million owned by

Keystone. Johnson, May 17, 2004, Tr. at 125; FDIC

Ex. 379. Buenger stated that code 406 loans were

under a “bad name” and should have been included

in the confirmed loans. Johnson, May 17, 2004, Tr.

at 126; FDIC Ex. 379. Buenger did not tell the OCC

that Ramirez had told her that the United loans

were Keystone loans. Johnson, May 17, 2004, Tr. at

126. Nor did she offer FDIC Exhibit 281, her

handwritten note of what Ramirez purportedly told

her, to the OCC. Indeed, Grant Thornton never

offered Exhibit 281 to the OCC while the Bank was

still open. Johnson, May 17, 2004, Tr. at 127-28. The

court found Johnson to be completely credible.

Furthermore, the failure of Grant Thornton to

produce Exhibit 281 to the OCC undermines

Buenger's credibility regarding what Ramirez

supposedly told her.

67. Third, during her testimony, Ramirez was

clear that she was absolutely certain regarding

ownership of the loans under investor codes 405 and

406. Putting aside the purvortedly speculative

testimony, Ramirez testified that she had never been

confused regarding the ownership of the loans.

Ramirez Depo., September 26, 2002, 143 (FDIC Ex.

896). The court found Ramirez to be a totally

credible witness. Indeed, her credibility was

strengthened by her candor in explaining that she

didn't have a specific recollection of her conversation

with Buenger.

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68. Fourth, as to certain points, Buenger's

testimony regarding scrutiny of her confirmation

process during the last week of the Bank's existence

and what she did was contradicted by Michael

Gibson and Gary Ellis, both of whom the court found

to be completely credible.

69. Finally, the demeanor of Buenger on the

witness stand, when taken together with her

interests in the case, leads the court to believe she

was not entirely truthful.

70. During the trial, Grant Thornton filed a

motion to exclude the speculative testimony of

Patricia Ramirez. By Order entered September 29,

2005, that motion was denied. The court's findings

regarding the phone call between Buenger and

Ramirez do not depend on the _ purportedly

speculative testimony. However, for the following

reasons, the court denied the motion to exclude it.

71. Ramirez testified via video deposition. The

disputed portion of her testimony concerns a

conversation she had with Susan Buenger on April

7, 1999. Buenger testified that Ramirez told her

‘[the United loans] belonged to Keystone at

12/31/98.” Buenger, June 2, 2004, Tr. at 28. Ramirez

testified that, although she has no_ specific

recollection of the conversation with Buenger, she

never would have made the remarks Buenger has

attributed to her.

72. At the outset, the court notes that much of the

deposition testimony that Grant Thornton argues is

speculative is not, in fact, speculative. See e.g.,

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Ramirez Depo., September 26, 2002, 186 (FDIC Ex.

896) (Q: Is there any possibility that you told Susan

Buenger that the United loans were actually

Keystone loans? A: No. Q: How do you know? A:

Because I know who owned the loans. 405 did not

belong to 406.). To borrow the FDIC's analogy,

someone might ask me whether I have ever

introduced myself as Abraham Lincoln and,

although I cannot recall the details of every

conversation I have ever had, I could answer that

question under oath in the negative without

speculating.

73. As to the speculative testimony, Federal Rule

of Evidence 406 provides:

Evidence of the habit of a person or of the

routine practice of an organization, whether

corroborated or not and regardless of the

presence of eyewitnesses, is relevant to prove

that the conduct of the person or organization

on a particular occasion was in conformity

with the habit or routine practice.

74. According to the Fourth Circuit, in

determining whether examples of specific conduct of

a party are numerous enough and sufficiently

regular to be admissible as evidence of a pattern of

conduct or habit, the key criteria are adequacy of

sampling and uniformity of response or ratio of

reactions to situations. Wilson v. Volkswagen of

America, Inc., 561 F.2d 494, 511 (4th Cir. 1977).

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75. The evidence in this case showed that

Advanta was in the business of servicing loans.

Investor reporting and responding to confirmation

requests were so commonplace that Advanta had an

entire department dedicated to those tasks, and

Patricia Ramirez was the manager of that

department. At the time period in question, Daniel

Burke worked in the investor reporting department

at Advanta and had primary responsibility for

Keystone's loans. Burke testified that when a

confirmation request was received, “you'd pull the

file, get the information, give it to the supervisor or

manager to verify and then send it to them.” Burke

Depo., December 13, 2002, 9 (FDIC Ex. 898). Burke

further testified that the supervisor reviewed the

information before it was sent to the requesting

party to make sure the information was correct.

Burke Depo., December 13, 2002, 17 (FDIC Ex. 898).

He testified that Advanta responded to confirmation

requests from auditors “numerous times.” Burke

Depo., December 13, 2002, 17 (FDIC Ex. 898). He

responded to two confirmation requests from Grant

Thornton regarding Keystone's loans, one in January

of 1999 and the other in March of 1999. Both of these

responses were correct, indicating that Advanta was

servicing approximately $6 million dollars worth of

loans on Keystone’'s behalf. Burke testified that in

the four or five years he worked with Ramirez she

never confused one investor with another investor.

Burke Depo., December 13, 2002, 28-29 (FDIC Ex.

899). Ramirez herself testified that she had never

made a mistake concerning investor numbers.

Ramirez Depo., September 26, 2002, 189 (FDIC Ex.

4

Th

ey yee ee ae —

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896); see also Romero Depo., September 25, 2002,

109-10 (FDIC Ex. 905) (“[T]here's no doubt in our

minds, the investor number is such an integral part

of how we service loans, it's the thing that drives

where payments go, where remittances go. There's

no question of that ever being inaccurate.”).

76. Ramirez' unequivocal testimony was that the

loans boarded in Investor No. 406 belonged to United

National Bank.

Q: And as of December 16, 1998, who did

you understand to own the loans boarded in

Investor No. 406?

A: United National Bank.

Q: And to whom did you authorize

information access for Investor No. 406?

A: United National Bank.

Q: Now, do you recall ever becoming

confused about who owned the loans in

Investor No. 406?

A: No.

Q: Do you ever recall having any doubt

that it was United National Bank that owned

the loans in Investor No. 406?

A: No.

Peas Ese a oe ee! aT ek 2

A-65

Q: Please-

A: That's who we reported and remitted to.

Q: And the reporting and remitting you did

to United National Bank was something you

did as par. of your job?

A: Correct.

Q: How familiar are you with investor

numbers.

A: Very familiar. Everything runs off of

investor numbers.

Ramirez Depo., September 26, 2002, 142-43

(FDIC Ex. 896). Her responses in this regard were

not speculative. Ramirez further testified that, in

sending the email, she specifically “felt like I had to

make sure that I identified the information being

provided was not Keystone's but was United's.”

Ramirez Depo., September 26, 2002, 175 (FDIC Ex.

896).

77. Upon further questioning, Ramirez testified:

Q: Now, if Ms. Buenger had asked you, if

she said, “I'm looking for 244 million in loans

that Advanta is servicing on behalf of

Keystone,” what would you have said?

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A: I would have told her what the total

amount of loans were being serviced for

Keystone did not equal what she was looking

for.

Q: If she said, “Hey, I think what I should

do is add up Investor 405 and 406,” what

would you say?

A: I would have said that would have been

incorrect.

Q: If she gave you any indication that she

intended to sum the unpaid principal balance

in Investor Nos. 405 and 406 to arrive at the

loans serviced by Advanta on behalf of

Keystone, what would you have said?

A: I would have told her it was wrong.

Q: If she had hit the reply button on the e-

mail and said to you, “What the heck is

United,” in response to your e-mail, “Tell me

what United is and why you're sending me

United when I'm trying to confirm Keystone

loans,” what would you have written back in

response to that reply?

A: I would have said that Investor 406-or

United National Bank was the owner of the

loans in Investor 406.

Ramiz2z Depo., September 26, 2002, 179-80

(FDIC Ex. 896). The court believes that the foregoing

testimony is admissible under F.R.E. 406 for the

reasons cited above. However, out of an abundance

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of caution, the court has disregarded this and any

other arguably speculative testimony by Ramirez in

making its findings and conclusions.

78. The Court finds that Ramirez did not state to

Buenger that “the loans coded under the United

name actually belonged to Keystone as of December

31, 1998,” as reflected in Buenger's handwritten

note. Buenger, June 2, 2004, Tr. at 67, Gunter Depo.,

December 20, 2002, 269-74 (FDIC Ex. 913);

Carmichael, May 24, 2004, Tr. at 69-70; Ramirez

Depo., September 26, 2002, 143-45; 179-80, 185-89,

192-93, 196, 198-200, 222, 247-49 (FDIC Ex. 896).

Ramirez clearly knew that United owned the $236

million in loans, as she worked with United with

respect to the loans on a regular basis, repeatedly

provided United with documentation of its

ownership of the loans and never demonstrated any

confusion about who owned the loans. Ramirez

Depo., September 26, 2002, 143-45; 179-80, 185-89,

192-93, 196, 198-200, 222, 247-49 (FDIC Ex. 896); J.

Wilson, May 21, 2004, Tr. at 27. Moreover, if

Ramirez had made such a statement, GAAS would

require that Buenger obtain written confirmation of

such a significant fact, in order to avoid a swearing

match over what was said. Carmichael, May 24,

2004, Tr. at 71-73, 81-82; Goldman, June 9, 2004, Tr.

at 69, 72-73. The auditing standards require an

auditor to obtain the best evidence they can within

the time constraints and money constraints set on

them. Goldman, June 9, 2004, Tr. at 71. A written

confirmation is the highest form of evidential matter

an auditor can receive. Goldman, June 9, 2004, Tr.

at 71. There were no time or money constraints that

Aes ye eee Lt see ee Pe > wae Mert, | teats Th tt Aca co Ue is edie ed be Lae WPS ene tT a ere Aye

A-68

would prevent Buenger from obtaining the best

evidence-a written confirmation from Ramirez that

3 Keystone owned the loans. Goldman, June 9, 2004,

Tr. at 72-73. Oral confirmations should be

documented in the workpapers. If the information in

the oral confirmation is significant, the auditor

should request the parties involved to submit

written confirmation of the ecific information

directly to the auditor. As previously stated, Buenger

failed to obtain any such written confirmation.

Carmichael, May 24, 2004, Tr. at 71-73, 81-82;

Goldman, June 9, 2004, Tr at 54-55; FDIC Ex. 439

(AU 330.29).

79. The $236 million exception was a significant

auditing question, but Quay was not involved in

evaluating its significance. Carmichael, May 24,

2004, Tr. at 77-78.

80. The auditor with final responsibility for the

audit should direct assistants to bring to his

attention significant accounting and auditing

questions raised during the audit so that he may

assess their significance. GT Ex. 267 (AU 311.12).

Quay violated GAAS by failing to supervise or

participate in the evaluation of the Advanta

confirmation responses. Carmichael, May 24, 2004,

Tr. at 56-58, 77-79; FDIC Exs. 709, 710.

VIII. Grant Thornton Issues its Audit Report

81. On March 24 and 25, 1999, Quay presented

several members and prospective members of

Keystone's board and Keystone's shareholders with

draft copies of Keystone's December 31, 1998

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financial statements and told them that Keystone

was going to get a clean opinion on its financial

statements. Budnick, May 18, 2004, Tr. at 122-30; G.

Ellis, May 22, 2004, Tr. at 13-14, 46; Gibson, May

20, 2004, Tr. at 54-56; Kaufman, May 18, 2004, Tr.

at 198-99, 219-20; Quay, June 4, 2004, Tr. at 74-77,

84-85; FDIC Exs. 263, 882. At the shareholders

meeting the next day, Quay also distributed copies of

Keystone's financial statements. G. Ellis, May 22,

2004, Tr. at 14-15; Kaufman, May 18, 2004, Tr. at

199-200; Quay, June 4, 2004, Tr. at 78-79, 106-09;

FDIC Ex. 172. Neither Quay nor Buenger made any

disclosure to the Board or shareholders of the $236

million discrepancy that Buenger had discovered.

Budnick, May 18, 2004, Tr. at 128-29; Carmichael,

May 24, 2004, Tr. at 64; Quay, June 4, 2004, Tr. at

78, 80. Quay violated GAAS by making statements

to Keystone's directors, prospective directors, and

officers that Keystone was going to receive a “clean

opinion” on its financial statements when he had no

reasonable basis for making such statements.

Carmichael, May 25, 2004, Tr. at 27-28, 175.

82. On April 19, 1999, Grant Thornton issued and

delivered to Keystone's board its audit report stating

that Keystone's financial statements were fairly

stated in accordance with GAAP, and reflecting a

shareholder's equity of $184 million. Budnick, May

18, 2004, Tr. at 131-33; G. Ellis, May 22, 2004, Tr. at

23-24 48-50; Ellis Ex. 4; FDIC Exs. 291, 621. In fact,

Keystone Was insolvent as of yearend, 1998.

Carmichael, May 24, 2004, Tr. at 41. The audited

fimancial statements provided by Quay to the board

on April 19, 1999, were substantially the same as the

ae

|

|

)

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financial statements Quay had provided board

members and shareholders in March, 1999. Budnick,

May 18, 2004, Tr. at 136-37; Kaufman, May 18,

2004, Tr. at 203-05; FDIC Exs. 291, 296. Grant

Thornton's audit report violated GAAS by offering a

“clean opinion” on Keystone's financial statements

without having adequate evidence to support that

opinion and having substantial evidence that

contradicted the opinion. Carmichael, May 24, 2004,

Tr. at 75; Carmichael, May 25, 2004, Tr. at 28-30.

83. Because Keystone's financial statements

reflected ownership of more than $500 million in

loans that were not in fact owned by Keystone, the |

financial statements were materially misstated.

Quay, June 4, 2004, Tr. at 88. |

|

84. Grant Thornton represented to Keystone's |

board that it had encountered no significant

difficulties in performing the year-end, 1998 audit. |

FDIC Ex. 296.

85. Keystone's board of directors and Gary Ellis

reasonably relied on Grant Thornton's report. The |

report led Keystone's board to believe that the Bank |

was in good financial condition. Based on Grant |

Thornton's report, Keystone’s board continued to

declare dividends and operate the Bank. If Grant

Thornton had exercised due professional care in

connection with its audit, the fraud would have been

discovered. If Grant Thornton had disclosed to

Keystone's board or the OCC the fact that Keystone

was carrying over $400 million in loans on its books

that were not owned by Keystone, the Bank would

A-71

have been closed by April 21, 1999. Budnick, May 18,

2004, Tr. at 122, 138-39, 145-46; G. Ellis, May 22,

2004, Tr. at 55; Gibson, May 20, 2004, Tr. at 35-37,

59; Johnson, May 17, 2004, Tr. at 148; Kaufman,

May 18, 2004, Tr. at 205-07; Potter, May 27, 2004,

Tr. at 14; Quay, June 4, 2004, Tr. at 74-76; C.

Wilson, May 17, 2004, Tr. at 240: FDIC Ex. 341.

IX. Gary Ellis Becomes President of Keystone

86. In 1984, Gary Ellis was President of the Bank

of Dunbar. The Bank of Dunbar was later merged

into United Bank at which time Ellis joined the

management team at United, eventually becoming

its President. J. Wilson, May 21, 2004, Tr. at 44-46.

87. From the time of the merger with the Bank of

Dunbar until the time Ellis left United, United more

than doubled in size. Ellis was instrumental tn the

growth of United. J. Wilson, May 21, 2004, Tr. at 47.

88. In 1998, United National Bank merged with

George Mason Bankshares of Virginia. G. Ellis, May

22, 2004, Tr. at 9. In the spring of 1999, following

the merger, Ellis voluntarily began looking for

employment outside United. G. Ellis, May 22, 2004,

Tr. at 10. Ellis had dealt with Keystone in the past,

and on March 19, 1999, Billie Cherry, Chairman of

Keystone's board, invited Ellis to attend Keystone's

annual shareholders meeting on March 25, 1999. G.

Ellis, May 22, 2004, Tr. at 10-13. During that call,

Cherry suggested that Ellis should consider

becoming president of Keystone. G. Ellis, May 22,

2004, Tr. at 10-13.

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89. Ellis was not fired or told to leave United, had

no deadline for leaving United, and could have

remained at United rather than leaving for the

Keystone position. G. Ellis, May 22, 2004, Tr. at 9-

10.

90. In late March 1999, Ellis visited Keystone

and discussed with Keystone directors Gibson,

Budnick, Kaufman and Church his potential

employment as president of the Bank. Gibson

received “pretty glowing recommendations” about

Ellis. Gibson, May 20, 2004, Tr. at 85. Ellis received

a rolling two-year contract at $375,000 per year with

benefits. G. Ellis, May 22, 2004, Tr. at 33-36; Gibson,

May 20, 2004, Tr. at 90. The contract discussions

included compensation for board meetings and

committee meetings. G. Ellis, May 22, 2004, Tr. at

34; Gibson, May 20, 2004, Tr. at 90. The total value

of the final contract between Ellis and Keystone was

approximately $460,000 to $470,000 per year. L.

Ellis, May 26, 2004, Tr. at 16, 21; Ellis Ex. 9.

91. Doing his due diligence before accepting a

position, Ellis attended Keystone's board meeting on

March 24 and annual shareholders meeting on

March 25, 1999. G. Ellis, May 22, 2004, Tr. at 13-18;

Gibson, May 20, 2004, Tr. at 82-82; FDIC Ex. 263. At

both meetings, Quay passed out copies of the

financial statements Grant Thornton was auditing

for Keystone. G. Ellis, May 22, 2004, Tr. at 14-15.

Quay also told Ellis and other members of the board

that Grant Thornton was going to give Keystone a

clean audit opinion for 1998. Budnick, May 18, 2004,

Tr. at 122-30; G. Ellis, May 22, 2004, Tr. at 46;

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Gibson, May 20, 2004, Tr. at 54-56; Kaufman, May

18, 2004, Tr. at 198-99, 219-20.

92. Ellis visited Keystone again, on or about

March 30, and Quay offered similar assurances at

that time. G. Ellis, May 22, 2004, Tr. at 16-17.

93. Ellis relied on the financial statements Quay

gave him, and Quay's oral representations to Ellis

and others that Keystone was going to get a clean

audit opinion. G. Ellis, May 22, 2004, Tr. at 15-16,

55. On April 2, 1999, Ellis met with his attorneys to

draft a proposed employment agreement with

Keystone. G. Ellis, May 22, 2004, Tr. at 18. During

the first two weeks of April 1999, Ellis met with

Church and Cherry regarding their expectations for

him. G. Ellis, May 22, 2004, Tr. at 20. It was decided

that Ellis would be responsible for the “banking”

business at Keystone as opposed to the mortgage

loan securitizations. G. Ellis, May 22, 2004, Tr. at

20; Ellis Ex. 9.

94. On April 19, 1999, at a Keystone board

meeting, Ellis reviewed Grant Thornton's final audit

report on Keystone for 1998, and that report showed

that Grant Thornton gave Keystone a clean opinion.

G. Ellis, May 22, 2004, Tr. at 23-27; Ellis Ex. 4. The

Board voted to approve EJiis' hiring as president of

Keystone, subject to the signing of a contract and

approval by the OCC. G. Ellis, May 22, 2004, Tr. at

28-29. Ellis resigned from United by letter dated

April 20, 1999. G. Ellis, May 22, 2004, Tr. at 92-93;

Ellis Ex. 7.

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95. Ellis' employment contract was signed on

April 26, 1999. G. Ellis, May 22, 2004, Tr. at 29.

96. Quay intended and knew that Ellis would rely

on his statements, and Ellis did, in fact, rely on

them. Quay, June 4, 2004, Tr. at 74-88; G. Ellis, May

22, 2004, Tr. at 15-16, 55; Ellis Ex. 4.

X. The OCC Discovers the Fraud and

the Bank is Closed

97. In 1999, an examination of Keystone was

conducted by a team of OCC examiners. Johnson,

May 17, 2004, Tr. at 102-03; C. Wilson, May 17,

2004, Tr. at 193. The examination began on site in

late June/early July of 1999. Johnson, May 17, 2004,

Tr. at 103; C. Wilson, May 17, 2004, Tr. at 193.

Members of the exam team included Joey Johnson,

Cindy Wilson, and Mark Blair. Johnson, May 17,

2004, Tr. at 102-03; C. Wilson, May 17, 2004, Tr. at

193. Blair was the examiner in charge of the

examination. C. Wilson, May 17, 2004, Tr. at 193.

98. Throughout the examination, the bank

examiners had difficulty obtaining accurate records

from the servicers. Johnson, May 17, 2004, Tr. at

105. They were informed in late July or early August

by Church and Ellis that the Bank did not want the

examiners to contact the servicers directly. C.

Wilson, May 18, 2004, Tr. at 21; FDIC Ex. 353.

99. Church and Graham made several efforts to

have Advanta and Compu-Link respond to the OCC

with information on loans owned by United as well

as Keystone, in order to keep the fraud concealed.

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Romero Depo., September 25, 2002, 266-67 (FDIC

Ex. 905); C. Wilson, May 17, 2004, Tr. at 217-23:

FDIC Exs. 365, 367, 369, 373, 374, 413.

100. On August 5, 1999, examiners met with

Church, Graham, and Cherry and indicated they

wanted to contact the servicers directly to obtain

accurate information. C. Wilson, May 18, 2004, Tr.

at 22, 213; FDIC Ex. 354. Church, Graham, and

Cherry became irate and insisted that such contacts

would damage the Bank's reputation. C. Wilson,

May 18, 2004, Tr. at 22, 213-15.

101. In early August, bank examiners learned

that Keystone had the ability to manipulate servicer

data and servicer reports that, while appearing to

come directly from the servicers, were actually

prepared by the Bank. C. Wilson, May 18, 2004, Tr.

at 42-44; Blair, June 4, 2004, Tr. at 164-65. As a

result, examiners sent by registered or certified mail,

on August 6, 1999, requests directly to Compu-Link

and Advanta for information on Keystone loans. C.

Wilson, May 17, 2004, Tr. at 215-17; C. Wilson, May

18, 2004, Tr. at 45; FDIC Exs. 350, 351.

102. On Monday, August 23, 1999, the examiners,

incident to their examination of the Bank, contacted

the Bank's loan servicers by phone to determine the

balances of loans actually owned by Keystone.

Johnson, May 17, 2004, Tr. at 106-07; C. Wilson,

May 17, 2004, Tr. at 224-25; FDIC Exs. 369, 408.

During that week, Joey Johnson spoke by telephone

with Beverly Reck, an employee of Compu-Link, one

of the servicers, and was told by Reck that Compu-

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Link was boarding $31 million in Keystone Loans.

Johnson, May 17, 2004, Tr. at 106; FDIC Ex. 408.

103. Blair and Wilson contacted Advanta and

learned that Advanta was. only _ servicing

approximately $6 million in Keystone loans, far less

than the approximately $242 million that Keystone

was reporting. C. Wilson, May 17, 2004, Tr. at 233;

Johnson, May 17, 2004, Tr. at 122-26; FDIC FExs.

408, 413, 379.

104. These contacts with Compu-Link and

Advanta led the examiners to quickly conclude that

the Bank's books overstated loans it owned by

approximately $515 million. C. Wilson, May 17,

2004, Tr. at 230.

105. On Wednesday, August 25, 1999, Blair, SS

Analyst Kathy Gerardy and Johnson met with Ellis

and Quay to obtain an explanation for the

discrepancy between the servicers’ records and the

Bank's records. Johnson, May 17, 2004, Tr. at 112;

FDIC Ex. 379. Church joined the meeting after it

began. Johnson, May 17, 2004, Tr. at 112; FDIC Ex.

379. Church and Quay were informed that the

examiners’ direct contacts with the _ servicers

indicated the Bank was reporting over $500 million

in loans boarded at the two servicers that were not

shown on the servicers' records. Johnson, May 17,

2004, Tr. at 112; FDIC Ex. 379. Church insisted the

Bank owned the $500 million of loans in question

and stated she had no idea why the records showed a

difference. FDIC Ex. 379. Quay repeatedly asserted

that the numbers had been reconciled and confirmed

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by Grant Thornton auditors at year-end 1998.

Johnson, May 17, 2004, Tr. at 117; FDIC Ex. 379.

The examiners told Quay and Church that the Bank

would have to provide proof that it owned the entire

balance of loans it claimed. FDIC Ex. 379.

106. Quay left the meeting and told Buenger to

have the confirmations faxed to the Bank, which

Buenger did. Buenger, June 2, 2004, Tr. at 162-64.

Buenger called Dale Schaffer in Grant Thornton's

Cincinnati office, and told him to fax the servicer

confirmation workpapers to her. Buenger, June 2,

2004, Tr. at 164-65. She reviewed the fax to make

sure Schaffer had sent her what she wanted.

Buenger, June 2, 2004, Tr. at 167.

107. Quay and Buenger represented to the OCC

that the fax Contained the confirmations Buenger

received in connection with her audit fieldwork.

Buenger, June 2, 2004, Tr. at 16%-68; Johnson, May

17, 2004, Tr. at 117-19.

108. Later, Quay provided copies of confirmation

requests that were prepared and signed by Church

and printed on Bank letterhead, but mailed from

Grant Thornton's office. Johnson, May 17, 2004, Tr.

at 117-19; FDIC Exs. 379, 754, 755.

109. The Advanta confirmation was initialed

“S.B. 3/17/99” and “S.J.Q. 3/23/29.” FDIC Ex. 754.

The initials were identified as those of Susan

Buenger and Stanley Quay. The response from

Advanta showed an ending balance as of 12/31/98 of

$6,342,110.34 for investor number 405, Keystone

Bank, and a balance of $236,221,923.07 for investor

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number 406, United National Bank. FDIC Ex. 754.

The two numbers had been added together by

Buenger in a handwritten notation at the bottom of

the response to produce a total of $242,564,033.41.

FDIC Ex. 754. Johnson described this as a “forced

reconciliation” to arrive at the total the Bank was

reporting for Advanta-serviced loans the Bank

owned with no basis to support adding the two

numbers together. Johnson, May 17, 2004, Tr. at

124-25.

110. On or about August 25, 1999, Buenger was

asked by the examiners to explain why she had

added together the two numbers provided by

Advanta in its response to the confirmation request.

Johnson, May 17, 2004, Tr. at 125, 137-38; FDIC Ex.

379. Buenger stated that the loans coded 406 were

under a “bad name” and should have been included

in the total of loans owned by Keystone. Johnson,

May 17, 2004, Tr. at 126, 138; FDIC Ex. 379. At that

time, Buenger did not provide any evidence that she

did anything further to verify the Bank's claim that

it owned all the loans. Johnson, May 17, 2004, Tr. at

126-28, 138. She did not assert at that time, as she

did later, that Patricia Ramirez of Advanta had told

her the loans coded as United Loans were actually

owned by Keystone, nor did she offer, or refer to, a

handwritten note produced later that read: “Per

discussion with Patricia Ramirez at (619) 674-3876,

the loans coded under the ‘United’ name actually

belonged to Keystone as of December 31, 1998.”

Johnson, May 17, 2004, Tr. at 126. Buenger

admitted the note was important evidence of her

confirmation work. Buenger, June 2, 2004, Tr. at

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169. The documents in the fax Buenger gave to the

OCC show that Keystone owned $6 million in loans

and that United owned $236 million in loans being

serviced by Advanta. FDIC Exs. 408, 754.

111. The only written confirmations Grant

Thornton ever received with regard to the loans

serviced by Advanta showed that $236 million of the

loans carried on Keystone's books were actually

owned by United. Johnson, May 17, 2004, Tr. at 179-

81; Carmichael, May 24, 2004, Tr. at 68-69, 73, 82:

FDIC Ex. 754. Even if Buenger had received an oral

confirmation from Ramirez at Advanta _ that

Keystone, and not United, was the owner of these

loans, under GAAS, Buenger was obligated to obtain

written confirmations. Carmichael, May 24, 2004,

Tr. at 70-71; FDIC Ex. 485. According to GAAS, if

information in an oral confirmation is significant,

the auditor cannot rely on the oral confirmation, but

must obtain the confirmation from the servicer in

writing. Carmichael, May 24, 2004, Tr. at 71-72;

FDIC Ex. 485. The $236 million at issue here was

significant since it constituted about one-fourth of

the Bank's claimed assets. Carmichael, May 24,

2004, Tr. at 71-72. Therefore, Buenger and Grant

Thornton were negligent in their failure to obtain

written confirmation from Advanta of what Buenger

asserts Ramirez told her over the _ telephone.

Carmichael, May 24, 2004, Tr. at 68-73.

112. On or after August 25, 1999, Buenger made

changes to her workpapers. Buenger, June 2, 2004,

Tr. at 53-55. Initially, she did not admit this fact in

her deposition, but when confronted with the

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evidence, she admitted that she had changed her

workpapers. Buenger, June 2, 2004, Tr. at 170-71;

FDIC Ex. 500. The e-mail from Ramirez to Buenger,

dated April 7, 1999, is initialed by Buenger on March

17, 1999 and by Quay on March 23, 1999, dates

which on their face are not correct. Johnson, May 17,

2004, Tr. at 127-29; FDIC Ex. 754 at p. 17.

113. When informed on August 26, 1999, that

some $500 million in loans were missing, Quay

stated finding the loans would not be a problem, they

could simply trace the interest payments back to the

mortgages they represented. Kaufman, May 18,

2004, Tr. at 216-17. Quay attempted to do this, but

after about 45 minutes was not successful. Kaufman,

May 18, 2004, Tr. at 217. Quay had indicated that if

actual cash receipts in respect of debt service on the

loans could be located, the loans were probably real

and belonged to Keystone. Budnick, May 18, 2004,

Tr. at 148. Similarly, the absence of cash receipts

would be a strong indicator that the loans did not

exist. Budnick, May 18, 2004, Tr. at 148.

114. On August 26, 1999, Quay called Patricia

Ramirez and contended that Keystone owned $242

million in loans serviced by Advanta. Ramirez told

Quay that he was wrong, that Keystone only owned

$6 million in loans being serviced by Advanta, and

that she had never confirmed a larger number to

Grant Thornton, which was true. Ramirez Depo.,

September 26, 2002, 201-06 (FDIC Ex. 896).

ee ee ee ee a ee eS ee eS aE eee ee ele ee eee

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115. Also on August 26, 1999, Quay called Lynn

Ellen (“Dee”) Romero, a client support specialist for

Advanta. She also told Quay that Advanta was

servicing only $6 million in loans owned by

Keystone. Quay said that Advanta was sending

millions of dollars to Keystone every month. Romero

tried to straighten Quay out on these issues, but he

resisted straightening. Romero Depo., September 25,

2002, 99-109, 269-71 (FDIC Ex. 905).

116. On or about August 26, 1999, Quay and

Buenger checked the remittances received by

Keystone from Compu-Link and Advanta during

1999. They were unable to find evidence of income to

support Keystone's ownership of over $500 million in

loans being serviced by Compu-Link and Advanta,

nor could they find evidence to support Keystonc's

reported interest income for 1999. Budnick, May 18,

2004, Tr. at 148-49; Buenger, June 2, 2004, Tr. at

172-73; Kaufman, May 18, 2004, Tr. at 217-18:

Quay, June 3, 2004, Tr. at 155-56.

117. After their August 25, 1999 meeting, efforts

were made by Bank management, the external

auditors and the examiners to locate the missing

loans. As part of these efforts, Johnson prepared a

calculation of interest received by Keystone that

quickly showed the Bank to be receiving far less in

interest income than it should have received on the

number of loans it claimed to own. Johnson, May 17,

2004, Tr. at 142-43, 185-87.

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118. At the regular meeting of the Bank's board

of directors on August 26, 1999, Ann Jaedicke, Kathy

Gerardy and Blair of the OCC and Prosser of the

FDIC advised the board that they had contacted two

of the Bank's servicers, Advanta and Compu-Link,

and learned that $515 million of loans the Bank had

booked as owned were not in fact owned by the

Bank. Gibsoa, May 20, 2004, Tr. at 70-71.

119. On August 26, 1999, examiners gave the

Bank's board of directors notice that they had until

the close of business on Monday, August 30, to

account for the discrepancy. FDIC 408. In the

meantime, the examiners themselves proceeded to

visit the offices of the servicers to examine relevant

records. FDIC 408.

120. After the August 26, 1999 meeting, Gibson

heard Quay questioning Buenger about the

confirmation of the loans. Gibson, May 20, 2004, Tr.

at 80-81. When Buenger revealed that she had relied

on a phone call to confirm the Advanta loans, Quay

got angry with Buenger and criticized her for relying

on a phone call and failing to follow up in writing.

Gibson, May 20, 2004, Tr. at 80-81.

121. On Friday, August 27, 1999, Johnson

traveled to Compu-Link headquarters in Lansing,

Michigan, accompanied by FDIC examiners Phil

Yannick and Mike Pisano. Johnson, May 17, 2004,

Tr. at 152, 174; FDIC Ex. 408. The three examiners

met with CFO Reck and MIS manager Dan Pearson

of Compu-Link and were provided copies of trial

balances and remittance records for the universe of

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loans owned by Keystone and those held in trust for

Keystone securitizations and owned by other

institutions. FDIC Ex. 408. The examiners also

examined copies of reports routinely provided to the

Bank by Compu-Link. FDIC Ex. 408. Reck and

Pearson explained how Compu-Link identified loans

held by Keystone and how it identified loans in

securitizations owned by other institutions. FDIC

Ex. 408. Reck also provided copies of remittance

checks sent to Keystone since October, 1998.

Johnson, May 17, 2004, Tr. at 188; FDIC Ex. 408. It

was clear to the examiners that the Bank had not

removed from its books loans it had sold into

securitizations. FDIC Ex. 408.

122. On or about August 27, 1999, FDIC

examiner Kristin Jertberg visited the office of

Advanta and obtained records supporting the

balances of loans owned by Keystone and serviced at

Advanta. FDIC Ex. 408. Loans for code 405 were the

only loans owned by Keystone and _ were

approximately $6 million for the relevant time

period. FDIC Ex. 408. Remittance records from

Advanta supported the total of $6 million in

Keystone-owned loans rather than approximately

$242 million the Bank was carrying on its books.

FDIC Ex. 408.

123. On August 29, 1999, Quay and Buenger and

several Keystone employees checked Keystone's

remittances from Compu-Link and Advanta, and in

less than two hours determined that the remittances

were only a small fraction of the amount reported on

Keystone's books, and that the remittances did not

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support Keystone's claimed ownership of $558

million in loans. Ellis, May 22, 2004, Tr. at 37-40,

78-80, 86, 94-95.

124. On August 30, 1999, the examiners

presented their findings to senior management in

Washington D.C. FDIC Ex. 408. A conference call

was held with Church, Ellis, Graham, Quay, Reck

and Compu:Link president, John LaRose. FDIC Ex.

408. Quay stated that he had no specific explanation

for the $515 million discrepancy previously

identified, but that he had discovered approximately

$500 million in loans boarded by Compu-Link that

the Bank was not getting credit for owning. FDIC

Ex. 408. Quay later provided a spreadsheet listing

the loans he claimed supported a $500 million

“boarding error” at Compu-Link. FDIC Ex. 408.

LaRose stated that this was false and the examiners

insisted that an explanation for the $515 million

discrepancy be provided first before dealing with the

purported boarding error. FDIC Ex. 408.

125. Late in the evening of August 30, 1999, Ellis,

Quay, and Gibson met at Webster's Restaurant in

Bluewell, West Virginia. Quay and Ellis told Gibson

that Church had admitted falsely reporting income

from the missing loans on the Bank's books. Gibson,

May 20, 2004, Tr. at 75.

126. On August 31, 1999, the examiners obtained

affidavits from Compu-Link and Advanta attesting

that the balances of Keystone owned loans serviced

by them were, respectively, $31 million and $6

million. FDIC Ex. 408. Bank management failed to

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provide a plausible explanation for the missing

loans, but did confirm that there was no additional

cash influx from the loans beyond remittances the

examiners had confirmed with the servicers. FDIC

Ex. 408. The examiners concluded that the Grant

Thornton auditors had been reconciling Bank

generated documents with servicer reports the Bank

had obtained in electronic format and “doctored,”

that they failed to “follow the audit trail on actual

remittance received” by the Bank on loans it owned,

and that even a small principal and interest analysis

would have shown that “the volume of loans reported

by the Bank was bogus.” FDIC Ex. 408.

127. Meredith Hale, a native of McDowell

County, West Virginia, was hired by Keystone in

November, 1994. Hale Depo., August 27, 2002, 6-9

(FDIC Ex. 889). She had no previous work

experience in the banking industry. Hale Depo.,

August 27, 2002, 9 (FDIC Ex. 889). As part of her job

at Keystone, Hale received monthly reports from

loan servicers during the 1998 time period. Hale

Depo., August 27, 2002, 138, 140-41 (FDIC Ex. 889).

Hard copies of the servicers' reports were kept in a

file cabinet under the stairs near Church's office.

Hale Depo., August 27, 2002, 142 (FDIC Ex. 889).

Hale would do a monthly reconciliation to ensure

that the servicers' records were correct. Hale Depo.,

August 27, 2002, 143-53 (FDIC Ex. 889). As part of

this process Hale had electronic access to records at

both Compu-Link and Advanta and communicated

frequently with United Bank. Hale Depo., August

27, 2002, 146-53 (FDIC Ex. 889). Periodically,

Church would give Hale a loan inventory list for

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reconciliation. Hale Depo., August 27, 2002, 153-55

(FDIC Ex. 889). Sometime between March and May,

1999, Hale noticed that Church had included

approximately $400 million in United-owned loans

as part of the Keystone inventory. Hale Depo.,

August 27, 2002, 156-59 (FDIC Ex. 889). Hale

deleted the United loans from the Bank's inventory

leaving only around $40 million in the Keystone

inventory. Hale Depo., August 27, 2002, 156-59

(FDIC Ex. 889). Church told her she had done it

wrong and that the deleted loans did not belong to

United “outright.” Hale Depo., August 27, 2002, 157

(FDIC Ex. 889). Hale testified that where United

was paid the principal balance, the accrued interest,

and the premium on the loan, it seemed to be that

United owned the loan. Hale Depo., August 27, 2002,

157 (FDIC Ex. 889). Hale's testimony illustrates the

ease with which the fraud could have been

discovered had Grant Thornton made proper inquiry

of the servicers, United, and even Hale.

128. Compu-Link and Advanta were both open

and helpful in providing and explaining requested

information. Johnson, May 17, 2004, Tr. at 111-12,

133-34; C. Wilson, May 17, 2004, Tr. at 223, 226-29;

C. Wilson, May 18, 2004, Tr. at 63-64; Romero Depo.,

September 25, 2002, 266-67 (FDIC Ex. 905); FDIC

Exs. 368, 369, 372, 408. From this, and other

evidence of record, the court concludes that the same

level of cooperation, disclosure and assistance would

have been readily available to Grant Thornton's

auditors.

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129. The examiners concluded that the loans

were not missing but were in fact owned by others.

On Wednesday, September 1, 1999, the Bank was

determined to be insolvent and was closed. Joh

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