Alert June 28, 2011

Court of Appeals Rules for FDIC in Unpublished Opinion Concerning Losses to FDIC Insurance Fund as a Result of Negligent Audit of First National Bank of Keystone

In an unpublished opinion, the U.S. Court of Appeals for the Fourth Circuit (the “Court of Appeals”) upheld a 2007 decision of the U.S. District Court for the Southern District of West Virginia (the “District Court”) that an audit by Grant Thornton LLP (“Grant Thornton”) of First National Bank of Keystone (the “Bank”) was the proximate cause of losses sustained by the Bank after the audit.  Grant Thornton was hired by the Bank in 1998 after the OCC ordered the Bank to hire a nationally recognized independent auditor to scrutinize the Bank’s operations.  Grant Thornton issued an audit report of the Bank on April 21, 1999 that the District Court concluded was negligent and that, among other things, failed to report that the Bank was carrying over $400 million of loans on its books that were not owned by the Bank.  The FDIC, as receiver, closed the Bank on September 1, 1999.  The District Court concluded that Grant Thornton’s negligent behavior cost the FDIC’s insurance fund approximately $750 million.

On appeal, Grant Thornton did not contest that its actions had been negligent, but argued that they were not the proximate cause of the losses to the Bank or the FDIC’s insurance fund.  The Court of Appeals disagreed and stated that a “reasonably prudent auditor” should have identified the Bank’s true losses and its insolvent position and have foreseen that they could lead to further losses at the Bank.  The Court of Appeals took special note of the fact that when Grant Thornton was hired, it was aware that the Bank was under a high level of regulatory scrutiny and that Grant Thornton was being hired because of that high level of regulatory concern. 

In its opinion, the Court of Appeals stressed that this case presented a unique set of facts, that it was not setting a new standard of auditor liability and that, as an unpublished opinion, the decision does not serve as precedent for future cases.