Judge says negligent audit caused bigger bank losses

Charleston Daily Mail

The Associated Press

Thursday March 15, 2007

BLUEFIELD -- Grant Thornton LLP's failure to uncover the First National Bank of Keystone's insolvency caused more than $24 million in additional losses stemming from the bank's collapse, a federal judge has ruled.

The Office of the Comptroller of the Currency closed the bank on Sept. 1, 1999 after it was unable to account for $515 million of the bank's reported $1 billion in assets.

U.S. District Judge David A. Faber said federal regulators could have closed the bank five months earlier if Grant Thornton auditors Stan Quay and Susan Buenger had found "a garden variety form of fraud" that left the bank insolvent.

Keystone had embarked on an investment scheme that involved buying up risky loans from around the country and bundling them into a form of security. The bank suffered massive losses that senior bank executives tried to conceal from federal regulators, Faber said.

After the bank was shut down, federal regulators discovered that three executives -- Terry Church, Billie Cherry and Michael Graham -- embezzled millions of dollars from the bank. All three were later convicted of numerous felonies. Cherry died in December.

The Federal Deposit Insurance Corporation had to pay out $664 million as a result of the bank's collapse. It was one of the most expensive U.S. bank failures since the Great Depression.

Chicago-based Grant Thornton's negligence cost the FDIC more than $24 million in additional losses that would not have occurred if the bank had closed sooner, Faber said in a ruling issued Wednesday. Those expenses included the cost of operating the bank, taxes and dividends paid to shareholders.

"If Grant Thornton had exercised due professional care in connection with its audit, the fraud would have been discovered," Faber wrote.

Faber's ruling came in a series of complaints and counterclaims by the FDIC, Grant Thornton and Gary Ellis, who became the bank's president in March 1999. Faber held a bench trial in the case in 2004.

Faber ordered Grant Thornton to pay $2.4 million in damages to Ellis, who left United National Bank to become the Keystone's president in March 1999. Faber said Ellis took the job after attending a Keystone board of directors meeting in which Quay said Grant Thornton would give Keystone a "clean audit opinion" for 1998.

After the bank closed, Ellis could not find a job in the banking industry because his reputation had been tainted by his association with Keystone, Faber said. Ellis is now an employee at West Virginia State University.

Faber delayed entering an order specifying damages that Grand Thornton must pay the FDIC until the federal agency and the international accounting firm determine whether Grant Thornton will receive credit from an earlier settlement between the FDIC and Kutak Rock, a national law firm that provided services to Keystone.

Grand Thornton had argued that federal regulators were responsible for the additional costs because they had examined the bank for several years and did not find any problems. Faber rejected that argument, along with all of Grant Thornton's claims and counterclaims.

"In other words, Grant Thornton would never have had the opportunity to be negligent if the regulators had not been negligent in the first place," Faber wrote.

In December, the Office of the Comptroller of the Currency fined Grant Thornton $300,000 for what regulators called "reckless conduct" in its audit of the bank.

Grant Thornton disputed the agency's findings and said it would challenge the sanction in a federal appeals court.

The judge's orders

To see a pdf of the judge's order in favor of Gary Ellis, click on the Ellis judgement. For the findings of fact and conclusions of law in the Keystone-Grant Thornton case, see the Keystone judgement.