Douglas A. Black, Mary L. Wolff, Wolff Ardis, P.C., Memphis, TN, Ruth M. Allen, Ruth M. Allen, Attorney, Raleigh, NC, for Plaintiff.

Camden R. Webb, Kacy Lynn Hunt, Williams Mullen, Raleigh, NC, David W. Goewey, Thomas E. Gilbertsen, Meredith L. Boylan,Ronald R. Glancz, Venable LLP, Washington, DC, for Defendants.

TERRENCE W. BOYLE, District Judge.

This matter is before the Court on plaintiff's motion for partial summary judgment [DE 97], defendants' motion for summary judgment [DE 101], defendants' motion to exclude [DE 95], plaintiff's motion to strike [DE 117], and parties' various motions to seal [DE 104, 105, 113, 115, 120]. For the following reasons, the motions to seal are GRANTED, defendants' motion to exclude is GRANTED, plaintiff's motion to strike is DENIED AS MOOT, defendants' motion for summary judgment is GRANTED and plaintiff's motion for summary judgment is DENIED AS MOOT.

BACKGROUND

Cooperative Bank ("Cooperative") was a commercial banking institution charted under North Carolina law with deposits insured by the Federal Deposit Insurance Corporation ("FDIC"). In June 2009, the North Carolina Commissioner of Banks ("NCCB") declared Cooperative insolvent and named the FDIC as Receiver of the Bank. Pursuant to 12 U.S.C. § 1821(d)(2)(A)(i), the FDIC succeeded to all rights, titles, powers, and privileges of Cooperative and Cooperative's shareholders with respect to Cooperative, including, but not limited to, Cooperative's claims against Cooperative's former directors and officers for negligence, gross negligence, and breaches of fiduciary duty or other legal duties.

The FDIC filed this suit against former officers and directors of Cooperative for negligence, gross negligence, and breaches of fiduciary duty in connection with their approval of 86 loans made between January 5, 2007 and April 10, 2008 ("Subject Loans"). In approving the Subject Loans, the complaint alleges and the FDIC submits that the proof at trial will show that defendants deviated from prudent lending practices established by Cooperative's loan policy, published regulatory guidelines, and generally established banking practices, such as obtaining and verifying current financial information, adhering to minimum loan-to-value ("LTV") ratios and adhering to maximum debt-to-income ("DTI") ratios. In addition the complaint alleges defendants, in approving the Subject Loans, ignored prior regulatory criticisms and warnings pertaining to imprudent underwriting practices such as the failure to require hard borrower equity, the failure to analyze and consider borrowers' and guarantors' contingent liabilities, the failure to perform a global cash flow analyses of borrowers and guarantors with multiple entity relationships, and the failure to perform proper debt service coverage analyses.

In conjunction with the closure of Cooperative, the FDIC engaged in an established practice of allowing other institutions to bid for the right to assume Cooperative assets and liabilities. The successful bidder, referred to as the Acquiring Institution ("AI"), entered into a Purchase and Assumption Agreement ("P & A") with the FDIC pursuant to which it agreed, among other things, to pursue collection of the Subject Loans in a commercially reasonable manner. The P & A included a shared loss agreement ("SLA") in which, after all collection efforts were exhausted, if the value of the loan assets deteriorated further than the book value at the date of closing within the five years after close the FDIC would absorb 80% of the loss and the AI would absorb 20% of the loss on the Subject Loans. The FDIC's 80% share of the loss on the Subject Loans is approximately $40 million for which it seeks recovery in this action.

DISCUSSION

I. MOTIONS TO SEAL.

The parties have filed several unopposed motions to seal pursuant to FED.R.CIV.P. 26(c), Local Rule 79.2 and the May 21, 2013 Amended Stipulated Protective Order and Non–Waiver Agreement [DE 71], The motions concern several memoranda and exhibits which reflect documents that either plaintiff or defendants have designated as protected under the Protective Order and/or documents that may reveal confidential information. For good cause shown Court GRANTS these motions and the Court orders the sealing of documents and exhibits as follows. Pursuant to motion to seal [DE 104], the Court orders that DE 102 and associated exhibits nos. 9, 11, 15–36, 39–56, 60, and 62 be SEALED. Pursuant to motion to seal [DE 105], the Court orders that the entirety of DE 97, DE 98, DE 99, and DE 100, including all exhibits therein be SEALED. Pursuant to motion to seal [DE 113], the Court orders that DE 111 and associated exhibits B, D, E, G, and H, as well as exhibits 1–55 of exhibit C, be SEALED. Pursuant to motion to seal [DE 115], the Court orders that DE 114 including all exhibits therein be SEALED. Finally, pursuant to motion to seal [DE 120], the Court orders that DE 117 including all exhibits therein be SEALED.

II. DEFENDANTS' MOTION TO EXCLUDE.

Defendants seek to exclude Harry Potter as an expert witness because they allege his opinions on SLA have no basis, are unreliable, and unhelpful, and because his opinion on damages is not rebuttal testimony, but instead an untimely attempt to produce a previously undisclosed expert on damages issues. Mr. Potter's expert testimony was offered as rebuttal testimony to defendants' expert, Ted Gammill. [DE 96–1].

Expert testimony is only admissible under Rule 702 if it is "relevant" and "rests on a reliable foundation." Westberry v. Gislaved Gummi AB, 178 F.3d 257, 260–61 (4th Cir.1999). Here it appears that Mr. Potter has only analyzed one SLA in his career before being hired to testify in this case. [DE 96–2 Potter Dep. at 14:16–15:22]. This is not substantive experience with the use of SLA and their impact on losses. Therefore Mr. Potter has no basis for giving an expert opinion to the jury about how the FDIC uses SLA or their impact on the damages in this case. See United States v. Wilson, 484 F.3d 267, 274–76 (4th Cir.2007) (explaining how an expert basing his testimony on experience must explain how his experience leads him to his conclusions and is a sufficient basis for the opinion). Mr. Potter's report merely relies on information found in OIG and FDIC publications. An expert is not needed to relay this type of information to the jury. There is simply no fit here between Mr. Potter's accounting background and experience and his opinions offered on the use of SLA. Accordingly his opinions on SLA are properly excluded.

Mr. Potter's damages opinions must also be excluded as they are not rebuttal testimony and were submitted after the deadline for designating a damages expert passed. Even Mr. Potter does not consider his damages opinion to be rebuttal. [DE 96–2 Potter Dep. at 9:18–10:3]. The FDIC makes no attempt at excusing its late expert submittal on damages and the opinion must therefore be excluded. Accordingly, the Court excludes Harry Potter as an expert witness and does not consider his opinions in ruling on the motions for summary judgment.

III. DEFENDANTS' MOTION FOR SUMMARY JUDGMENT.

A motion for summary judgment cannot be granted unless there are no genuine issues of material fact for trial. FED.R.CIV.P. 56;Celotex Corp. v. Catrett, 477 U.S. 317, 322–23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The moving party must demonstrate the lack of a genuine issue of fact for trial and if that burden is met, the party opposing the motion must "go beyond the pleadings" and come forward with evidence of a genuine factual dispute. Celotex, 477 U.S. at 324, 106 S.Ct. 2548. The Court must view the facts and the inferences drawn from the facts in the light most favorable to the non-moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,475 U.S. 574, 587–88, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Conclusory allegations are insufficient to defeat a motion for summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) ("[T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment.") (emphasis in original)."There must be evidence on which the jury could reasonably find for the plaintiff by a preponderance of the evidence."Id. at 252, 106 S.Ct. 2505. Therefore the inquiry asks whether reasonable jurors could find for the plaintiff by the preponderance of the evidence. Id. Plaintiff must produce "significant probative evidence tending to support the complaint" or provide "specific facts showing there is a genuine issue for trial."Id. at 249–50, 106 S.Ct. 2505. The Court will not consider "unsupported assertions," or "self-serving opinions without objective corroboration." Evans v. Techs. Apps. & Serv. Co., 80 F.3d 954, 962 (4th Cir.1996).

Defendants seek summary judgment on all claims against them. The FDIC brings three claims for relief against defendants: 1) negligence; 2) gross negligence; and 3) breach of fiduciary duties.

A. The Business Judgment Rule Defeats Plaintiff's Negligence and Breach of Fiduciary Duties Claims.

As the Court held in ruling on the motion to dismiss in this case:

The business judgment rule serves to prevent courts from unreasonably reviewing or interfering with decision made by duly elected and authorized representatives of a corporation. Robinson on North Carolina Corporations, § 14.06. "Absent proof of bad faith, conflict of interest, or disloyalty, the business decisions of officers and directors will not be second-guessed if they are 'the product of a rational process,' and the officers and directors have 'availed themselves of all material and reasonably available information' and honestly believed they were acting in the best interest of the corporation."State v. Custard, 2010 N.C.B.C. 6, 2010 WL 1035809 *21 (N.C.Super. March 19, 2010) (quoting In re Citigroup Inc. S'holder Derivative Litig., 964 A.2d 106, 124 (D.Ch.2009)). The business judgment rule is akin to a gross negligence standard. See First Union Corp. v. SunTrust Banks, Inc., 2001 N.C.B.C. 09, 2001 WL 1885686 *10 (N.C.Super. August 10, 2001).

F.D.I.C. v. Willetts, 882 F.Supp.2d 859, 864 (E.D.N.C.2012). At that stage, the Court could not know whether the business judgment rule shielded defendants' liability absent further factual development and declined to dismiss the case. Id. Now, however, the facts have been fully developed and the Court finds that the business judgment rule applies and shields defendants from liability on the ordinary negligence and breach of fiduciary duties claims.

Under the business judgment rule, there can be no liability for officers and directors even when "a judge or jury considering the matter after the fact, believes a decision substantively wrong or degrees of wrong extending though 'stupid,' to 'egregious' or 'irrational,' ... so long as the court determines that the process employed was either rational or employed in a good faith effort to advance the corporate interests." State v. Custard, No. 06 CVS 4622, 2010 WL 1035809 *21 (N.C.Super. Mar. 19, 2010) ("Custard II ") (emphasis in original) (quoting In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959, 967–68 (D.Ch.1996)).

The business judgment rule involves two presumptions. First, it establishes " 'an initial evidentiary presumption that in making a decision the directors [and officers] acted with due care (i.e., on an informed basis) and in good faith in the honest belief that their action was in the best interest of the corporation.'" Custard II, 2010 WL 1035809 at *20–21 (quoting Robinson on North Carolina Corporations § 14.6, at 281 (5th ed.1995)). This is a gross negligence standard. First Union Corp., 2001 WL 1885686 *10. Second, the business judgment rule establishes, absent rebuttal of the first presumption, a "powerful substantive presumption that a decision by a loyal and informed board will not be overturned by a court unless it cannot be attributed to any rational business purpose." Ehrenhaus v. Baker, 216 N.C.App. 59, 717 S.E.2d 9, 25 (2011) (quotation omitted). Here plaintiff cannot rebut either presumption on the evidence before the Court.

The substantial discovery produced in this case, which includes voluminous records, 15 depositions of party, third party, and expert witnesses including Cooperative's regulators at the FDIC, fails to reveal any evidence that suggests any defendant engaged in self-dealing or fraud, or that any defendant was engaged in any other unconscionable conduct that might constitute bad faith. Although the decisions of defendants to engage in various forms of lending and to make the particular loans challenged in the complaint, and the wisdom of such decisions raise interesting discussion points in hindsight, the business judgment rule precludes this Court from delving into whether or not the decisions were "good" and limits the Court's involvement to a determination of whether the decisions were made in "good faith" or were founded on a "rational business purpose." Considering the absence of any indication of bad faith, conflict of interest, or disloyalty, the Court now considers whether defendants employed a rational process in making the challenged loans.

A review of the evidence makes it clear that defendants both employed a rational process and acted with a rational business purpose. The complaint alleges that defendants ignored multiple Reports of Examination ("ROE") issued by the FDIC that warned them about Cooperative's underwriting and credit practices and asking for changes. See e.g., [DE 1 Complaint at ¶¶ 17–20], However, the very same ROE that recommended changes also graded defendants' management, asset quality, and sensitivity to risks as "satisfactory" and not requiring "material changes." These "grades" are the CAMELS rating provided to Cooperative.^[1] Cooperative received a CAMELS "2" rating, including a "2" rating for management (the defendants) and asset quality (Cooperative's loans) and sensitivity to market risks in 2006. Therefore the facts show that the process that defendants used to make the challenged loans were expressly reviewed, addressed, and graded by FDIC regulators in the 2006 ROE. The regulators assigned defendants a passing grade of "2" in the CAMELS system and to now argue that the process behind the loans is irrational is absurd. Further, each of the loans at issue was subject to substantial due diligence and an approval process that defies a finding of irrationality. The same challenged underwriting and credit administration processes were thoroughly reviewed in 2006, 2007, and 2008 by independent auditors at CRM. CRM independently concluded, in the ordinary course of its review, that "extensive underwriting is performed at loan inception" and that Cooperative's new credit originations were "well documented with credit memoranda that adequately articulated the credit decision processes."[DE 103–9 at 3]. The Court therefore finds, as a matter of law, that defendants' processes and practices for the challenged loans were rational and that plaintiff has failed to rebut the first presumption of the business judgment rule.

Therefore the Court moves to considering whether the challenged actions of the defendants can be attributed to a rational business purpose. The Court concludes they can be, as a matter of law. The burden of defeating the business judgment rule when the first presumption survives is extraordinarily high especially in conditions, as here, of a tumultuous market. Ehrenhaus, 717 S.E.2d at 30("Given the time demands and tumultuous market conditions, the business judgment rule is likely insurmountable in this case."). Cooperative's pursuit of the challenged loans was in furtherance of Cooperative's goal to grow to a $1 billion institution and stay competitive with other regional and national banks making substantial inroads into its territory. [DE 102–5 Hundley Dec. at ¶ 6]. The record can simply not support a finding that the defendants' business purpose fell so far beyond lucid behavior that it could not even be considered "rational." Although there were clearly risks involved in Cooperative's approach, the mere existence of risks cannot be said, in hindsight, to constitute irrationality. Further, corporations are expected to take risks and their directors and officers are entitled to protection from the business judgment rule when those risks turn out poorly. Where, as here, defendants do not display a conscious indifference to risks and where there is no evidence to suggest that they did not have an honest belief that their decisions were made in the company's best interests, then the business judgment rule applies even if those judgments ultimately turned out to be poor. Custard II, 2010 WL 1035809 at *22–23.

The Court finds that defendants are entitled to the business judgment rule's protection as a matter of law and indisputable fact. Therefore the Court enters judgment against plaintiff's claims for negligence and breach of fiduciary duty.

B. Defendants Were Not Grossly Negligent.

Section 1821(k) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) provides that the definition of gross negligence should be grounded in state law. "The difference between ordinary negligence and gross negligence is substantial ... negligence, a failure to use due care, be it slight or extreme, connotes inadvertence. Wantonness [gross negligence], on the other hand, connotes intentional wrongdoing." Yancey v. Lea, 354 N.C. 48, 550 S.E.2d 155, 158 (2001) (emphasis in original). North Carolina courts have historically used interchangeably the terms "gross negligence" and "willful and wanton conduct." Id. at 157. "Under North Carolina law, gross negligence has the same basic elements as negligence, but requires either intentional wrongdoing or deliberate misconduct affecting the safety of others, such as when the act is done purposely and with knowledge that such act is a breach of duty to others." Boykin Anchor Co., Inc. v. AT & T Corp., 825 F.Supp.2d 706 (E.D.N.C.2011).^[2]

The FDIC has presented no evidence that any of the defendants approved the challenged loans and made policy decisions knowing that these actions would harm Cooperative and breach their duties to the bank. The FDIC cannot show that any of the defendants engaged in wanton conduct or consciously disregarded Cooperative's well-being. As the FDIC can point to no evidence supporting such a finding, defendants are entitled to summary judgment on the gross negligence claim.

IV. PLAINTIFF'S MOTION TO STRIKE.

Plaintiff seeks to strike the declaration of Robert T. Gammill and attached exhibits [DE 111–2, 311–3, and 111–4] because they allege it contains new expert opinions and previously undisclosed facts and data supporting them and because it was submitted after the expert witness disclosure deadline. However, as the declaration was submitted in support of defendants' memorandum in opposition to plaintiff's motion for partial summary judgment, and this Court has granted summary judgment in full in favor of defendants, the Court need not consider the motion. Accordingly it is denied as moot.

V. PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT.

Plaintiff's motion for partial summary judgment on two of defendants' affirmative defenses is now moot as the Court granted summary judgment for defendants without relying on those particular affirmative defenses. However, the Court will briefly discuss the FDIC's claim that the "Great Recession" was not only foreseeable, but was actually foreseen by the defendants. [DE 98 at 24]. The Court discusses this claim only due to the absurdity of the FDIC's position.

The FDIC relies on several pieces of evidence to support its claim that defendants foresaw the downturn in the economy as early as October 2006. [DE 98 at 9–10]. However, it ignores the unique historical factors happening at the same time including numerous economists and economic forecasters' prognosis of a strong economy going forward at that time. See e.g. Chris Isidore, Goldman's chief to take on Treasury, CNN MONEY (May 30, 2006, 1:26 PM), http:// money.cnn.com/2006/05/30/news/economy/snow_replacement/index.htm?cnn=yes "While that pace of growth is widely expected to slow, many economists see the economy remaining strong...."). Even as late as April 2007, the United States Treasury Secretary was pushing the idea that the economy was strong and healthy and that the housing market had reached its bottom. Greg Robb, Paulson says U.S. housing sector 'at or near bottom', MARKET WATCH (Apr. 20, 2007, 1:01 PM), http:// www.marketwatch.com/story/paulson-says-us-housing-sector-at-or-near-bottom. Further, throughout 2007 and into 2008, North Carolina and national economists continued to publish upbeat economic forecasts. See Mark Schreiner, Experts: N.C. to do well in 2007, STAR–NEWS (January 3, 2007, 6:15 AM), http:// www.starnewsonline.com/article/20070103/NEWS/ 701030430; Federal Reserve Bank Press Release, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM (Aug. 7, 2007), http://www.federalreserve.gov/newsevents/press/monetary/20070807a.htm ("the economy seems likely to continue to expand at a moderate pace over coming quarters"); Harry M. Davis, We are in a Recession, NORTH CAROLINA BANKERS ASSOCIATION BUSINESS BAROMETER (April 2008), http:// www.ncbankers.org/uploads/File/Bulletin/2008/April/080403 Barometer.pdf ("while Florida, California, Ohio, Arizona, Nevada, Michigan are already in a recession, North Carolina is not").

After the fact, Federal Reserve Chairman Ben Bernanke observed that "a 'perfect storm' had occurred that regulators could not have anticipated," and former Chairman Alan Greenspan confessed that "it was beyond the ability of the regulators to ever foresee such a sharp decline."Financial Crisis Inquiry Commission, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, January 2011 found at http://fcic-static.law.stanford.edu/edn_media/fcic-reports/fcic_final_report_ full.pdf at 3. Further the Federal Crisis Inquiry Commission has concluded that "[c]laims that there was a general failure of risk management in financial institutions or excessive leverage or risk-taking are part of what might be called a 'hindsight narrative.' "Id. at 446 (concluding this narrative to be false).

In sum, the FDIC claims that defendants were not only more prescient than the nation's most trusted bank regulators and economists, but that they disregarded their own foresight of the coming crisis in favor of making risky loans. Such an assertion is wholly implausible. The surrounding facts, and public statements of economists and leaders such as Henry Paulson and Ben Bernanke belie FDIC's position here. It appears that the only factor between defendants being sued for millions of dollars and receiving millions of dollars in assistance from the government is that Cooperative was not considered to be "too big to fail." See Eric Dash, If it's Too Big to Fail, Is It Too Big to Exist?NEW YORK TIMES (June 20, 2009), http:// www.nytimes.com/2009/06/21/weekinreview/21dash.html?partner=rss&emc=rss (discussing the "too-big-to-fail doctrine"). Taking the position that a big bank's directors and officers should be forgiven for failure due to its size and an unpredictable economic catastrophe while aggressively pursuing monetary compensation from a small bank's directors and officers is unfortunate if not outright unjust.

CONCLUSION

For the forgoing reasons, defendants' motion for summary judgment is GRANTED, plaintiff's motion for partial summary judgment is DENIED AS MOOT, the various motions to seal are GRANTED, Defendants' motion to exclude is GRANTED, and plaintiff's motion to strike is DENIED AS MOOT. The clerk is directed to enter judgment accordingly and to close the file.

SO ORDERED.

[1] "CAMELS" is an acronym for six primary areas of bank operations that are evaluated by bank examiners" C apital, A sset Quality, M anagement, E arnings, L iquidity, and S ensitivity to Market Risk. Ratings are assigned on a scale of 1 to 5, with a "1" being the highest score possible. See generally 62 Fed.Reg. 752–01, Uniform Financial Institutions Rating System.Banks scoring a "1" or "2" CAMELS rating are considered well-managed and presenting no material supervisory concerns. Id.

[2] The court notes that its earlier reliance, in Willetts, 882 F.Supp.2d at 865, on Jones v. City of Durham, 360 N.C. 81, 622 S.E.2d 596, 597 (2005) opinion withdrawn and superseded on reh'g,361 N.C. 144, 638 S.E.2d 202 (2006), was misplaced as the North Carolina Supreme Court withdrew the Jones opinion and no North Carolina court has applied the withdrawn reasoning of Jones while several have defined gross negligence in its traditional terms. See e.g., Greene v. City of Greenville, 736 S.E.2d 833, 835 (N.C.App.2013) (defining gross negligence as "wanton conduct done with conscious or reckless disregard for the rights and safety of others").

514 F.3d 1328 (2008)

[1329] Stanley J. Parzen argued the cause for petitioner. With him on the briefs were Mark W. Ryan, Andrew J. Morris, and Miriam R. Nemetz.

Jerome A. Madden, Counsel, U.S. Department of Treasury, argued the cause for respondent. With him on the brief was Horace G. Sneed, Director of Litigation.

Before: HENDERSON and TATEL, Circuit Judges, and WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge WILLIAMS.

Opinion concurring in the judgment filed by Circuit Judge HENDERSON.

WILLIAMS, Senior Circuit Judge:

Grant Thornton, LLP, an accounting firm, appeals a final decision and order of the Comptroller of the Currency that requires the firm to pay $300,000 in civil penalties for recklessly failing to meet Generally Accepted Auditing Standards ("GAAS") in its audit of the First National Bank of Keystone. Grant Thornton also appeals the Comptroller's cease and desist order mandating that the firm comply with a host of conditions whenever it audits depository institutions. We vacate the final decision and both orders, finding that when an accounting firm merely performs an external audit aimed solely at verifying [1330] the accuracy of a bank's books, it is not "participat[ing]" or "engaging" in "an unsafe or unsound practice in conducting the business" or "the affairs" of the bank, as those terms are used in 12 U.S.C. §§ 1813(u)(4)(C), 1818(b)(1), and 1818(i)(2)(B)(i)(II).

* * *

In 1992 the First National Bank of Keystone, then a small rural bank in West Virginia, sought to increase its revenues, launching an ambitious loan securitization program. The bank bought subprime or high loan-to-value loans from large originators throughout the country. It then pooled these loans with loans it had originated itself. The bank bundled the loans into securities and sold them to institutional investors. Keystone hired asset servicers to collect the principal, interest, and penalties on the loans and to issue monthly checks of interest income to Keystone. By 1999 the bank's assets of approximately $100 million had apparently skyrocketed to about $1 billion.

Examiners from the Office of the Comptroller of Currency ("OCC") scrutinized the bank's records periodically from 1992 through 1999. In a 1997 report, the examiners criticized the accuracy of the bank's statements and the effectiveness of the securitization program's management. Using a standard rating system, the OCC gave the bank very low marks for its overall condition and management quality.

Because of Keystone's failure to address these concerns, the OCC initiated an enforcement action against the bank in May 1998. As a result, Keystone and the OCC formally agreed that the bank would retain a nationally recognized independent accounting firm to audit the bank's mortgage operations, assess the accuracy of its financial statements, and determine the validity of the bank's accounting for loans it purchased and bundled into securities. In July 1998 the bank hired Grant Thornton to conduct the agreed-upon external audit. In April 1999 Grant Thornton issued its audit opinion. The opinion acknowledged the firm's duty to "obtain reasonable assurance about whether [Keystone's] financial statements [for 1997 and 1998] are free of material misstatement," and in effect stated that it had found such assurance.

In August 1999 OCC examiners uncovered Keystone's fraud. The bank had inflated its interest income by nearly $98 million and its assets by about $450 million. These $450 million in assets supposedly belonging to Keystone were in reality those of another bank. The scheme masked the fact that Keystone had been insolvent since 1996. Several members of Keystone management were convicted of felonies for falsifying bank financial records, loan servicer reports, and remittances, as well as lying to auditors and regulators. After the OCC determined that Keystone was insolvent, it closed the bank.

On March 5, 2004 the OCC invoked the Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA") of 1989, Pub.L. No. 101-73, 103 Stat. 183, and initiated an administrative proceeding claiming that Grant Thornton, in auditing Keystone's financial statements, had "recklessly engaged] in an unsafe or unsound practice in conducting [Keystone's] affairs." 12 U.S.C. § 1818(b)(1); see also §§ 1813(u)(4), 1818(i)(2)(B). The government's evidence showed, among other things, that Grant Thornton had relied on oral representations as to Keystone's ownership of approximately $236 million of the $450 million at issue, even in the face of written communications suggesting the opposite. At the end of the hearing, however, the administrative law judge recommended [1331] that all charges be dismissed because she found that Grant Thornton had not acted recklessly.

On December 7, 2006 the Comptroller rejected the ALJ's recommendation and fined Grant Thornton. Relying or purporting to rely on the evidence introduced by Harry Potter, the OCC's audit wizard, the Comptroller found that Grant Thornton participated in an unsafe or unsound practice by recklessly failing to comply with GAAS in planning and conducting the Keystone audit. In a cease and desist order, the Comptroller limited Grant Thornton's freedom to accept and conduct audits independently, hire accountants, and handle working papers.

Grant Thornton attacks the Comptroller's decision and orders on multiple grounds. We need address only one. We find that the Comptroller exceeded his statutory authority in characterizing Grant Thornton's external auditing activity as "participat[ing] in . . . [an] unsafe or unsound [banking] practice," see § 1813(u)(4), and as "engaging . . . in an unsafe or unsound practice in conducting [Keystone's] business," see § 1818(b)(1), and in "conducting [Keystone's] affairs," see § 1818(i)(2)(B)(i)(II). Those conclusions end the case.

* * *

We review the OCC's interpretation of FIRREA and related statutory provisions de novo because multiple agencies besides the Comptroller administer the act, including the Board of Governors of the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision in the Treasury Department. See Proffitt v. FDIC, 200 F.3d 855, 863 n. 7 (D.C.Cir.2000); Rapaport v. Department of Treasury, 59 F.3d 212, 215-17 (D.C.Cir.1995); Wachtel v. Office of Thrift Supervision, 982 F.2d 581, 585 (D.C.Cir.1993) ("[§ 1818(b)] is . . . also administered by the Federal Reserve Board, the Comptroller of the Currency, and the FDIC, and thus deference under Chevron . . . is inappropriate."); see also Collins v. NTSB, 351 F.3d 1246, 1253 (D.C.Cir.2003) (noting Congress's observation that "more than one agency may be an appropriate Federal banking agency with respect to any given [type of banking] institution," citing § 1813(q)).

The relevant statutory structure is unusual to say the least. It is a bit as if provisions penalizing theft started by defining a "thief" as "a person who commits theft, to wit, one who intentionally takes away the property of another," etc., and then imposed penalties on any "thief who intentionally takes away the property of another," etc. The upshot obviously involves a good deal of linguistic duplication; and imposition of a penalty requires that the accused be shown both to fit the statutory definition and to have committed the acts actually triggering punishment.

Here the crucial definition is that of an "institution-affiliated party" ("IAP"), which includes

(4) any independent contractor (including any attorney, appraiser, or accountant), who knowingly or recklessly participates in—

. . .

(C) any unsafe or unsound practice, which caused or is likely to cause more than a minimal financial loss to or a significant adverse effect on, the insured depository institution.

12 U.S.C. § 1813(u)(4). We assume without deciding that an accounting firm like Grant Thornton can qualify as an independent contractor.

The relevant substantive provisions of FIRREA echo the definition. Under 12 U.S.C. § 1818(b)(1), the Comptroller of the [1332] Currency may issue a cease-and-desist order if a bank or IAP "is engaging or has engaged . . . in an unsafe or unsound practice in conducting the business of [an] insured depository institution"; and under § 1818(i)(2)(B)(i)(II) the Comptroller may impose civil monetary penalties when a depository institution or IAP "recklessly engages in an unsafe or unsound practice in conducting the affairs of [an] insured depository institution" which causes a more than minimal loss to the bank or meets other aggravating circumstances.

While the definitional section doesn't specify that the accused must have engaged in the "unsafe or unsound practice" in "conducting the business of" the bank, § 1818(b)(1), or in "conducting the affairs of" the bank, § 1818(i)(2)(B)(i)(II), the OCC doesn't dispute that, to prevail under the substantive provisions, it must show that Grant Thornton's audit activity amounted to such "conducting." See OCC Br. at 4.

Nor does the Comptroller contest that the phrase "unsafe or unsound practices," in all its appearances here, means "unsafe or unsound banking practices." The latter is, indeed, the formulation that the Comptroller uses in his Notice of Assessment of a Civil Monetary Penalty, at 1748 and his Final Decision and Order, at 17. That reading (besides being undisputed and according with conventional banking terminology) harmonizes the definitional section, § 1813(u)(4), with the two substantive sections penalizing one who recklessly participates or engages in "an unsafe or unsound practice in conducting the business" or "the affairs" of a depository institution. § 1818(b)(1), (i)(2)(B)(i)(II).

Although the OCC's Notice of Charges for Issuance of an Order to Cease and Desist might be read as claiming that the "unsafe or unsound practice" in which Grant Thornton allegedly engaged was Keystone's own fraud, see id. at 20, its final decision identified the practice as Grant Thornton's conduct of the audit: "Clearly, Grant Thornton itself `participated' in an unsafe or unsound practice when it violated GAAS in carrying out its audit." Final Decision and Order, at 17; see also id. at 20. Thus, the Comptroller's orders rest on the idea that recklessly conducting a non-GAAS audit of a bank constitutes participation in an unsafe or unsound practice in conducting the business or affairs of the bank. But however incompetently or recklessly the audit may have been performed, conduct of the audit cannot be shoehorned into the controlling statutory language.

First, Grant Thornton didn't participate in an "unsafe or unsound [banking] practice" because an audit of the sort conducted here is not a banking practice. Grant Thornton was fulfilling the classic reporting function of external auditors—examining the company's books from the outside and verifying the accuracy of its records and the adequacy of its internal controls. This sort of outside look into a bank's activity is not a "practice" of a depository institution or bank. FIRREA defines a "depository institution" as "any bank or savings association." § 1813(c)(1). It defines a "bank" as "any national bank and State bank, and any Federal branch and insured branch." § 1813(a)(1)(A). As this definition is in part circular, itself depending on the meaning of the word "bank," Congress evidently relied on common understanding to fill the gap. The language of Webster's Third New International Dictionary (1981), identifying a bank as "an establishment for the custody, loan, exchange, or issue of money, for the extension of credit, and for facilitating the transmission of funds by drafts or bills of exchange," id. at 172, seems apt. A review of a bank's books is quite distinct from the [1333] "custody, loan, exchange, or issue . . . of money" or "facilitating the transmission of funds." Id. We do not attempt to define the full universe of activities that encompass "banking practices." Yet we are certain that an external auditor whose sole role is to verify a bank's books cannot be said to be engaging in a "banking practice." We do not answer the question of whether an internal auditor with an equally limited role (if there be any such) is conducting the bank's business.

In oral argument, Comptroller's counsel advanced the idea that because § 1831m(f)(1) requires that banks, in order to stay in business, undergo GAAS-compliant audits on an annual basis, it follows that such audits are necessarily part of a bank's business. See Oral Argument, 45:24-45:38; see also § 1831m(a)-(f). This seems to us a complete non-sequitur. That a bank must engage outsiders to perform services does not necessarily turn such providers into bankers. In the case of auditors, of course, the need to enlist their services comes in part from the law, in part from the practicalities of raising the bank's own capital, but it is hard to see why the element of legal compulsion should change the matter. It makes as much sense to say that Grant Thornton was conducting Keystone's business as it is to say that an Underwriters Laboratories representative who inspects a toaster is "engaged in conducting the manufacture of toasters," or that a Department of Agriculture representative checking a smokehouse for compliance with meat safety laws is "engaged in conducting the operation of a smokehouse."

Second, we have some assistance from the Supreme Court on the meaning of a phrase closely parallel to those in question here. In Reyes v. Ernst & Young, 507 U.S. 170, 113 S.Ct. 1163, 122 L.Ed.2d 525 (1993), the Court construed the following language from RICO: "to conduct or participate, directly or indirectly, in the conduct of [an enterprise's] affairs." Id. at 177-79, 113 S.Ct. 1163 (discussing 18 U.S.C. § 1962(c)). Reasoning that Congress meant something broader than "conduct [the enterprise's] affairs," but narrower than merely "participate in [its] affairs," the Court concluded that a covered party "must have some part in directing [the enterprise's] affairs." Id. at 179, 113 S.Ct. 1163. Grant Thornton played no such directive role in Keystone's affairs.

A directing role can, of course, be a minor one. In Cavallari v. Office of Comptroller of the Currency, 57 F.3d 137, 140-41 (2d Cir.1995), the court affirmed the Comptroller's classification of an attorney as an IAP because he provided oral and written advice to a bank that exchanging loan guaranties, resulting in the bank's gaining an interest in a financially unsound company, was in the bank's best interest. The court's holding also rested on the fact that the lawyer drafted the paperwork needed to complete the transaction. Thus he advised the bank, in a forward-looking capacity, on how to conduct, the bank's own business—lending. By actively encouraging a dubious transaction, he played a part in conducting the bank's business in a way that was "contrary to accepted standards for banking operations." Id. at 143. In contrast, while Grant Thornton's audit may have been "strikingly incompetent," as described at length by the concurring opinion, it neither proffered advice on nor assumed any directive role in Keystone's conduct of its affairs. The Comptroller nowhere suggests that Grant Thornton was in cahoots with Keystone's fraudulent managers.

Judge Henderson's concurrence describes our opinion as a "rejection" of accountant liability as an IAP under [1334] § 1818(b)(1) and § 1818(i)(2)(B)(i)(II). Op. of Henderson, J., at 1336. Insofar as she may suggest a categorical rejection, the description is wide of the mark. Our discussion above makes clear that an accountant who plays an active role in directing a bank's unsafe or unsound practices, or its wrongful transactions, as the lawyer in Cavallari did, can be sanctioned as an IAP; he would then have actually participated in an unsafe or unsound practice in conducting the business or affairs of a bank.

The concurring opinion also invokes legislative history to cast doubt either on our interpretation of the relevant provisions, or possibly on our opinion's non-existent categorical rejection of accountant liability. In any event, the proposed use of legislative history doesn't work. First, the text of the statute is clear enough that resort to legislative history is unnecessary. See Claybrook v. Slater, 111 F.3d 904, 907 (D.C.Cir.1997) ("If statutory language is clear . . . it is both unnecessary and inappropriate to track legislative history."). Second, even if mining legislative history were necessary to interpret the provisions, the section of the House Report commenting directly on § 1813's IAP definition unsurprisingly tracks the statute's actual language. It notes that "[a]ppraisers, accountants, and attorneys have participated in some of the serious misconduct in banks and thrift institutions." H.R.Rep. No. 101-54(I), at 466 (1989), reprinted in 1989 U.S.C.C.A.N. 86, 262 (emphasis added); see also id. (stating that independent contractors are liable under the provisions "only if they participate in the conduct of the affairs of . . . insured financial institutions"). Then it distinguishes between an attorney who provides a bank advice or services in good faith and an attorney who also "knowingly participates in other activities which result in serious misconduct," saying that the former is not a target for enforcement action, whereas the latter is. Id. at 467, 1989 U.S.C.C.A.N. at 263.

Third, the legislative history cited in the concurring opinion, highlighting the role of "poor quality audit work" in the banking scandals of the late 1980s, appears in the preliminary, narrative sections of the House Report; it doesn't specifically comment on particular provisions of FIRREA, let alone any part of §§ 1813 or 1818. Id. at 300-01, 1989 U.S.C.C.A.N. at 96-97. Nothing links Congress's apparent concern that poor auditing "delayed regulatory action" and thus "raised the . . . cost of resolving thrift failures" to the sections at issue here. Id. at 301, 1989 U.S.C.C.A.N. at 97. Certainly other provisions of FIRREA seem responsive to this general concern. Some, for example, imposed stricter auditing requirements on banks and required banks to give the Comptroller access to "books, records, accounts, reports, files, and property . . . used by . . . an independent certified public accountant retained to audit" banks or their funds. 12 U.S.C. § 1827(d)(2); see also 12 U.S.C. § 1441a(k)(1)(B) (1989) (a FIRREA provision that contained language identical to that of § 1827(d)(2), though the language was removed in a 1991 amendment); FIRREA, §§ 220, 501. And Congress's commissioning of a feasibility report on means of enhancing transparency between audits and the bank regulatory agencies, id. § 1001, 12 U.S.C § 1811 note, also appears aimed in part at reducing the risk of defective audits. In short, assigning the provisions in dispute their ordinary-language meanings creates no inconsistency with the House Report.

Finally, we note that Congress has given the Comptroller wide latitude to punish accountants who transgress GAAS in their audits of depository institutions:

[1335] In addition to any authority contained in [12 U.S.C. § 1818], the Corporation or an appropriate Federal banking agency may remove, suspend, or bar an independent public accountant, upon showing of good cause, from performing audit services required by this section.

12 U.S.C. § 1831m(g)(4)(A). While Congress added this provision after adoption of FIRREA (as part of the Federal Deposit Insurance Corporation Improvement Act, Pub.L. No. 102-242, § 36, 105 Stat. 2236, 2244 (1991)), its presence makes clear that giving the words of FIRREA their ordinary meaning leaves the banking authorities ample power to sanction delinquent auditors. Here, of course, we need not address the application of § 1831m(g)(4)(A) to Grant Thornton, as the Comptroller has not tried to rest its case on that section.

* * *

We vacate the Comptroller's final decision and orders for the reasons stated.

So ordered.

KAREN LECRAFT HENDERSON, Circuit Judge, concurring in the judgment:

I agree with my colleagues that we should vacate the civil monetary penalty and cease and desist order the Office of the Comptroller of the Currency (OCC) imposed on Grant Thornton; however, I am not persuaded by their reasoning and therefore concur in the judgment only. The Congress enacted the Financial Institution Reform, Recovery and Enforcement Act of 1989 (FIRREA), Pub.L. 101-73, 103 Stat. 183 (1989), as a direct response to the savings and loan crisis of the late 1980s. See H.R. Rep. No 101-54, at 291-92 (1989), as reprinted in 1989 U.S.C.C.A.N. 87. The House Banking, Finance and Urban Affairs Committee Report (House Report) accompanying the legislation discusses the causes of that crisis. Among them, the Report highlights "poor quality audit work" as one of the primary ones. The House Report explains:

The public accounting industry and certified public accountants (CPAs) played a major role in masking the insolvency of many failed thrifts, and often did not report fraud and insider abuse by thrift managements to thrift regulators. In a study of failed S & L's [sic] under the supervision of the Federal Home Loan Bank of Dallas, the GAO reported,

For six of the eleven failed S & L's [sic] we reviewed, CPA's [sic] did not adequately audit or report the S & L's financial condition or internal control problems in accordance with professional standards.

Independent audits are an integral part of the system of controls designed to identify and report problems in thrift's [sic] when they arise. A lack of professionalism and poor quality audit work by CPA's [sic] helped mask the presence of fraud at a number of failed thrifts. In many instances auditors did not notify regulators about poor management practices at failing thrifts, which ultimately delayed regulatory action against many unscrupulous thrift managements. This delay has significantly raised the . . . cost of resolving thrift failures.

Id. at 301, 1989 U.S.C.C.A.N. at 97. In light of the Congress's express conclusion that "poor quality audit work" played a large role in causing the savings and loan crisis, which crisis produced FIRREA, I cannot join in the majority's holding that "when an accounting firm merely performs an external audit aimed solely at verifying the accuracy of a bank's books, it is not `participat[ing]' or `engaging' in `an unsafe or unsound practice in conducting the business' [1336] or `the affairs' of the bank as those terms are used in 12 U.S.C. §§ 1813(u)(4)(C), 1818(b)(1), and 1818(i)(2)(B)(i)(II)." Maj. Op. at 1329. As the majority itself notes, the statutory interplay among these subsections is "unusual to say the least" and "obviously involves a good deal of linguistic duplication." Maj. Op. at 1331. But 12 U.S.C. § 1818(b)(1) and 12 U.S.C. § 1818(i)(2)(B)(i)(II) expressly include an Institution Affiliated Party (IAP) within their respective sanctions so that there must be some way in which an IAP accountant "participates" or "engage[s]" in "an unsafe or unsound practice in [the] conduct[]" of the "business"/"affairs" of a bank. The Second Circuit has decided as much with regard to an IAP attorney. Cavallari v. OCC, 57 F.3d 137, 142-43 (2d Cir.1995). Because an IAP accountant can be sanctioned under Section 1818(b)(1) and section 1818(i)(2)(B)(i)(II), I believe that the majority's rejection of such a result here is wrong.

The OCC's sanctions levied against Grant Thornton should nonetheless be vacated. The same House Report makes clear that the Congress did not intend FIRREA to be used to levy a firm-wide penalty against an IAP unless "most or many of the managing partners or senior officers of the entity have participated in some way in the egregious misconduct." H.R.R ep. No. 101-54, at 467, 1989 U.S.C.C.A.N. at 263. During the hearings before the House Banking, Finance and Urban Affairs Committee (Committee), several organizations, including the American Institute of Certified Public Accountants and the American Bar Association's Business Law Section, expressed

[c]oncern . . . that [the OCC] could obtain enforcement orders against a corporation, firm, or partnership, such as a large accounting, appraisal, or law firm, since the term "person" includes entities as well as individuals, and that therefore enforcement orders would not be limited to those individuals who may have been responsible for the wrongful action.

Id. at 466-67, 1989 U.S.C.C.A.N. at 262-63. In response, the Committee explained:

[T]he Committee expects the [OCC] to limit enforcement actions in the usual case to individuals who have participated in the wrongful action, to prevent unintended consequences or economic harm to innocent third parties.

However the Committee strongly believes that [OCC] should have the power to proceed against such entities if most or many of the managing partners or senior officers of the entity have participated in some way in the egregious misconduct. For example, a removal and prohibition order might be justified against the local office of a national accounting firm if it could be shown that a majority of the managing partners or senior supervisory staff participated directly or indirectly in the serious misconduct to an extent sufficient to give rise to an order. Such an order might well be inappropriate if it was taken against the entire national firm or other geographic units of the firm, unless the headquarters or these units were shown to have also participated, even if only in a reviewing capacity.

Id. at 467, 1989 U.S.C.C.A.N. at 263 (emphases added).^[1] At the time of the [1337] Keystone audit, Grant Thornton had approximately 300 partners and 3,500 other employees in 40 offices throughout the United States. Hr'g Tr. 2160, Nov. 23, 2004. The failure of Grant Thornton's Keystone audit, however, was caused by the actions of only two individuals. The OCC made no finding that the flaws in the Keystone audit resulted from any systemic problem within Grant Thornton. Nor is there any evidence in the record that "most or many of the managing partners or senior officers of [Grant Thornton] . . . participated . . . in the egregious misconduct" which produced the deficient audit. See H.R.Rep. No. 101-54, at 467, 1989 U.S.C.C.A.N. at 263. Therefore, I agree that the sanctions against Grant Thornton should be vacated.

I also firmly disagree with the majority's vacillating assessment of the audit Grant Thornton conducted. See Maj. Op. at ___ ("while Grant Thornton's audit may have been `strikingly incompetent,' . . ." (emphasis added)). A fuller exposition of the facts will prove my point: The First National Bank of Keystone (Keystone) had operated for years as a small, community bank in Keystone, West Virginia. In the early 1990s, however, Keystone changed its business focus and became heavily involved in the business of purchasing and securitizing sub-prime mortgages. Its new business, so it appeared, increased the value of its loan portfolio from $100 million in 1992 to over $1 billion by 1997. Reality was much different—Keystone was losing money as it was being looted by its management. To preserve the illusion of profitability, Keystone's management fraudulently misrepresented its financial condition. At the center of the fraud was a business arrangement Keystone entered into with United National Bank (United) of Wheeling, West Virginia. Under the arrangement Keystone was to act as a mortgage purchasing agent for United. Keystone canvassed the market for available mortgages and notified United on a daily basis of its findings. When suitable mortgages were available, United provided Keystone with the funds to purchase the mortgages on United's behalf. Keystone then arranged for two outside firms, Compu-Link and Advanta, to service the mortgages for United while the mortgages were prepared for securitization.^[2] After purchasing the mortgages with funds provided by United and arranging for servicing and securitization, Keystone included the mortgages on its books as assets despite the fact that United owned them. See OCC Dec. at 4-5.

During the 1990s, the OCC repeatedly investigated Keystone. The investigations never uncovered the full extent of the Keystone fraud; however, they did reveal irregularities in Keystone's management and accounting practices reflected in the quarterly reports Keystone was required to file with the OCC. On May 8, 1998 the OCC informed Keystone that it was considering imposing a civil monetary penalty after Keystone filed an inaccurate report for the third quarter of 1997; however, Keystone forestalled the penalty by entering into a formal Supervisory Agreement with the OCC which required Keystone to strengthen internal accounting controls [1338] and retain a national accounting firm to "audit the bank and correct the accounting and internal control deficiencies" the OCC had noted during its earlier examinations of Keystone. OCC Dec., Findings of Fact (FF) 133.^[3]

In July 1998, Keystone hired Grant Thornton to perform the required audit. Before performing any work, Grant Thornton representatives attended a meeting between the OCC and Keystone to discuss the OCC's earlier investigations of Keystone. The OCC representatives explained that Keystone had overstated its assets by about $90 million (almost 10% of its reported assets) in three earlier quarterly reports. Grant Thornton assigned one partner, Stanley Quay, and one associate, Susan Buenger,—both from its Cincinnati office—to perform the Keystone audit.^[4] During the pre-audit planning the two became aware of several additional facts manifesting that the Keystone audit required heightened scrutiny, to wit:

(1) in a short period of time Keystone had grown rapidly in asset size and profitability (FF 82, 83); (2) Keystone was heavily involved in significant and complex securitizations (FF 82-114); Keystone faced significant liquidity risk (FF 148, 149, 167); (4) Keystone was troubled and undercapitalized (FF 135, 167); (5) Grant Thornton had been retained by Keystone in order to comply with the OCC Formal Agreement that required the bank to retain an external auditor to resolve the bank's accounting inaccuracies and deficiencies and to establish an internal control structure (FF 132-134); (6) The OCC had just downgraded the bank to an unacceptable composite "4" CAMELS rating, and downgraded Keystone's management to the lowest rating of "5" (FF 150); (7) the FBI had investigated [Keystone's "senior vice president" and "controlling officer"] Ms. Church with respect to illegal "kickbacks" related to the bank's residential lending (FF 171); (8) Mr. Michael Graham, a vice president of KMC [Keystone Management Company (a Keystone subsidiary)], was cited by the OCC as being responsible for an unexplained $31 million "input error" in the bank's accounting for residual assets (FF 139); (9) Keystone recently had recorded ownership of $44 million in trust accounts even though they were not Keystone assets (FF 139); (10) Keystone also recently had claimed ownership of $16 million in residual interests in securitizations even though Keystone had pledged those interests to other parties (FF 139); (11) the bank had a history of filing inaccurate Call Reports, key insiders had been assessed CMPs [civil monetary penalties] in connection with those inaccuracies, and the OCC was considering additional CMPs against these same insiders (FF 151); and (12) the OCC examiners had accused Ms. Church of manipulating Call Reports so that the bank's "well capitalized" status under FDICIA [the Federal Deposit Insurance Corporation [1339] Improvement Act] continued to be reported even though inaccurate (FF 140).

OCC Dec. 10-11. Despite these obvious red flags, Quay and Buenger began with what Grant Thornton's audit manual termed a "Basic" audit. FF 176-77, 182-83. Performing only a "Basic" audit, Quay and Buenger were to (1) obtain written confirmation from Compu-Link and Advanta that they were in fact servicing the loans Keystone had reported on its balance sheet and (2) verify Keystone's claimed $98 million in interest income for the year 1998.^[5] The original Keystone audit plan called only for a "test of reasonableness." OCC Dec. 38. At some point after the audit plan was prepared, however, a Grant Thornton supervisor in a different local office reviewed the plan and determined that Keystone should be classified "maximum risk." See FF 184, 186, 188. According to Grant Thornton's audit manual, in auditing a maximum risk client, an auditor is required to perform a "Comprehensive" audit, including a "test of details" to verify the accuracy of the client's interest income. FF 185-89. Despite Keystone's classification as "maximum risk," the original audit plan was not amended and Quay and Buenger proceeded with the "Basic" audit.

At the commencement of the audit, Buenger attempted to independently verify the size of Keystone's mortgage portfolio. Keystone's records indicated that, as of December 31, 1998, Compu-Link and Advanta had serviced Keystone-owned accounts worth, according to Keystone, approximately $227.2 million and $242.6 million respectively. In reality, however, Compu-Link had serviced approximately $14 million in Keystone accounts and Advanta had serviced approximately $6.3 million. Buenger asked Compu-Link and Advanta in writing to verify the size of Keystone's loan portfolios. CompuLink verified, without explanation, that it had serviced just over $227 million "of Keystone loans."^[6]

After receiving no response from Advanta for several weeks, Buenger followed up by telephone and fax. The Advanta manager in charge of the Keystone accounts, Patricia Ramirez, then sent Buenger a statement via FedEx indicating that Advanta had serviced only approximately $6.3 million in Keystone mortgages in 1998—a figure less than 1/38 of the $242 million Keystone reported.^[7] Several weeks later Buenger again telephoned Ramirez. Ramirez told Buenger that she had located another pool of "Keystone" mortgages worth approximately $236 million. Immediately after the call, however, Ramirez emailed Buenger stating that the $236 million in mortgages were owned by "Investor # 406," identified in the email as "United National Bank." Notwithstanding the titanic [1340] discrepancy, Buenger did not request a written clarification as required under Generally Accepted Auditing Standards (GAAS).^[8] Instead, relying on the earlier telephone call with Ramirez, Buenger simply concluded that the $242 million figure was accurate.

This was only the most eye-popping deficiency in the Keystone audit. Despite Keystone's classification as "maximum risk," Quay and Buenger used only the "test of reasonableness" to verify Keystone's self-reported interest income figures. Their test of "reasonableness" was based on fraudulent financial information Buenger obtained directly from Keystone. They made no effort to independently verify the accuracy of the figures as they were required to do under GAAS and Grant Thornton's own internal audit manual.^[9] In reality almost the entire $98 million that Keystone reported in interest income for 1998 did not exist—a fact that could have quickly been verified by requesting the monthly remittances Keystone received from its loan servicers.^[10] See FF 220-27. Nor does it appear that the auditors confirmed that any of the reported interest income was in fact deposited in Keystone's account by reviewing Keystone's general ledger. Compare Tr. 2502-10, Nov. 24, 2004 with FF 257.

Having failed to detect the Keystone fraud, Grant Thornton issued an unqualified audit opinion in April 1999 confirming that "the audit had been conducted pursuant to GAAS and that Grant Thornton had [1341] obtained reasonable assurance that the bank's financial statements were free from material misstatements." FF 253. Only four months later, however—in August 1999—OCC examiners discovered that Keystone had fraudulently reported over $98 million in interest income, FF 259, and over $450 million in assets (approximately 50% of the total assets reported by Keystone), id., and was "hopelessly insolvent," OCC Dec. 1. In September 1999, OCC ordered Keystone closed and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. The Keystone collapse cost the FDIC approximately $600 million to resolve.^[11] Tr. 351, Nov. 12, 2004.

The conduct of the two Grant Thornton auditors can only be described as strikingly incompetent. They failed to comply with GAAS as required under 12 U.S.C. § 1831m(f)(1). They failed to assess, in Grant Thornton's own words, the "maximum risk" Keystone represented. They relied upon a telephone conversation regarding the loan amount Advanta had serviced despite the fact that Advanta advised them in writing at least twice that Advanta had serviced only a fraction of the amount of loans Keystone's records showed. They failed to amend their audit plan to require a "test of details"—in violation of Grant Thornton's own manual—after Keystone was classified a "maximum risk" audit.

Accountants and auditors perform a critical role in insuring the integrity of financial institutions. See H.R.Rep. No. 101-54, at 301 ("Independent audits are an integral 'part of the system of controls designed to identify and report problenis in thrift's [sic] when they arise."). Although I recognize that "[a]uditors do not function as insurers and their reports do not constitute a guarantee," OCC Dec. 2, nonetheless "bank regulators, the bank's shareholders and the public," id., expect to rely on an auditor's professional competence and deserve better than what happened here.

[1] The OCC argues that this language limiting firm-wide liability applies only to "12 U.S.C. § 1818(e)'s removal and prohibition sanctions against professional firms. . . . There was no hint in the House Report that professional firms were not subject to [other] enforcement actions or that it would be inappropriate to impose non-prohibition remedial actions and [civil monetary penalties] against professional firms acting as IAPs." OCC's Br. 33. Not so. The House Report makes clear that the discussion of removal and prohibition sanctions is offered as simply one example of the "special" circumstances under which firm-wide liability might be applied. See H.R.Rep. No. 101-54(I), at 467, 1989 U.S.C.C.A.N. at 263.

[2] In 1998 alone, Keystone purchased over $960 million in mortgages for United.

[3] The Supervisory Agreement required that Keystone retain a national accounting firm to, inter alia,

(1) "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";

(2) reconcile Keystone's records and loan servicer records; and

(3) assess the appropriateness of all carrying values of entries on the balance sheet and income statement.

FF 133 (quoting OCC Ex. 353) (internal citations omitted).

[4] At that time Quay had worked on over 600 financial institution audits. Tr. 2159, Nov. 23, 2004. Buenger had over four years of auditing experience with Grant Thornton. See Tr. 2590, Nov. 24, 2004.

[5] Interest income can be verified in at least two different ways. See OCC Dec. 27-28 (discussing tests). The first method, a "test of reasonableness," requires only that the auditor examine the bank's self-reported figures and evaluate their reasonableness based on "expected relationships" with other information in the bank's financial statements. See FF 66-68, 180. The more searching method, a "test of details," requires the auditor to review the bank's "primary financial documents such as . . . remittances and cash receipts" and to "trace[] those items into bank records." FF 63-65.

[6] The Administrative Law Judge suggested that the reason for the discrepancy was that Keystone management influenced Compu-Link to pool the Keystone and United accounts when responding to Grant Thornton's request. See ALJ Dec. 9-10.

[7] Most of the mortgages were "high-loan-to value . . . second and third mortgage loans." FF 83.

[8] The American Institute of Certified Public Accountants (AICPA) adopted Generally Accepted Auditing Standards to govern the performance of a financial audit. See Ferriso v. NLRB, 125 F.3d 865, 871 (D.C.Cir.1997). Under 12 U.S.C. § 1831 m(f)(1) an auditor examining a federally insured depository institution is required to comply with GAAS. GAAS requires, inter alia, that an auditor exercise "due professional care" and "professional skepticism" in conducting an audit. See GAAS § .02 (2007); AICPA, Codification of Statements on Auditing Standards (AU) § 230.07 (2007). GAAS also specifies that "[w]henever the auditor has concluded that there is significant risk of material misstatement . . . of the financial statements . . . more experienced personnel[,] more extensive supervision [or] . . . expanded] . . . [auditing] procedures" may be required. See AU § 312A.17. GAAS also requires that all "significant" confirmations of financial data be obtained in writing. See AU § 330.29. Buenger's reliance on her telephone conversation with Ramirez that Ramirez had located an additional $236 million in "Keystone loans" flagrantly violated the requirement that all "significant" confirmations of financial data be in writing.

[9] See, e.g., FF 225 ("Grant Thornton did not follow the requirements of its audit manual to conduct a `Comprehensive' audit that called for primary reliance upon a `test of details' in connection with the audit of interest income from loans serviced by third-party servicers."); FF 230 ("Before an analytical test could be used for substantive purposes in place of a `test of details,' GAAS, as described in Grant Thornton's auditing manual, required Grant Thornton's auditors to identify and describe the internal controls pertinent to the assertions to be audited, test the controls to be relied upon, and re-evaluate such controls in light of the results to determine if reliance would be warranted."); FF 232 ("Where an entity's internal controls have not been tested for reliability, GAAS imposes a duty upon the auditor to independently verify all financial data generated internally or otherwise provided by the client's management before that data may be used for auditing purposes."); see also FF 166, 179, 185-86, 233-36.

[10] Had Quay and Buenger applied a "test of details" instead of a "test of reasonableness," they would have almost certainly detected the Keystone fraud. When, some months after the Grant Thornton audit, the OCC learned from Compu-Link and Advanta that Keystone's mortgage portfolios were grossly overstated, the OCC contacted Grant Thornton. Grant Thornton performed a "test of details" and uncovered the fraud in under one hour. See OCC. Dec. 30 (citing FF 226).

[11] Recent litigation in the District of West Virginia resulted in the entry of a $25 million judgment against Grant Thornton for losses that "`but for' Grant Thornton's gross negligence, the FDIC would have avoided." Grant Thornton LLP v. FDIC, Nos. 1:00-0655 et al., 2007 U.S. Dist. LEXIS 19379, at *100 (D.W.Va. Mar. 14, 2007).