978-1285770178 Case Printout Case CPC-27-04 Part 1

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514 F.3d 1328, 379 U.S.App.D.C. 419

United States Court of Appeals,

District of Columbia Circuit.

GRANT THORNTON, LLP, Petitioner

Briefs and Other Related Documents

Key52 Banks and Banking

Key52IV National Banks

Key170BVIII(K)1 In General

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An appellate court reviews the Office of the Comptroller of the Currency‘s

interpretation of the Financial Institutions Reform, Recovery, and Enforcement

*1329 On Petition for Review of a Final Decision and Orders of the Office of the

Comptroller of the Currency.

Stanley J. Parzen argued the cause for petitioner. With him on the briefs were

Mark W. Ryan, Andrew J. Morris, and Miriam R. Nemetz.

Opinion for the Court filed by Senior Circuit Judge WILLIAMS.

Opinion concurring in the judgment filed by Circuit Judge HENDERSON.

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

* * *

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

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

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

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

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

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.

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.

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

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

(4) any independent contractor (including any attorney, appraiser, or accountant)

who knowingly or recklessly participates in-

…

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

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

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).

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

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

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

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

Second, we have some assistance from the Supreme Court on the meaning of a

phrase closely parallel to those in question here. In Reves 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

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,

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.

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

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

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

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

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

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.

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

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:

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.