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514 F.3d 1328, 379 U.S.App.D.C. 419
Key52 Banks and Banking
Key52IV National Banks
Key170BVIII(K)1 In General
Key170Bk776 k. Trial De Novo. Most Cited Cases
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.
Key52 Banks and Banking
Key52IV National Banks
Key170BVIII(K)1 In General
Key170Bk776 k. Trial De Novo. Most Cited Cases
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.
