Grant Thornton, LLP v. Office of Comptroller of the Currency

The Office of the Comptroller of the Currency (the comptroller) (defendant) could levy a fine against a bank or its independent contractor (institution-affiliated party) if either the bank or the institution-affiliated party participated in an unsafe or unsound practice in conducting bank business. First National Bank of Keystone (Keystone) sought to increase its business. In 1992, Keystone started a loan-securitization program and began buying subprime and high loan-to-value loans. By 1999, Keystone’s assets had increased tenfold. During this seven-year period, the comptroller periodically had examiners review Keystone’s records. In 1997, the examiners doubted the accuracy of Keystone’s financial statements and the effectiveness of the loan-securitization program. In May 1998, the comptroller initiated an enforcement action against Keystone. The comptroller and Keystone agreed that Keystone would retain an independent accounting firm to perform an external audit of Keystone’s books. Keystone hired Grant Thornton, LLP (plaintiff) to perform the audit. In April 1999, Grant Thornton issued an audit opinion, which stated that it had obtained reasonable assurance that Keystone’s financial statements were accurate. Several months later, the comptroller’s examiners discovered that Keystone had committed fraud and had been insolvent since 1996. Keystone had overstated its interest income and assets by about $550 million combined. In 2004, the comptroller initiated an administrative proceeding against Grant Thornton under the Financial Institution Reform, Recovery and Enforcement Act of 1989 (the financial-reform act). The comptroller claimed that Grant Thornton had recklessly engaged in an unsafe or unsound practice in conducting Keystone’s business by failing to meet generally accepted auditing standards (GAAS). At a hearing before an administrative-law judge (ALJ), the government showed that Grant Thornton had relied on the oral representations by Keystone officials regarding Keystone’s assets despite contradictory documents. Still, the ALJ recommended that the charges against Grant Thornton be dismissed because Grant Thornton had not acted recklessly. The comptroller rejected the recommendation, found that Grant Thornton had recklessly failed to comply with GAAS, and ordered Grant Thornton to pay civil penalties. The comptroller also issued a cease-and-desist order, limiting Grant Thornton’s right to conduct audits. Grant Thornton sued, challenging the comptroller’s decision and order.