Keystone auditors can't shift costs to lawyers, W.Va. SC rules

Steve Korris Nov. 17, 2011, 2:24pm


CHARLESTON, W.Va. (Legal Newsline) - Accountants who owe Federal Deposit Insurance Corporation about $23 million for failing to detect a big fraud at little Keystone Bank can't shift part of the cost to Keystone's lawyers, the West Virginia Supreme Court has decided.

The Justices on Wednesday affirmed McDowell Circuit Judge Rudolph Murensky, who ruled that a settlement between FDIC and the multi-state law of firm Kutak Rock barred a contribution claim from Grant Thornton accounting firm.

Keystone collapsed in 1999 after Grant Thornton issued a "clean audit" that overlooked manipulations and overstatements. Grant Thornton sued FDIC in 2000 to collect a fee and preserve its contribution rights.

FDIC filed a counterclaim alleging Grant Thornton added to the bank's losses.

In 2003, Kutak Rock agreed to pay FDIC $22 million.

The agreement provided that either side could move in appropriate proceedings for an order barring contribution or indemnification claims by non settling parties.

Grant Thornton sued Kutak Rock in McDowell County in 2004, alleging fraud, negligent misrepresentation, and tortious interference with the audit. Kutak Rock answered that the allegations amounted to an improper contribution claim.

In the federal case, district judge David Faber denied judgment in favor of Grant Thornton in 2005 after a bench trial that lasted 19 days.

Calculation of damages would take years, with Faber revising it to $23,196,917 this September.

In McDowell County, Murensky adopted Kutak Rock's position last year.

"The acts of both Kutak and Grant Thornton resulted in a single, indivisible injury," he wrote last year. "Kutak entered into a good faith settlement with the FDIC.

"Grant Thornton did not and chose to go to trial. Now Grant Thornton wants judgment against Kutak for the amount of the judgment against them, plus their attorney fees.

"If allowed, this would make Kutak pay for both their liability and Grant Thornton's liability. In effect, this would make Kutak pay for Grant Thornton's wrongdoing, as found by the district court.

"This would place a chilling effect on settlements, and settlements would cease to exist."

Grant Thornton appealed, and the Justices found Murensky correctly determined that Kutak Rock's settlement barred the claims.

Justice Menis Ketchum wrote that Keystone adopted a strategy of securitization in 1992. He wrote that Keystone acquired mortgage loans from sources throughout the country, pooled them, and sold interests in the pools.

"Fatal to Keystone's securitization strategy, however, was the fact that the underlying mortgage loans were high risk or high loan to value and included many borrowers who were substantially leveraged with little collateral," he wrote.

He wrote that bank managers concealed problems from directors, FDIC, and the public. He wrote that they falsified records and continued carrying $515 million in loans on the books after selling them.

He wrote that in 1998, the comptroller of the currency and directors agreed to retain an independent firm to audit their records.

"In accepting the assignment, the accounting firm rated the Keystone audit maximum risk," he wrote. "Nevertheless, the accounting firm concluded that Keystone's financial papers were free of material misstatements.

"Keystone, thus, continued to operate though, in reality, it was hemorrhaging losses and hopelessly insolvent."

He wrote that the comptroller of the currency closed the bank on Sept. 1, 1999, after discovering the $515 million overstatement.

David Thomas, Stephanie Thacker and Debra Price, all of Guthrie and Thomas in Charleston, represented Kutak Rock. John Tinney and John Cecil, both of Tinney Law Firm in Charleston, represented Grant Thornton.

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