Due to alleged overstatements of the value of loans held by First National Bank of Keystone…

Due to alleged overstatements of the value of loans held by
First National Bank of Keystone (Keystone), the federal Office of the
Comptroller of the Currency (OCC) began investigating Keystone. OCC required
Keystone to retain an auditor to determine the appropriateness of Keystone’s
accounting treatments of its purchased loans and securitization of loans.
Keystone hired Grant Thornton LLP to perform an audit of Keystone’s financial
statements. In April 1999, Grant Thornton issued an audit opinion to Keystone
stating that its 1998 financial statements—which showed shareholder equity of
$84
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Due to alleged overstatements of the value of loans held by
First National Bank of Keystone (Keystone), the federal Office of the
Comptroller of the Currency (OCC) began investigating Keystone. OCC required
Keystone to retain an auditor to determine the appropriateness of Keystone’s
accounting treatments of its purchased loans and securitization of loans.
Keystone hired Grant Thornton LLP to perform an audit of Keystone’s financial
statements. In April 1999, Grant Thornton issued an audit opinion to Keystone
stating that its 1998 financial statements—which showed shareholder equity of
$84 million—were fairly stated in accordance with GAAP. In fact, Keystone was
insolvent. Grant Thornton’s audit report stated that “This report is intended
for the information and use of the Board of Directors and Management of The
First National Bank of Keystone and its regulatory agencies and should not be
used by third parties for any other purpose.” Gary Ellis, a candidate to become
Keystone’s next president, reviewed in April 1999 the 1998 financial statements
audited by Grant Thornton. At the time, Ellis was president of another bank and
not an employee of Keystone. He became a candidate for the Keystone presidency
in late March 1999. Relying on the audit, Ellis decided to accept Keystone’s
offer to be its president at a base salary of $375,000. He also purchased
$49,500 in Keystone stock. When Keystone failed, Ellis claimed he lost over $2
million in compensation he would have earned had he not taken the Keystone
presidency, as well as losing the full amount of his investment in Keystone
stock. He sued Grant Thornton for negligent misrepresentation. Under the
Restatement (Second) of Torts, was Ellis a proper plaintiff to whom Grant
Thornton owed a duty not to be negligent when conducting the audit?

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