Citations
- 535 F. Supp. 2d 676
Full opinion text
FINDINGS OF FACT AND CONCLUSIONS OF LAW
DAVID A. FABER, Chief Judge.
INTRODUCTION
A bench trial was held on May 17, 2004, through June 10, 2004. Closing arguments were held on August 20, 2004. Set forth herein are the court’s findings of fact and conclusions of law pursuant to Fed. R.Civ.P. 52.
Because this case was tried before the court as a bench trial, the court’s findings are presumed to be based on admissible evidence. Fishing Fleet, Inc. v. Trident Ins. Co., Ltd., 598 F.2d 925, 929 (5th Cir.1979); see also Chicago Title Ins. Co. v. IMG Exeter Associates Ltd. P’ship, 985 F.2d 553, 1993 WL 27392 at *4 (4th Cir.1993) (unpublished); see also Harris v. Rivera, 454 U.S. 339, 346, 102 S.Ct. 460, 70 L.Ed.2d 530 (1981) (“In bench trials, judges routinely hear inadmissible evidence that they are presumed to ignore when making decisions.”). Accordingly, the court finds it unnecessary to rule on each separate objection raised by the parties. The court has considered those objections relating to the evidence supporting the findings contained herein and, to the extent such objections relate to the evidence which the court cites in support of its findings, such objections are hereby overruled.
FINDINGS OF FACT
I. Background
1. The First National Bank of Keystone (“Keystone” or the “Bank”) located in Keystone, McDowell County, West Virginia, was incorporated in 1904 under the National Banking Act. GT Ex. 22. Prior to 1992, Keystone was a small community bank servicing primarily McDowell County and the surrounding area. Keystone was a national banking association within the Federal Reserve System, the deposits of which were insured by the Federal Deposit Insurance Corporation (“FDIC”). Keystone’s principal place of business was in West Virginia. Prior to his death in 1997, J. Knox McConnell, the Bank’s president and its largest shareholder, controlled Keystone. FDIC Ex. 431 at 2-3.
2. From at least 1992 through October 1997, Keystone’s board of directors consisted of two inside directors, J. Knox McConnell and Billie Cherry, and outside directors Michael Gibson, a local attorney; Andres Rago, a local doctor; Julian Bud-nick, a retired furniture salesman; and Louis Pais, a retired beer distributor. When McConnell died in October 1997, Terry Church replaced him on the board. At the same time, Billie Cherry became president of the Bank, and Melissa Quizen-beury, a long-time employee, became a director. Gibson, May 20, 2004, Tr. at 7, 10; FDIC Exs. 90, 124, 248 at 2; GT Exs. 208, 625. After McConnell’s death, Church controlled every material aspect of the Bank’s operations. Carney, May 19, 2004, Tr. at 69-71; Quay, June 4, 2004, Tr. at 13-14; FDIC Ex. 417 at 3. Church was also the executrix of McConnell’s estate, giving her control of the largest single block of Keystone stock. FDIC Ex. 248 at 2.
3. In December 1998, Julian Budnick resigned from the board and was replaced by his son Victor Budnick, an attorney. Budnick, May 18, 2004, Tr. at 86-88; Gibson, May 20, 2004, Tr. at 10. In March 1999, two new directors were elected: Bernard Kaufman, a retired attorney and investor, and Daniel Halsey, a local car dealer. Most of the outside directors owned sizable blocks of Keystone stock, and outside director Gibson actually bought more stock during the last few months of the Bank’s existence. Gibson, May 20, 2004, Tr. at 58; FDIC Ex. 248 at 2, FDIC Exs. 263, 880.
4. This civil action arises from the fraudulent operation and eventual collapse of Keystone. The fraud was conceived and perpetrated by senior bank management and continued for years until detected. In addition to McConnell, who died in October, 1997, before the Bank was closed, the principal perpetrators of the fraud, all Keystone insiders, were Terry Church, Michael Graham and Billie Cherry. FDIC Exs. 431, 432. Church, Graham and Cherry have all been convicted of numerous felonies, their convictions have been affirmed on appeal, and all three were sentenced to lengthy terms of incarceration. FDIC Exs. 430, 433, 434, 435, 558, 560, and 579. For several years the wrongdoers successfully concealed the fraud from the public, from the Bank’s examiners, from the Bank’s board of directors, and even from some of Keystone’s own senior management.
5.Central to the fraud was an investment strategy that involved securitization of high risk mortgage loans. Beginning in 1992, Keystone originated nineteen securi-tizations over a six-year period. GT Ex. 514. Keystone would acquire Federal Housing Authority (“FHA”) or high loan to value real estate mortgage loans from around the United States, pool a group of these loans, and sell interests in the pool through underwriters to sophisticated investors. GT Ex. 22. The pooled loans were serviced by third-party loan servi-cers; principal among these servicers were Advanta and Compu-Link. GT Ex. 22. Keystone retained residual interests (“residuals”) in each loan securitization. GT Ex. 22. The residuals were subordinated securities that would receive payments only after all expenses were paid and all investors in each securitization pool were paid. GT. Ex. 22. In short, Keystone stood to profit from a securitization only after everyone else was paid. The residuals were assigned a value that was carried on the books of the Bank as an asset. Over time, the residual evaluations came to represent a significant portion of the Bank’s book value. GT Ex. 22.
6. From 1993 until 1998 when the last loan securitization was completed, the size and frequency of these transactions expanded from about $33 million to approximately $565 million for the last one in September 1998. FDIC Ex. 431 at 3. All told, Keystone acquired and securitized over 120,000 loans with a total value in excess of $2.6 billion. FDIC Ex. 431 at 3. Keystone appeared to be an exceptionally profitable bank, whose assets purportedly grew from $107 million in 1992 to over $1.1 billion in 1999. FDIC Ex. 431 at 3; GT Ex. 22.
7. In reality, the securitization program proved highly unprofitable. Owing to the risky nature of many of the underlying mortgage loans, the failure rate was excessive. As a result, the residual interests retained by the Bank proved highly speculative and, in actuality, they did not perform very well. Malami, May 26, 2004, Tr. at 77-134; Potter, May 26, 2004, Tr. at 159-60; Potter, May 27, 2004, Tr. at 34-35. Keystone’s valuation of the residuals was greater than their market value. Quay, June 4, 2004, Tr. at 29; FDIC Ex. 286. McConnell, Church, and others concealed the failure of the securitizations by falsifying the Bank’s books. FDIC Ex. 431. Bogus entries hid the true financial condition of the Bank from the Bank’s directors, shareholders, depositors and regulators. FDIC Ex. 431. Among the bogus documents were false remittance reports prepared by Graham and given to examiners from the Office of the Comptroller of the Currency (“OCC”). At the same time, the wrongdoers embezzled large sums from the Bank, covering their theft with other false entries in the Bank’s books. FDIC Ex. 431.
8. The embezzlement of funds and the falsification of Keystone’s financial records were both integral parts of the fraudulent scheme. The scheme participants booked false credits to interest income to make it appear that Keystone was highly profitable and booked false debits to loans to fraudulently inflate assets and capital — which made this a very common (“a garden variety”) form of fraud. These fraudulent entries, and their reflection in the Bank’s financial statements, enabled Keystone’s corrupt management to continue to embezzle funds and conceal their earlier embez-zlements. Carmichael, May 24, 2004, Tr. at 36-41; Carmichael, May 25, 2004, Tr. at 30-31; Goldman, June 9, 2004, Tr. at 83-84.
9. One of the boldest acts of fraud designed to conceal the Bank’s true financial condition occurred when approximately $515 million in loans were sold by Keystone, but continued to be carried on the Bank’s books as assets. FDIC Ex. 431; GT Ex. 22. Discovery of these fraudulent entries would have revealed at once the fraud and the Bank’s insolvency, resulting in the Bank’s immediate seizure and closure by federal regulators. Johnson, May 17, 2004, Tr. at 148; C. Wilson, May 17, 2004, Tr. at 240.
II. Hiring of Grant Thornton
10. Keystone had a long history of conflict with federal bank examiners and regulators.- GT Ex. 22. In May, 1998, the OCC sought civil money penalties against Keystone’s management and board for repeatedly filing inaccurate call reports. Casey, June 1, 2004, Tr. at 105; Gibson, May 20, 2004, Tr. at 12; FDIC Ex. 64 at 5; FDIC Ex. 182 at 31; FDIC Ex. 183 at 48. Call reports are detailed statements of a bank’s financial condition that must be filed with the FDIC at the end of each quarter. Carney, May 19, 2004, Tr. at 103; FDIC Exs. 106,171, 270, 323.
11. In examinations from 1995 to 1998, the OCC repeatedly criticized Keystone’s management and records. GT Exs. 22, 243; FDIC Exs. 182, 183. The OCC asked for additional civil monetary penalties when it discovered over $100 million in errors in Keystone’s accounting records. Carney, May 19, 2004, Tr. at 62-63; Goldman, June 9, 2004, Tr. at 111. In its 1998 examination report, the OCC stated that Keystone’s management had demonstrated an unwillingness or inability to follow appropriate accounting guidelines and comply with applicable laws and regulations. FDIC Ex. 183 at 3; GT Ex. 22. In the same examination, the OCC stated that Keystone had not filed an accurate call report the last seven quarters, that the Bank was willfully violating brokered deposit restrictions, and that data was being manipulated to enhance Keystone’s capital position. FDIC Ex. 183 at 22, 41, 48. At one point, the OCC, suspecting that McConnell and Church were involved in an illegal kickback scheme concerning appraisal fees, made a criminal referral. FDIC Ex. 180; Quay, June 4, 2004, Tr. at 17-20; GT Ex. 22. The OCC discovered that Graham had made an “input error” of $31 million while entering data on loan residual evaluations, and criticized numerous other actions of Bank management designed to enhance Keystone’s capital position as reflected by the Bank’s records. FDIC Ex. 183 at 48. Over time a hostile relationship developed between Keystone officials and the regulators. GT Ex. 22. Church and McConnell (prior to his death) were at the center of this conflict. GT Ex. 22.
12.By the Spring of 1998, conflict between Keystone and the regulators had reached a critical juncture. In May of 1998, the OCC required Keystone to enter into a Formal Agreement obligating Keystone to take specific steps to improve its regulatory posture and financial condition. FDIC Ex. 64; Gibson, May 20, 2004, Tr. at 12. This included retaining a nationally recognized independent accounting firm. Gibson, May 20, 2004, Tr. at 14; Buenger, June 2, 2004, Tr. at 179-81; FDIC Exs. 64, 228. Discussions followed between Bank officials and defendant Grant Thornton LLP (“Grant Thornton”) concerning the possible employment of Grant Thornton as the Bank’s outside auditor. Grant Thornton knew that the Bank had significant accounting problems and was aware of the troubled relationship between the Bank and federal regulatory authorities. Buenger, June 2, 2004, Tr. at 179-81; Quay, June 3, 2004, Tr. at 15; FDIC Exs. 64, 228.
13. Between July 17 and August 21, 1998, appropriate officials at Grant Thornton approved acceptance of the Bank as a client. Quay, June 3, 2004, Tr. at 24. While the approval process was taking place, Stanley Quay, Grant Thornton’s partner who was to be in charge of the audit, drafted a proposal covering the services he expected Grant Thornton to perform for the Bank. Quay, June 3, 2004, Tr. at 24-25; FDIC Ex. 75. Under this proposal, there were two principal levels of service Grant Thornton was to perform for the Bank: (1) An audit of the Bank’s consolidated financial statements as of December 31,1998; and (2) Completion of certain “agreed-upon-procedures” relative to elements of the Bank’s financial statements beginning quarterly as of June 30, 1998. Quay, June 3, 2004, Tr. at 25-26.
14. On or about July 27,1998, the OCC indicated it had no objection to the hiring of Grant Thornton by the Bank. Gibson, May 20, 2004, Tr. at 67-68; FDIC Ex. 79. Grant Thornton began its work at the Bank on or about August 12, 1998. Carmichael, May 24, 2004, Tr. at 110-11; Casey, June 1, 2004, Tr. at 99; Gibson, May 20, 2004, Tr. at 69-70; FDIC Ex. 91.
15. On September 10, 1998, Quay prepared and signed an engagement letter by which Grant Thornton agreed to perform an audit of Keystone’s December 31, 1998, financial statements in accordance with Generally Accepted Auditing Standards (“GAAS”). Quay, June 3, 2004, Tr. at 28; FDIC Ex. 98. Billie Cherry signed the letter on behalf of Keystone on February 5, 1999. Quay, June 3, 2004, Tr. at 28-29; FDIC Ex. 98.
16. Stan Quay was the lead Grant Thornton partner on the engagement. FDIC Ex. 75. Susan Buenger, a junior manager, performed substantial work on the engagement. FDIC Ex. 75. Quay reviewed the Formal Agreement, and was familiar with its terms. Quay, June 3, 2004, Tr. at 18-19.
III. Grant Thornton’s Standard of Care
17. The American Institute of Certified Public Accountants (AICPA) is a national professional organization for CPAs. During the time period involved, the AICPA set the professional standards that applied to the work of CPAs. GAAS, promulgated by the AICPA, are the standards applicable to auditing functions. GAAS is generally accepted as the minimum standard of professional conduct in performing an audit. Generally Accepted Accounting Principles (“GAAP”) “encompass the convention, rules, and procedures necessary to define accepted accounting practice at a particular time.” Carmichael, May 24, 2004, Tr. at 11-14.
18. Due professional care under GAAS requires the auditor to exercise professional skepticism. Carmichael, May 24, 2004, Tr. at 23. Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence. Carmichael, May 24, 2004, Tr. at 27-29; Buenger, June 2, 2004, Tr. at 62; Goldman, June 9, 2004, Tr. at 19; GT Ex. 266 (AU 230.07). The auditor has the responsibility to plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement, whether caused by error or fraud. Carmichael, May 24, 2004, Tr. at 32-34; Buenger, June 2, 2004, Tr. at 62-63; Quay, June 3, 2004, Tr. at 151; FDIC Exs. 438, 473 (AU 110.02). “When considering the auditor’s responsibility to obtain reasonable assurance that the financial statements are free from material misstatement, there is no important distinction between errors and fraud.” GT Ex. 268 (AU 312.08).
19. An auditor should have a “show me” attitude, and not accept unsubstantiated assertions by management. Buenger, June 2, 2004, Tr. at 63; Carmichael, May 24, 2004, Tr. at 27-29; FDIC Ex. 728. When applying procedures to the client’s records, schedules and supporting data, the auditor should be on guard against accepting documents at face value. Buen-ger, June 2, 2004, Tr. at 63-64; Goldman, June 9, 2004, Tr. at 38-39; Carmichael, May 24, 2004, Tr. at 25.
20. If there is a high risk of fraud, the auditor ought to employ a heightened professional skepticism. Carmichael, May 24, 2004, Tr. at 29-31. Grant Thornton had many reasons to employ a heightened professional skepticism in its audit of Keystone’s financial statements. Grant Thornton rated the Keystone audit maximum risk. Buenger, June 2, 2004, at Tr. 64; Carmichael, May 24, 2004, Tr. at 29; FDIC Ex. 174. It was the highest risk audit on which Buenger and Quay had ever worked. Buenger, June 2, 2004, Tr. at 64; Quay, June 3, 2004, Tr. at 189. Quay and Buenger testified that their “fraud antenna” were up as high as they could get. Buenger, June 2, 2004, Tr. at 64; Quay, June 3, 2004, Tr. at 189.
IV. Grant Thornton’s Failure to Check the Remittances From Servicers
21. Due professional care is to be exercised in the performance of the audit and the preparation of the report. GT Ex. 262 (AU 150.02); GT Ex. 266 (AU 230.01).
22. The auditor has the responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Carmichael, May 24, 2004, Tr. at 32-36; FDIC Ex. 473 (AU 110.02).
23. The auditor should specifically assess the risk of material misstatement due to fraud and should consider that assessment in designing the audit procedures to be performed. Carmichael, May 24, 2004, Tr. at 34-36; FDIC Ex. 695 (AU 316.12).
24. As already noted, the risk of material misstatement in Keystone’s financial statements due to error or fraud was high, and Grant Thornton had already reached that conclusion before its year-end 1998 audit of Keystone commenced. Carmichael, May 24, 2004, Tr. at 94.
25. Buenger was responsible for testing Keystone’s interest income during the year-end, 1998 audit. Keystone’s management was reporting $98.8 million in interest income from loans owned by Keystone during 1998. Buenger, June 2, 2004, Tr. at 78. Over $65 million of the interest income was fraudulent and nonexistent. Carmichael, May 24, 2004, Tr. at 41.
26. Buenger performed the interest income testing in March, 1999. Buenger did not perform a test of details, which would have entailed looking for underlying support for the recorded item. Carmichael, May 24, 2004, Tr. at 49. Buenger did not examine remittance records of interest income. It would only have taken a short time to check the remittance records to verify the interest income. By tracking the ten remittances showing income for 1998 from loan servicer Compu-Link into Keystone’s bank statement, Buenger could have verified 80-90% of the interest income. Buenger, June 2, 2004, Tr. at 71-93; Carmichael, May 24, 2004, Tr. at 100-01; Carmichael, May 25, 2004, Tr. at 23-25, 154-57; G. Ellis, May 22, 2004, Tr. at 78-80, 86, 94-95; Johnson, May 17, 2004, Tr. at 184-87; Quay, June 3, 2004, Tr. at 154-56; Terry Depo., November 16, 2002, pp. 14-15, 17-25, 31-34, 36-45 (FDIC Ex. 902).
27. GAAS requires an auditor to obtain the best evidence available within the time constraints and money constraints applicable to the engagement. Buenger, June 2, 2004, Tr. at 90. In this case, it would have been less time consuming and costly to perform a test of details rather than the analytical test that Buenger performed because the bulk of the interest income came from one servicer. Grant Thornton would only need to look at twelve remittances to very effectively substantiate most of the interest income. Carmichael, May 24, 2004, Tr. at 100-01.
28. Instead, the primary procedure that Buenger relied on to test interest income was an ineffective “analytical test.” This test compared recorded interest income for the annual period to the average balance of loans outstanding during the same period, as reflected in the quarterly average balances reported in Keystone’s call reports, to calculate an annual yield. Carmichael, May 24, 2004, Tr. at 84-85, 97-98. Buenger then considered the reasonableness of this calculated expectation of the yield based on her understanding of the industry yield on the same types of loans. Buenger, June 1, 2004, Tr. at 180-81; Carmichael, May 24, 2004, Tr. at 84-85, 97-98; FDIC Ex. 164.
29. The analytical test that Buenger did to test interest income only considered information provided by management. Carmichael, May 24, 2004, Tr. at 90. The data that Buenger obtained in her analytical testing was not independent of the entity, was not from a person independent of those responsible for the amount being audited, was not developed under a reliable system with adequate controls, and Grant Thornton had determined that the prior auditors were incompetent. Carmichael, May 24, 2004, Tr. at 98-100. Buen-ger used only three items of information in her analytical test. Goldman, June 9, 2004, Tr. at 29-30; Quay, June 4, 2004, Tr. at 10-13. The first was the average balance of owned loans reported on Keystone’s call reports. Goldman, June 9, 2004, Tr. at 30. Buenger and Quay knew that the OCC had imposed civil money penalties on Keystone for filing inaccurate call reports; in fact, the OCC said that Keystone had not filed an accurate call report in the last seven quarters. Quay, June 4, 2004, Tr. at 10-11. Buenger decided not to use the call report information for March 31, 1998 because the OCC had required the call report to be restated, but she then proceeded to use the other 1998 call reports despite knowing that the OCC had determined those call reports were also inaccurate. Buenger, June 2, 2004, Tr. at 106-09. Thus, Buenger knew the call report information she used was of questionable reliability. Carmichael, May 24, 2004, Tr. at 89-90, 98-99; Goldman, June 9, 2004, Tr. at 32-33; Quay, June 3, 2004, Tr. at 151.
30. The second piece of information Buenger used in her analytical test was a chart of Keystone’s month end loan inventories for 1998 that was provided to her by Graham. According to Buenger’s memorandum to the file on Keystone’s loan purchasing, Keystone purchased loans throughout the year, and then sold them into securitizations. Buenger, June 2, 2004, Tr. at 96-98; FDIC Ex. 181. Buen-ger believed Keystone was funding these purchases with brokered deposits. Buen-ger, June 2, 2004, Tr. at 95. Keystone’s loan inventory should have dropped substantially at the time of the securitizations because the loans were sold into the secu-ritizations. Buenger, June 2, 2004, Tr. at 97-98. Keystone had two securitizations in 1998 — one in May for $275 million and one in September for $565 million. But according to the Graham chart, the Keystone loan inventory only dropped slightly in those months — with a $47 million drop in May, 1998 and a $32 million drop in September, 1998. FDIC Ex. 164. Finally, there were large discrepancies between the total loan inventories on Graham’s chart and the total loan inventories reflected in Grant Thornton’s workpapers on its agreed upon procedures. FDIC Ex. 164; Buenger, June 2, 2004, Tr. at 103-04. For example, as of June 30, 1998, Graham’s chart reflected Keystone owned $566 million in loans, but Grant Thornton’s reconciliation of loans as of the same date reflected an inventory of only $402 million. FDIC Ex. 164; Buenger, June 2, 2004, Tr. at 103-04. Buenger realized the numbers in Graham’s chart were not reasonable, and didn’t tie to any of the other numbers of which she was aware. Buenger, June 2, 2004, Tr. at 95-104, 130-31; Quay, June 4, 2004, Tr. at 8-10; FDIC Exs. 164, 915. Nevertheless, neither Buenger nor Quay asked Graham to explain why the loan balances that he provided Buenger made no sense. Buenger, June 2, 2004, Tr. at 103-04; Quay, June 4, 2004, Tr. at 9-10. Even though she had determined that Graham’s chart made “no sense,” Buenger continued to use the January through March 1998 loan inventories in Graham’s chart in her analytical test of income. Buenger, June 2, 2004, Tr. at 104-06, 109-10; Goldman, June 9, 2004, Tr. at 26-27, 150; Quay, June 3, 2004, Tr. at 150-51. Buenger violated GAAS by failing to investigate how Graham provided her bogus loan inventories that made “no sense,” by failing to investigate how Graham had made the $31 million “input error” on the residual valuation, and by using information that she knew contained material errors in her analytical test. Goldman, June 9, 2004, Tr. at 19-29, 31-32.
31. The third piece of information used by Buenger in her analytical test was a “remittance report,” reflecting $10 million in income from Compu-Link during the month of December, 1998. FDIC Ex. 165. One of Graham’s subordinates, Debbie Watkins, provided the “remittance report” to Buenger with a letter from Forest Krumm of Compu-Link. Buenger, June 1, 2004, Tr. at 187; Buenger, June 2, 2004, Tr. at 64-65. The Krumm letter states that “enclosed is a trial balance.” FDIC Ex. 165. The letter does not reference a “remittance report” as being enclosed. FDIC Ex. 165. The “remittance report” contains no identifying markings to indicate that it is a true Compu-Link record. FDIC Ex. 165. Under GAAS, Buenger should have investigated these anomalies, and could not rely on the “remittance report” until she cleared them up. Buenger violated GAAS by using data on the remittance report in her analytical test, and by failing to investigate the anomalies in the information she was provided. Buenger, June 2, 2004, Tr. at 64-65, 72-78; Carmichael, May 24, 2004, Tr. at 102-05; Carmichael, May 25, 2004, Tr. at 158-59, 169-70; FDIC Ex. 165.
32. Detailed testing is better and provides stronger evidence than analytical testing. Goldman, June 9, 2004, Tr. at 46-47. At trial, Buenger professed not to know that there was a difference between an analytical test and a test of details. Buenger, June 2, 2004, Tr. at 71. An auditor with Buenger’s level of training and experience should know the difference between an analytical test and a test of details. Goldman, June 9, 2004, Tr. at 46.
33. After the OCC reported the $500 million of missing loans in August, 1999, Grant Thornton’s first step was to look for check and wire remittances showing the interest income, but they could not find any evidence to support $500 million in loans. Carmichael, May 24, 2004, Tr. at 85-86; Quay, June 3, 2004, Tr. at 154-56.
34. In August, 1999, Buenger and Quay asked Graham and Church to provide proof of the income from the loans, and they came back and said they couldn’t find it. Quay, June 3, 2004, Tr. at 154-56. Graham and Church had every reason to produce whatever proof they could to support the income from loans. If Buenger and Quay had asked for the same proof in March, 1999, the result would likely have been the same: Church and Graham would not have been able to provide proof of the income. Buenger, June 2, 2004, Tr. at 79-90; Carmichael, May 24, 2004, Tr. at 101.
35. When Quay tested the more than $11 million in income from the residuals during the year-end, 1998 audit, he performed detailed testing procedures by actually examining the remittances, the checks, and wires from the servicers. Quay decided that the best way to test the residual income was to trace the actual remittances into the cash accounts. Buen-ger, June 2, 2004, Tr. at 78-79; Goldman, June 9, 2004, Tr. at 47-48; Quay, June 3, 2004, Tr. at 152-54; Carmichael, May 24, 2004, Tr. at 96; FDIC Ex. 188. The fact that Quay used detailed testing procedures to test the residual income is further evidence that Buenger should have done the same when she tested the interest income, especially given the fact that the amount of interest income Keystone was reporting was $98 million.
36. Under GAAS, AU 329.16 states the following concerning the reliability of data used in analytical procedures:
The auditor should assess the reliability of the data by considering the source of the data and the conditions under which it was gathered, as well as other knowledge the auditor may have about the data. The following factors influence the auditor’s consideration of the reliability of data for purposes of achieving audit objectives:
Whether the data was obtained from independent sources outside the entity or from sources within the entity.
Whether sources within the entity were independent of those who are responsible for the amount being audited.
Whether the system was developed under a reliable system with adequate controls.
Whether the data was subjected to audit testing in the current or prior year.
Whether the expectations were developed using data from a variety of sources.
FDIC Ex. 715.
37. In Grant Thornton’s audit of Keystone, potential misstatements in interest income would be apparent in the remittance records — as they were in August, 1999. Detailed evidence was readily available and was not voluminous. Carmichael, May 24, 2004, Tr. at 91-92; Johnson, May 17, 2004, Tr. at 184-87; FDIC Ex. 548.
38. Quay and Buenger had rated the Keystone audit a “G” or “comprehensive” audit. Carmichael, May 24, 2004, Tr. at 92-94, 96-97; FDIC Ex. 436. Although Grant Thornton’s audit manual states that a “C” rated audit generally concentrates on tests of details for income statement accounts, Quay and Buenger did not use tests of details for a majority of the accounts, and instead only used tests of details for two of the accounts. Goldman, June 9, 2004, Tr. at 51-52.
39. In March, 1999, given the high risk of material misstatement in Keystone’s financial statements, and the fact that Keystone’s $98 million in interest income was more than 90% of Keystone’s reported income, Buenger should have tested Keystone’s interest income for 1998 by reviewing the remittance records of interest income for 1998. Her failure to do so was a violation of GAAS. Carmichael, May 24, 2004, Tr. at 30, 84-85, 94-96.
40. If Buenger had followed GAAS by testing Keystone’s interest income for 1998 by reviewing the remittance records of interest income for 1998, it is more likely than not she would have discovered the loan inventory fraud in March, 1999, reported it to Keystone’s board, Keystone’s president Owen Carney, and the OCC, and Keystone would have been closed by March 30, 1999. Budnick, May 18, 2004, Tr. at 122; Buenger, June 2, 2004, Tr. at 79-80; Carney, May 19, 2004, Tr. at 101; Carmichael, May 24, 2004, Tr. at 31, 41-42; Carmichael, May 25, 2004, Tr. at 30-31; Gibson, May 20, 2004, Tr. at 34-37; Johnson, May 17, 2004, Tr. at 138-44, 148, 184-87; Potter, May 27, 2004, Tr. at 13; Quay, June 3, 2004, Tr. at 167-68; C. Wilson, May 17, 2004, Tr. at 240; FDIC Exs. 408, 548.
V. Grant Thornton’s Failure to Properly Prepare for the Confirmation Process
41. Keystone’s December 31, 1998 financial statements represented Keystone owned loans held for sale and loans receivable of approximately $579 million. FDIC Ex. 291 at 4. Approximately $548 million of the $579 million was ostensibly located at large loan servicing organizations. The loans serviced by Compu-Link and Advan-ta were recorded at $469.7 million, but this amount was fraudulently overstated by $431.8 million. Of this amount, $236 million in loans being serviced by Advanta were recorded as assets on Keystone’s books, when in fact the loans were owned by United National Bank (“United”). The $236 million were loans that United was to have sold to Keystone for inclusion in the December 1998 securitization that Keystone abruptly cancelled. Carmichael, May 24, 2004, Tr. at 41; Hale Depo., August 27, 2002, 51-55, 138-39, 155-59 (FDIC Ex. 889); J. Wilson, May 21, 2004, Tr. at 23-27.
42. The confirmation process was primary and critical to the Keystone audit. Buenger, June 2, 2004, Tr. at 131-32; Carmichael, May 24, 2004, Tr. at 46-47. Buenger was tasked with doing the confirmations. Buenger, June 2, 2004, Tr. at 6-23.
43. Professional skepticism is important in performing confirmation procedures, and evaluating the results of the confirmation procedures. Buenger, June 2, 2004, Tr. at 132; Carmichael, May 24, 2004, Tr. at 48; FDIC Exs. 439, 483 (AU 330.15).
44. Buenger had never worked on an audit of a bank involved in the securitization business before Keystone; she had no experience regarding the securitization business. Buenger, June 2, 2004, Tr. at 133-34.
45. The auditor’s understanding of the client’s arrangements and transactions with third parties is key to determining the information to be confirmed. The auditor should obtain an understanding of the substance of such arrangements and transactions to determine the appropriate information to include in the confirmation request. Buenger, June 2, 2004, Tr. at 134-35; Carmichael, May 24, 2004, Tr. at 54-55; FDIC Ex. 439 (AU 330.25); FDIC Ex. 483 (AU 330.15).
46. An understanding of the substance of the client’s arrangements and transactions with third parties is an important factor in determining the information to be confirmed. Buenger, June 2, 2004, Tr. at 135; FDIC Ex. 436 at 133.
47. Buenger violated GAAS, including AU 330.25, by failing to obtain an adequate understanding of Keystone’s arrangements and transactions with United, Compu-Link and Advanta. Carmichael, May 24, 2004, Tr. at 47-48, 52-56; Carmichael, May 25, 2004, Tr. at 18-21. Indeed, Buenger testified that she had no idea Keystone had a relationship with United. Buenger, June 2, 2004, Tr. at 135. Buenger did not investigate the details of that relationship, nor did she review or ask to review the written agreements between United and Keystone. Buenger knew little or nothing of the details concerning the Bank’s relationship with United. Buenger, June 2, 2004, Tr. at 135-40.
VI. Grant Thornton Failed to Confirm $85 Million in Loans that Were Allegedly in Transit
48. In order to conduct the audit in accordance with GAAS, Grant Thornton was required to confirm Keystone’s loans in the manner prescribed by GAAS. Confirmation is the process of obtaining and evaluating a direct communication from a third party in response to a request for financial information about a particular item affecting financial statement assertions. Goldman, June 9, 2004, Tr. at 52-53. The confirmation response must come to the auditor directly from the third party, and must be in response to the auditor’s confirmation request. Goldman, June 9, 2004, Tr. at 53-54.
49. According to Keystone’s books, as of December 31, 1998, and the lead sheet of supposed Keystone-owned loans that Buenger was trying to confirm, the Bank owned $85 million in loans that were being serviced by Compu-Link, but were transferred to Advanta for servicing effective January 15, 1999. These loans were in fact non-existent. Neither Advanta nor Compu-Link ever confirmed to Buenger that the $85 million in loans existed, that the loans were owned by Keystone, or that servicing of the loans was transferred from Compu-Link to Advanta. Buenger did nothing to investigate this discrepancy, but improperly relied upon the dubious remittance statement that was given to her with the Forrest Krumm letter, discussed above. Buenger, June 2, 2004, Tr. at 66-67, 141-44; Quay, June 3, 2004, Tr. at 127-32; FDIC Ex. 500. Buenger failed to confirm the $85 million in loans in accordance with GAAS. Goldman, June 9, 2004, Tr. at 52-57.
VII. Grant Thornton’s Failure with Respect To the Advanta Confirmation
50. The first confirmation response from Advanta was received by Grant Thornton on or about January 24, 1999, and went into a folder in the confirmation drawer in Grant Thornton’s Cincinnati office. That confirmation showed only $6 million in loans owned by Keystone were being serviced by Advanta, rather than the $242 million in loans Keystone was reporting. Burke Depo., December 13, 2002,16-21, 34-36, 129-30 (FDIC Ex. 898); Gunter Depo., December 20, 2002, 260-64 (FDIC Ex. 913); Carmichael, May 24, 2004, Tr. at 58-61; French Depo., November 19, 2002, 85-86 (FDIC Ex. 907); Ramirez Depo., September 26, 2002,165-71, 197-98 (FDIC Ex. 896); FDIC Exs. 175, 176, 177, 255, 500.
51. Buenger did not know she had the first January confirmation response in the confirmation drawer, and on March 16, 1999, she asked Advanta to send another confirmation. Carmichael, May 24, 2004, Tr. at 61-62; FDIC Exs. 255, 500. On March 17, 1999, Buenger received another confirmation response from Advanta, which again showed only $6 million in loans owned by Keystone being serviced by Advanta. Burke Depo., December 13, 2002, 20-25, 32-36, 129-40 (FDIC Ex. 899); Gunter Depo., December 20, 2002, 260-64 (FDIC Ex. 913); Carmichael, May 24, 2004, Tr. at 61-62; FDIC Exs. 169, 176,177, 257, 500.
52. Both Advanta confirmation responses identified Keystone as Investor 405. FDIC Exs. 176, 177, 500. Buenger never made any inquiry about what the investor numbers meant. She was not aware of the significance of the investor numbers. Buenger, June 2, 2004, Tr. at 66.
53. The “investor” is the owner. Buenger, June 2, 2004, Tr. at 152; Carmichael, May 24, 2004, Tr. at 63; Johnson, May 17, 2004, Tr. at 180. The number following “investor” identifies the owner of the loans. Investor 405 was Keystone and Investor 406 was United. Ramirez Depo., September 26, 2002, 141-42 (FDIC Ex. 896).
54. The independent auditor should be thorough in his or her search for evidential matter and unbiased in its evaluation. FDIC Ex. 480 (AU 326.25). A thorough and skeptical auditor would have determined what the investor numbers meant. Carmichael, May 25, 2004, Tr. at 65-66.
55. There was a $236 million discrepancy between the amount of Keystone-owned loans Advanta confirmed it was servicing in its two confirmation responses and what Keystone’s books said. Carmichael, May 24, 2004, Tr. at 61; French Depo., November 19, 2002, 87-92 (FDIC Ex. 907); FDIC Exs. 176,177, 235, 379, 500.
56. Buenger reviewed the second Ad-vanta confirmation response on or about March 17, 1999. Buenger, June 2, 2004, Tr. at 155; FDIC Exs. 169, 176, 177, 500. Buenger did not notify Keystone’s management, the OCC, or even Quay of the $236 million discrepancy. Buenger testified it kind of got put on the “backburner.” Buenger, June 2, 2004, Tr. at 155-57; Goldman, June 9, 2004, Tr. at 58; Carmichael, May 24, 2004, Tr. at 61-62.
57. Buenger can’t tell what she was doing during the 91 hours she billed to Keystone during the last two weeks of March, 1999 that was more important than resolving the $236 million discrepancy issue with Advanta. Buenger, June 2, 2004, Tr. at 156-57; FDIC Ex. 210.
58. Buenger’s failure to pursue the $236 million discrepancy was a violation of GAAS. If Buenger had followed GAAS and promptly investigated the $236 million discrepancy, she would have discovered the fraud, which would have led to the closure of the Bank. Budnick, May 18, 2004, Tr. at 122, 138-39, 145-46; Carmichael, May 24, 2004, Tr. at 30-31, 41-42, 66-69; Carmichael, May 25, 2004, Tr. at 30-31; Gibson, May 20, 2004, Tr. at 35-37, 59; Johnson, May 17, 2004, Tr. at 148; Kaufman, May 18, 2004, Tr. at 205-07; C. Wilson, May 17, 2004, Tr. at 240. Buenger’s evaluation and investigation of the Advanta confirmation response demonstrated a lack of professional skepticism and due care. Her actions were an extreme departure from GAAS. Carmichael, May 24, 2004, Tr. at 68-69.
59. Quay saw and initialed the Advanta confirmation response on March 23, 1999. Quay, June 3, 2004, Tr. at 133-34; FDIC Exs. 169,176,177, 500.
60. On April 7, 1999, Buenger called Patricia Ramirez, the Investor Reporting Manager for Advanta, and talked with her for three minutes. The word “United” was not used during the Buenger-Ramirez conversation. Buenger, June 2, 2004, Tr. at 67; Gunter Depo., December 20, 2002, 269-74 (FDIC Ex. 913); Ramirez Depo., September 26, 2002, 182-83 (FDIC Ex. 896); FDIC Ex. 282.
61. On April 7, 1999, one minute after the phone call between Buenger and Ramirez concluded, Ramirez sent an e-mail to Buenger reflecting that United, Investor No. 406, owned $236 million in loans being serviced by Advanta. The e-mail does not reflect that the $236 million in loans are owned by Keystone. Gunter Depo., December 20, 2002, 269-74, 294-95 (FDIC Ex. 913); Carmichael, May 24, 2004, Tr. at 70; FDIC Exs. 169, 500. There is nothing in Keystone’s records reflecting that Keystone owned loans under Investor No. 406, or under the name United National Bank, and there is nothing in the e-mail reflecting the $236 million in loans are owned by Keystone. Goldman, June 9, 2004, Tr. at 59-61.
62. All of the documentary information provided by Advanta to Grant Thornton was true and accurate. Buenger, June 2, 2004, Tr. at 162; Carmichael, May 25, 2004, Tr. at 144-45; Goldman, June 9, 2004, Tr. at 75; Johnson, May 17, 2004, Tr. at 179-81; C. Wilson, May 18, 2004, Tr. at 62-63. That information showed that United, not Keystone, owned the $236 million in loans, and the inevitable conclusion from that is that Keystone’s financial statements were materially misstated as a result of fraud. Carmichael, May 24, 2004, Tr. at 72-73; Johnson, May 17, 2004, Tr. at 121-26; FDIC Exs. 169, 178, 379, 500.
63. Buenger violated GAAS by failing to carefully evaluate and investigate the Advanta confirmation responses — especially the e-mail from Ramirez. If Buenger had followed GAAS, she would have found the fraud on April 7, 1999, and the Bank would have been closed in April, 1999. Budnick, May 18, 2004, Tr. at 122; Carney, May 19, 2004, Tr. at 101; Carmichael, May 24, 2004, Tr. at 30-31, 79; Carmichael, May 25, 2004, Tr. at 30-31; Gibson, May 20, 2004, Tr. at 34-37; Johnson, May 17, 2004, Tr. at 148; C. Wilson, May 17, 2004, Tr. at 240.
64. To comply with GAAS’s requirements of professional skepticism, Buenger should have called Ramirez back after receipt of the e-mail to determine why the email reflected that the loans were owned by United and requested that Ramirez confirm in writing that the $236 million in loans were owned by Keystone. Carmichael, May 24, 2004, Tr. at 70-71, 75-76; Carmichael, May 25, 2004, Tr. at 21-22; Quay, June 3, 2004, Tr. at 135-39. Buen-ger failed to take either step; in fact, she never spoke with Ramirez again after receipt of the e-mail. Buenger, June 2, 2004, Tr. at 66-69; Goldman, June 9, 2004, Tr. at 62.
65. In any event, the court does not believe Buenger’s testimony about the telephone call with Ramirez for the following reasons. First and most importantly, the physical evidence, i.e., the email, contradicts Buenger’s account of the phone call. According to Buenger, Ramirez told her “[tjhese belonged to Keystone at 12/31/98.” Buenger, June 2, 2004, Tr. at 28. However, one minute later, Ramirez sent Buenger an email which stated:
“Below is the information requested from investor 406 as of 12/31/98. Investor number 406, investor name United National Bank, number of loans, 6,283, month end balances $236,221,923.07.”
FDIC Exs. 754, 777. Ramirez’s email is completely at odds with the statements Buenger attributes to her. For this reason alone, Buenger’s testimony on this point is not credible.
66. Second, Joey Johnson, an OCC examiner, testified that, on August 25, 1999, he and other OCC examiners met with Grant Thornton to apprise them of the OCC’s discovery of major discrepancies in the loan balances serviced by Compu-Link and Advanta. Johnson, May 17, 2004, Tr. at 112; FDIC Ex, 379. At that meeting, Stan Quay told the OCC they had confirmed those balances for the year ended 1998 and they all reconciled. Johnson, May 17, 2004, Tr. at 112; FDIC Ex. 379. Thereafter, Grant Thornton retrieved copies of the confirmations and the confirmation requests from their Cincinnati office. Johnson, May 17, 2004, Tr. at 112; FDIC Exs. 379, 754, 755. According to Johnson, the examiners questioned Buenger about why she added the $236 million owned by United to the $6 million owned by Keystone. Johnson, May 17, 2004, Tr. at 125; FDIC Ex. 379. Buenger stated that code 406 loans were under a “bad name” and should have been included in the confirmed loans. Johnson, May 17, 2004, Tr. at 126; FDIC Ex. 379. Buenger did not tell the OCC that Ramirez had told her that the United loans were Keystone loans. Johnson, May 17, 2004, Tr. at 126. Nor did she offer FDIC Exhibit 281, her handwritten note of what Ramirez purportedly told her, to the OCC. Indeed, Grant Thornton never offered Exhibit 281 to the OCC while the Bank was still open. Johnson, May 17, 2004, Tr. at 127-28. The court found Johnson to be completely credible. Furthermore, the failure of Grant Thornton to produce Exhibit 281 to the OCC undermines Buenger’s credibility regarding what Ramirez supposedly told her.
67. Third, during her testimony, Ramirez was clear that she was absolutely certain regarding ownership of the loans under investor codes 405 and 406. Putting aside the purportedly speculative testimony, Ramirez testified that she had never been confused regarding the ownership of the loans. Ramirez Depo., September 26, 2002, 143 (FDIC Ex. 896). The court found Ramirez to be a totally credible witness. Indeed, her credibility was strengthened by her candor in explaining that she didn’t have a specific recollection of her conversation with Buenger.
68. Fourth, as to certain points, Buen-ger’s testimony regarding scrutiny of her confirmation process during the last week of the Bank’s existence and what she did was contradicted by Michael Gibson and Gary Ellis, both of whom the court found to be completely credible.
69. Finally, the demeanor of Buenger on the witness stand, when taken together with her interests in the case, leads the court to believe she was not entirely truthful.
70. During the trial, Grant Thornton filed a motion to exclude the speculative testimony of Patricia Ramirez. By Order entered September 29, 2005, that motion was denied. The court’s findings regarding the phone call between Buenger and Ramirez do not depend on the purportedly speculative testimony. However, for the following reasons, the court denied the motion to exclude it.
71. Ramirez testified via video deposition. The disputed portion of her testimony concerns a conversation she had with Susan Buenger on April 7, 1999. Buenger testified that Ramirez told her “[the United loans] belonged to Keystone at 12/31/98.” Buenger, June 2, 2004, Tr. at 28. Ramirez testified that, although she has no specific recollection of the conversation with Buenger, she never would have made the remarks Buenger has attributed to her.
72. At the outset, the court notes that much of the deposition testimony that Grant Thornton argues is speculative is not, in fact, speculative. See e.g., Ramirez Depo., September 26, 2002, 186 (FDIC Ex. 896) (Q: Is there any possibility that you told Susan Buenger that the United loans were actually Keystone loans? A: No. Q: How do you know? A: Because I know who owned the loans. 405 did not belong to 406.). To borrow the FDIC’s analogy, someone might ask me whether I have ever introduced myself as Abraham Lincoln and, although I cannot recall the details of every conversation I have ever had, I could answer that question under oath in the negative without speculating.
73. As to the speculative testimony, Federal Rule of Evidence 406 provides:
Evidence of the habit of a person or of the routine practice of an organization, whether corroborated or not and regardless of the presence of eyewitnesses, is relevant to prove that the conduct of the person or organization on a particular occasion was in conformity with the habit or routine practice.
74. According to the Fourth Circuit, in determining whether examples of specific conduct of a party are numerous enough and sufficiently regular to be admissible as evidence of a pattern of conduct or habit, the key criteria are adequacy of sampling and uniformity of response or ratio of reactions to situations. Wilson v. Volkswagen of America, Inc., 561 F.2d 494, 511 (4th Cir.1977).
75.The evidence in this case showed that Advanta was in the business of servicing loans. Investor reporting and responding to confirmation requests were so commonplace that Advanta had an entire department dedicated to those tasks, and Patricia Ramirez was the manager of that department. At the time period in question, Daniel Burke worked in the investor reporting department at Advanta and had primary responsibility for Keystone’s loans. Burke testified that when a confirmation request was received, “you’d pull the file, get the information, give it to the supervisor or manager to verify and then send it to them.” Burke Depo., December 13, 2002, 9 (FDIC Ex. 898). Burke further testified that the supervisor reviewed the information before it was sent to the requesting party to make sure the information was correct. Burke Depo., December 13, 2002, 17 (FDIC Ex. 898). He testified that Advanta responded to confirmation requests from auditors “numerous times.” Burke Depo., December 13, 2002, 17 (FDIC Ex. 898). He responded to two confirmation requests from Grant Thornton regarding Keystone’s loans, one in January of 1999 and the other in March of 1999. Both of these responses were correct, indicating that Advanta was servicing approximately $6 million dollars worth of loans on Keystone’s behalf. Burke testified that in the four or five years he worked with Ramirez she never confused one investor with another investor. Burke Depo., December 13, 2002, 28-29 (FDIC Ex. 899). Ramirez herself testified that she had never made a mistake concerning investor numbers. Ramirez Depo., September 26, 2002, 189 (FDIC Ex. 896); see also Romero Depo., September 25, 2002, 109-10 (FDIC Ex. 905) (“[T]here’s no doubt in our minds, the investor number is such an integral part of how we service loans, it’s the thing that drives where payments go, where remittances go. There’s no question of that ever being inaccurate.”).
76. Ramirez’ unequivocal testimony was that the loans boarded in Investor No. 406 belonged to United National Bank.
Q: And as of December 16, 1998, who did you understand to own the loans boarded in Investor No. 406?
A: United National Bank.
Q: And to whom did you authorize information access for Investor No. 406?
A: United National Bank.
Q: Now, do you recall ever becoming confused about who owned the loans in Investor No. 406?
A: No.
Q: Do you ever recall having any doubt that it was United National Bank that owned the loans in Investor No. 406?
A: No.
Q: Please—
A: That’s who we reported and remitted to.
Q: And the reporting and remitting you did to United National Bank was something you did as part of your job?
A: Correct.
Q: How familiar are you with investor numbers.
A: Very familiar. Everything runs off of investor numbers.
Ramirez Depo., September 26, 2002, 142-43 (FDIC Ex. 896). Her responses in this regard were not speculative. Ramirez further testified that, in sending the email, she specifically “felt like I had to make sure that I identified the information being provided was not Keystone’s but was United’s.” Ramirez Depo., September 26, 2002,175 (FDIC Ex. 896).
77. Upon further questioning, Ramirez testified:
Q: Now, if Ms. Buenger had asked you, if she said, “I’m looking for 244 million in loans that Advanta is servicing on behalf of Keystone,” what would you have said?
A: I would have told her what the total amount of loans were being serviced for Keystone did not equal what she was looking for.
Q: If she said, “Hey, I think what I should do is add up Investor 405 and 406,” what would you say?
A: I would have said that would have been incorrect.
Q: If she gave you any indication that she intended to sum the unpaid principal balance in Investor Nos. 405 and 406 to arrive at the loans serviced by Advanta on behalf of Keystone, what would you have said?
A: I would have told her it was wrong.
Q: If she had hit the reply button on the e-mail and said to you, “What the heck is United,” in response to your e-mail, “Tell me what United is and why you’re sending me United when I’m trying to confirm Keystone loans,” what would you have written back in response to that reply?
A: I would have said that Investor 406 — or United National Bank was the owner of the loans in Investor 406.
Ramirez Depo., September 26, 2002, 179-80 (FDIC Ex. 896). The court believes that the foregoing testimony is admissible under F.R.E. 406 for the reasons cited above. However, out of an abundance of caution, the court has disregarded this and any other arguably speculative testimony by Ramirez in making its findings and conclusions.
78.The Court finds that Ramirez did not state to Buenger that “the loans coded under the United name actually belonged to Keystone as of December 31, 1998,” as reflected in Buenger’s handwritten note. Buenger, June 2, 2004, Tr. at 67, Gunter Depo., December 20, 2002, 269-74 (FDIC Ex. 913); Carmichael, May 24, 2004, Tr. at 69-70; Ramirez Depo., September 26, 2002, 143-15; 179-80, 185-89, 192-93, 196, 198-200, 222, 247-49 (FDIC Ex. 896). Ramirez clearly knew that United owned the $236 million in loans, as she worked with United with respect to the loans on a regular basis, repeatedly provided United with documentation of its ownership of the loans and never demonstrated any confusion about who owned the loans. Ramirez Depo., September 26, 2002, 143-45; 179-80, 185-89, 192-93, 196, 198-200, 222, 247-49 (FDIC Ex. 896); J. Wilson, May 21, 2004, Tr. at 27. Moreover, if Ramirez had made such a statement, GAAS would require that Buenger obtain written confirmation of such a significant fact, in order to avoid a swearing match over what was said. Carmichael, May 24, 2004, Tr. at 71-73, 81-82; Goldman, June 9, 2004, Tr. at 69, 72-73. The auditing standards require an auditor to obtain the best evidence they can within the time constraints and money constraints set on them. Goldman, June 9, 2004, Tr. at 71. A written confirmation is the highest form of evidential matter an auditor can receive. Goldman, June 9, 2004, Tr. at 71. There, were no time or money constraints that would prevent Buenger from obtaining the best evidence — a written confirmation from Ramirez that Keystone owned the loans. Goldman, June 9, 2004, Tr. at 72-73. Oral confirmations should be documented in the workpapers. If the information in the oral confirmation is significant, the auditor should request the parties involved to submit written confirmation of the specific information directly to the auditor. As previously stated, Buenger failed to obtain any such written confirmation. Carmichael, May 24, 2004, Tr. at 71-73, 81-82; Goldman, June 9, 2004, Tr. at 54-55; FDIC Ex. 439 (AU 330.29).
79. The $236 million exception was a significant auditing question, but Quay was not involved in evaluating its significance. Carmichael, May 24, 2004, Tr. at 77-78.
80. The auditor with final responsibility for the audit should direct assistants to bring to his attention significant accounting and auditing questions raised during the audit so that he may assess their significance. GT Ex. 267 (AU 311.12). Quay violated GAAS by failing to supervise or participate in the evaluation of the Advan-ta confirmation responses. Carmichael, May 24, 2004, Tr. at 56-58, 77-79; FDIC Exs. 709, 710.
VIII. Grant Thornton Issues its Audit Report
81. On March 24 and 25, 1999, Quay presented several members and prospective members of Keystone’s board and Keystone’s shareholders with draft copies of Keystone’s December 31, 1998 financial statements and told them that Keystone was going to get a clean opinion on its financial statements. Budnick, May 18, 2004, Tr. at 122-30; G. Ellis, May 22, 2004, Tr. at 13-14, 46; Gibson, May 20, 2004, Tr. at 54-56; Kaufman, May 18, 2004, Tr. at 198-99, 219-20; Quay, June 4, 2004, Tr. at 74-77, 84-85; FDIC Exs. 263, 882. At the shareholders meeting the next day, Quay also distributed copies of Keystone’s financial statements. G. Ellis, May 22, 2004, Tr. at 14-15; Kaufman, May 18, 2004, Tr. at 199-200; Quay, June 4, 2004, Tr. at 78-79, 106-09; FDIC Ex. 172. Neither Quay nor Buenger made any disclosure to the Board or shareholders of the $286 million discrepancy that Buenger had discovered. Budnick, May 18, 2004, Tr. at 128-29; Carmichael, May 24, 2004, Tr. at 64; Quay, June 4, 2004, Tr. at 78, 80. Quay violated GAAS by making statements to Keystone’s directors, prospective directors, and officers that Keystone was going to receive a “clean opinion” on its financial statements when he had no reasonable basis for making such statements. Carmichael, May 25, 2004, Tr. at 27-28,175.
82. On April 19, 1999, Grant Thornton issued and delivered to Keystone’s board its audit report stating that Keystone’s financial statements were fairly stated in accordance with GAAP, and reflecting a shareholder’s equity of $184 million. Bud-nick, May 18, 2004, Tr. at 131-83; G. Ellis, May 22, 2004, Tr. at' 23-24, 48-50; Ellis Ex. 4; FDIC Exs. 291, 621. In fact, Keystone was insolvent as of year-end, 1998. Carmichael, May 24, 2004, Tr. at 41. The audited financial statements provided by Quay to the board on April 19, 1999, were substantially the same as the financial statements Quay had provided board members and shareholders in March, 1999. Budnick, May 18, 2004, Tr. at 136-37; Kaufman, May 18, 2004, Tr. at 203-05; FDIC Exs. 291, 296. Grant Thornton’s audit report violated GAAS by offering a “clean opinion” on Keystone’s financial statements without having adequate evidence to support that opinion and having substantial evidence that contradicted the opinion. Carmichael, May 24, 2004, Tr. at 75; Carmichael, May 25, 2004, Tr. at 28-30.
83. Because Keystone’s financial statements reflected ownership of more than $500 million in loans that were not in fact owned by Keystone, the financial statements were materially misstated. Quay, June 4, 2004, Tr. at 88.
84. Grant Thornton represented to Keystone’s board that it had encountered no significant difficulties in performing the year-end, 1998 audit. FDIC Ex. 296.
85. Keystone’s board of directors and Gary Ellis reasonably relied on Grant Thornton’s report. The report led Keystone’s board to believe that the Bank was in good financial condition. Based on Grant Thornton’s report, Keystone’s board continued to declare dividends and operate the Bank. If Grant Thornton had exercised due professional care in connection with its audit, the fraud would have been discovered. If Grant Thornton had disclosed to Keystone’s board or the OCC the fact that Keystone was carrying over $400 million in loans on its books that were not owned by Keystone, the Bank would have been closed by April 21, 1999. Budnick, May 18, 2004, Tr. at 122, 138-39, 145-46; G. Ellis, May 22, 2004, Tr. at 55; Gibson, May 20, 2004, Tr. at 35-37, 59; Johnson, May 17, 2004, Tr. at 148; Kaufman, May 18, 2004, Tr. at 205-07; Potter, May 27, 2004, Tr. at 14; Quay, June 4, 2004, Tr. at 74-76; C. Wilson, May 17, 2004, Tr. at 240; FDIC Ex. 341.
IX. Gary Ellis Becomes President of Keystone
86. In 1984, Gary Ellis was President of the Bank of Dunbar. The Bank of Dunbar was later merged into United Bank at which time Ellis joined the management team at United, eventually becoming its President. J. Wilson, May 21, 2004, Tr. at 44-46.
87. From the time of the merger with the Bank of Dunbar until the time Ellis left United, United more than doubled in size. Ellis was instrumental in the growth of United. J. Wilson, May 21, 2004, Tr. at 47.
88. In 1998, United National Bank merged with George Mason Bankshares of Virginia. G. Ellis, May 22, 2004, Tr. at 9. In the spring of 1999, following the merger, Ellis voluntarily began looking for employment outside United. G. Ellis, May 22, 2004, Tr. at 10. Ellis had dealt with Keystone in the past, and on March 19, 1999, Billie Cherry, Chairman of Keystone’s board, invited Ellis to attend Keystone’s annual shareholders meeting on March 25, 1999. G. Ellis, May 22, 2004, Tr. at 10-13. During that call, Cherry suggested that Ellis should consider becoming president of Keystone. G. Ellis, May 22, 2004, Tr. at 10-13.
89. Ellis was not fired or told to leave United, had no deadline for leaving United, and could have remained at United rather than leaving for the Keystone position. G. Ellis, May 22, 2004, Tr. at 9-10.
90. In late March 1999, Ellis visited Keystone and discussed with Keystone directors Gibson, Budnick, Kaufman and Church his potential employment as president of the Bank. Gibson received “pretty glowing recommendations” about Ellis. Gibson, May 20, 2004, Tr. at 85. Ellis received a rolling two-year contract at $375,000 per year with benefits. G. Ellis, May 22, 2004, Tr. at 33-36; Gibson, May 20, 2004, Tr. at 90. The contract discussions included compensation for board meetings and committee meetings. G. Ellis, May 22, 2004, Tr. at 34; Gibson, May 20, 2004, Tr. at 90. The total value of the final contract between Ellis and Keystone was approximat