An administrative judge has ruled that the Office of the Comptroller of the Currency should not assess a $300,000 penalty against Grant Thornton LLP for its role in the failure of First National Bank of Keystone.
The recommendation is not binding on the OCC, which has 30 days to respond.
The Chicago auditing giant faces a separate $80 million suit filed by the Federal Deposit Insurance Corp. over the West Virginia bank's failure.
The FDIC sued Grant Thornton in 2003, accusing it of negligence in its role as Keystone's auditor. The agency is seeking two judgments, for $20 million and $60 million, plus interest. A federal court in West Virginia heard arguments in the case last summer, but the judge has not issued his ruling.
Though acknowledging the two suits were independent, Margaret Zagel, Grant Thornton's national managing principal for risk, regulatory, and legal affairs, said the administrative law judge's decision strengthened her firm's hand against the FDIC.
In a 35-page opinion, Judge Ann Z. Cook said that the auditing firm bore only limited responsibility for the 1999 downfall of the $1.1 billion-asset bank.
Keystone's senior management, "now convicted felons, purposefully falsified bank records and carefully manipulated the flow of information so as to thwart and confuse the work of Keystone's auditors, examiners and even third parties," Judge Cook wrote in the ruling, issued Friday.
"It is true that Grant Thornton missed the fraud. However … it did not do so 'recklessly,' as is required to impose the relief sought in this case," she wrote.
The OCC filed charges against the auditing firm in March 2004, arguing it should have discovered the massive scam at the bank earlier.
Ms. Zagel called the opinion a major victory. The judge "held in our favor on every fact," she said.
Keystone's management "lied directly to us and arranged for third parties to lie to us and auditors can't always catch lies. We try but we can't," Ms. Zagel said. "Those findings should be helpful and relevant in the other case."
Ms. Zagel said Grant Thornton would appeal the decision to a federal appeals court if the OCC decides to assess the fine. A spokesman for the OCC declined to comment.
Alfred J.T. Byrne, a former general counsel at the FDIC, said there are different thresholds of proof in each case. The OCC had to demonstrate Grant Thornton acted recklessly while the FDIC merely needs to show negligence, he said.
"I doubt very much whether the disposition in the OCC's enforcement case would at the end of the day affect the FDIC's civil suit," said Mr. Byrne, who now serves as general counsel at Virginia National Bank in Charlottesville.
