Gariety v. Grant Thornton, Llp, 03-1629.

CourtUnited States Courts of Appeals. United States Court of Appeals (4th Circuit)
Citation368 F.3d 356
Docket NumberNo. 03-1629.,03-1629.
PartiesDebra GARIETY; Horst O. Bischoff, as Trustee of Bischoff Family Trust; Pamela Hanyzewki; John J. Cline; Thomas Allen, Individually and on Behalf of all Others Similarly Situated; Thomas J. Shannon, Jr., as Trustee, Natural Parent and Guardian of; SMV Holding Company, PLL; Vincent Paul; Charles Thornton, Individually and as Trustee, SEP; Fred L. Millner; Warren H. Hyde; Caryl Hyde; Teen Response, Incorporated; Elizabeth B. Sponseller; Michael J. Sponseller; Terry Overholser; and Lawrence Corman, on behalf of themselves and all others similarly situated, Plaintiffs-Appellees, and Crystal N. Shannon; City National Bank, a banking corporation; Coast Partners Financial Corporation, formerly known as Coast Partners Securities, Incorporated, a California Corporation, Plaintiffs, and Federal Deposit Insurance Corporation, Intervenor-Plaintiff, v. GRANT THORNTON, LLP, Defendant-Appellant, and Herman & Cormany; Michael Graham; Billy Jean Cherry; Terry Lee Church; Estate Of J. Knox McConnell, Philip C. Petty, Administrator; Louis J. Pais; Michael F. Gibson; Andrew L. Rago; Julian G. Budnick; Gary Ellis; J & J Construction Company; Hermie Church; Diversified Capital Markets; Michael Patterson; E.E. Powell & Company, Incorporated; John Does 1-100; Robert Wagner; Quantum Capital Corporation; Ferris, Baker, Watts, Incorporated; Scott & Stringfellow; Nancy Vorono; Gunnallen Financial Incorporated; Jack Ingold; Regis Securities Corporation, a/k/a Quantum Securities Corporation; Nancy Vargo; Tom Dooley; Garvin Tankersley; Ellen Turpin; Lora McKinney; Michael Patterson, Incorporated; Kutak Rock; Alan D. Strasser, An Individual; Michael D. Lambert, An Individual; Vida Headrick; Evelyn Herron; Jeanie Wimmer; Virginia Burks; Debra Bailey; Susan Dalton; Robbin White; Constance Evans, Defendants, and Melissa Quizenbeury; Hog Pen Enterprises, Incorporated; JLT Enterprises; Keystone Hardware; C & H Ranch; Marbil, Incorporated; HC & TC Trust; Dolores Hughes; Bill Pack; Wendy Pack; Tammy Fisher; Larry Fisher; Herman Fisher; Judy Kahl; Andrew T. Rapoff; Donna Marie Rapoff; Michael A. Rapoff; Danny Rapoff; Nancy E. Kelanon; David Rapoff; Andrew J. Rapoff; Michael J. Cherry; Roslyn A. Cherry; Leah M. Cherry; Rachel L. Cherry; Daniel T. Halsey; Sunrise Automotive Group, Incorporated; Nancy E. Kelahan; Terry L. Rose, Intervenors-Defendants, and H. Lynden Graham, Jr., Trustee, v. Advanta Mortgage Corporation USA; Celink, Incorporated, formerly known as Compulink Service, Incorporated, Third Party Defendants, and Hargrave Military Academy, a non-profit corporation; Waynesburg College, a non-profit corporation; Michael Cherry; Timmy Cline; Vickie Cline; The Office Of The Comptroller Of The Currency; First Commerce Of America, Parties in Interest. United Bank, Incorporated, formerly known as United National Bank; Terry Witt; Gregory Witt; David Witt; Scott Witt; Gary Witt; Dennis Witt, Movants.
Decision Date12 May 2004

ARGUED: Stanley Julius Parzen, Mayer, Brown, Rowe & Maw, L.L.P., Chicago, Illinois, for Appellant. Sigmund S. WissnerGross, Heller, Horowitz & Feit, P.C., New York, New York, for Appellees. ON BRIEF: John H. Tinney, Kimberley R. Fields, The Tinney Law Firm, Charleston, West Virginia; James C. Schroeder, Daniel G. Hildebrand, Mayer, Brown, Rowe & Maw, L.L.P., Chicago, Illinois; Mark W. Ryan, Andrew J. Morris, Craig Isenberg, Mayer, Brown, Rowe & Maw, L.L.P., Washington, D.C., for Appellant. Joshua I. Barrett, Ditrapino, Barrett & Dipiero, P.L.L.C., Charleston, West Virginia, for Appellees.

Before NIEMEYER and SHEDD, Circuit Judges, and HAMILTON, Senior Circuit Judge.

Affirmed in part, vacated in part and remanded by published opinion. Judge NIEMEYER wrote the opinion, in which Judge SHEDD and Senior Judge HAMILTON joined.

NIEMEYER, Circuit Judge:

Grant Thornton LLP, a national accounting firm, appeals the district court's interlocutory order certifying this action as a class action to adjudicate the plaintiffs' securities-fraud claims against Grant Thornton in connection with the 1999 demise of the First National Bank of Keystone in Keystone, West Virginia. Grant Thornton contends principally that the district court, in finding that the predominance requirement of Federal Rule of Civil Procedure 23(b)(3) was satisfied, erred in accepting at face value the plaintiffs' allegations that the reliance element of their fraud claims could be presumed under a "fraud-on-the-market" theory without determining whether the plaintiffs had any basis for making the allegations. The district court, concerned about making findings that would overlap with and therefore prejudice issues on the merits, concluded that the plaintiffs' assertions alone were "enough at the certification stage" to justify certifying a class action under Rule 23(b)(3).

As more fully discussed below, we conclude that the district court's reliance on mere assertions did not fulfill the requirements that the district court take a "close look" at relevant matters, conduct a "rigorous analysis," and make findings in determining whether the plaintiffs have demonstrated that the requirements of Rule 23(b)(3) have been satisfied. We conclude, however, that the district court did not abuse its discretion, as argued by Grant Thornton, in its appointment of two of the plaintiffs as lead class representatives. Accordingly, we affirm in part and vacate in part the district court's certification order, and we remand this case for further proceedings.


Until the early 1990s, the First National Bank of Keystone ("Keystone") was a relatively small community bank in McDowell County, West Virginia. In 1992, Keystone embarked on a growth strategy through which it became a niche lender focusing on subprime mortgage loans (i.e., loans extended to higher risk borrowers), and in late 1993, it began buying Federal Housing Authority home improvement loans, pooling them, and selling shares in them to investors — a process called loan securitization. To pursue its loan securitization business, Keystone entered into financing relationships with other banks, paying higher than normal interest rates. In 1997, Keystone began to securitize its own high loan-to-value loans made to highly leveraged borrowers with little or no collateral. During these years, Keystone made its highly risky securitization business its principal business. From 1992, when Keystone had assets of $107 million, to 1999, Keystone's business grew almost tenfold. In 1995, Keystone was reported to be one of the most profitable community banks in the nation, and by 1999, it reported assets of $1.1 billion. Keystone was listed No. 1 in American Banker's June 1999 list of "the 75 most profitable large community banks," with a "whopping" 7.24% return on average assets in 1998.

From 1992 until 1999, the Office of the Comptroller of the Currency ("OCC") examined Keystone's books annually, but the examinations proved unsatisfactory to OCC because of mutual distrust and the bank's resistance to examiners' findings. The examinations repeatedly uncovered unsafe and unsound banking practices and regulatory violations, yet OCC enforcement actions proved largely ineffective. In May 1998, pursuant to an agreement with the OCC to hire an outside auditor, Keystone hired the accounting firm of Grant Thornton LLP. Grant Thornton issued an audit report on April 19, 1999 (the "Audit Report"), which revealed no problem in Keystone's statement of assets. The July 1999 edition of Walker's Manual of Unlisted Stocks included a one-page write-up of Keystone that identified Grant Thornton as Keystone's auditor and that reported summary figures taken from Grant Thornton's Audit Report. During the period that Grant Thornton was Keystone's accountant, Grant Thornton also participated to some extent in the preparation of Keystone's "Call Reports," which Keystone filed quarterly with the Federal Deposit Insurance Corporation ("FDIC"). These Call Reports were available to the public on the FDIC website.

While OCC's examinations of Keystone generally focused on the credit risk associated with subprime mortgage loan securitizations, it was not until August 1999 that OCC independently verified that Keystone was unable to substantiate $515 million in loan assets, constituting almost one-half of its assets. On September 1, 1999, the OCC announced that Keystone was insolvent, and it closed the bank. A few months later, the FDIC's Bank Insurance Fund determined that the Keystone failure would cost the Fund between $750 and $850 million, making the loss one of the largest in history. A subsequent investigation by the Office of Inspector General determined that Keystone had been suffering heavy losses early in its growth period and that by late 1996 Keystone had become insolvent. Keystone concealed its financial condition by continuing to record loans as assets even after they had been sold to investors as part of a securitized loan pool. The Office of Inspector General concluded that "[a]lleged fraudulent accounting practices, uncooperative bank management and reported high profitability may have all served to mask the bank's true financial condition from OCC examiners."

The plaintiffs, who were purchasers of Keystone stock during the period after Grant Thornton issued its Audit Report on April 19, 1999, and before the OCC closed the bank on September 1, 1999, commenced this action to recover damages suffered by reason of the bank's failure. The plaintiffs proposed to represent a class of all purchasers of Keystone stock during the April-to-September period. Their amended complaint, which alleged four counts of federal securities fraud and seven counts of fraud under state law, named as defendants Grant Thornton, other accountants, former Keystone directors and officers, broker-dealers, and other Keystone stockholders who allegedly dumped Keystone...

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