Ellis v. Grant Thornton LLP

PUBLISHED

UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

GARY ELLIS, 
Plaintiff-Appellee,
v.  No. 07-1352
GRANT THORNTON LLP,
Defendant-Appellant.

Appeal from the United States District Court
for the Southern District of West Virginia, at Bluefield.
David A. Faber, Chief District Judge.
(1:04-cv-00043)

Argued: March 19, 2008

Decided: June 25, 2008

Before DUNCAN, Circuit Judge, HAMILTON,
Senior Circuit Judge,
and William L. OSTEEN, Jr., United States District Judge
for the Middle District of North Carolina,
sitting by designation.

Reversed by published opinion. Senior Judge Hamilton wrote the
opinion, in which Judge Duncan and Judge Osteen joined.

COUNSEL

ARGUED: Stanley Julius Parzen, MAYER BROWN, L.L.P., Chi-
cago, Illinois, for Appellant. Benjamin Lee Bailey, BAILEY &
GLASSER, L.L.P., Charleston, West Virginia, for Appellee. ON
2 ELLIS v. GRANT THORNTON LLP
BRIEF: John H. Tinney, Kimberley R. Fields, THE TINNEY LAW
FIRM, P.L.L.C., Charleston, West Virginia; Bradley J. Andreozzi,
MAYER BROWN, L.L.P., Chicago, Illinois; Mark W. Ryan, Andrew
J. Morris, MAYER BROWN, L.L.P., Washington, D.C., for Appel-
lant. Eric B. Snyder, BAILEY & GLASSER, L.L.P., Charleston,
West Virginia, for Appellee.

OPINION

HAMILTON, Senior Circuit Judge:

The principal issue presented in this appeal is whether Grant
Thornton LLP (Grant Thornton), an accounting firm retained by First
National Bank of Keystone (Keystone), in response to an investiga-
tion by the Office of the Comptroller of the Currency (OCC) into
Keystone’s banking activities, owed a duty of care under the West
Virginia law of negligent misrepresentation to Gary Ellis, who alleg-
edly relied on oral statements made by Stan Quay (Quay), a Grant
Thornton partner, and a Grant Thornton audit report of Keystone’s
1998 financial statements in deciding to accept the job as president of
Keystone. We hold that Grant Thornton owed Ellis no such duty
under West Virginia law. Accordingly, we reverse the judgment of
the district court, which found in favor of Ellis on his negligent mis-
representation claim against Grant Thornton.

I

In late June 1999, the OCC began to intensify its ongoing investi-
gation into Keystone’s banking activities. The OCC’s investigation
revealed that Keystone’s books overstated the value of the loans Key-
stone owned by over $515 million. Based on these overstatements,
Keystone was declared insolvent and was closed on September 1,
1999. This case is yet another case that comes before this court in the
wake of Keystone’s collapse. See Gariety v. Vorono, No. 06-2248,
2008 WL 110906 (4th Cir. January 8, 2008) (unpublished) (civil
action filed by individuals who purchased Keystone stock between
September 28, 1998 and September 1, 1999); FDIC v. Bakkebo, 506
F.3d 286 (4th Cir. 2007) (civil action brought by FDIC); Gariety v.
 ELLIS v. GRANT THORNTON LLP 3
Grant Thornton, LLP, 368 F.3d 356 (4th Cir. 2004) (securities class
action by persons who purchased stock prior to Keystone’s failure);
United States v. Cherry, 330 F.3d 658 (4th Cir. 2003) (criminal
appeal); United States v. Church, 11 Fed. App’x. 264 (4th Cir. 2001)
(unpublished) (same). This case concerns Ellis, who took the job as
president of Keystone in April 1999. According to Ellis, he took the
position only because he relied on negligent misrepresentations made
by Quay and made by Grant Thornton in the audit report.

A

Prior to 1992, Keystone was a small community bank providing
banking services to clients located primarily in McDowell County,
West Virginia. Before its collapse, Keystone was a national banking
association within the Federal Reserve System, the deposits of which
were insured by the FDIC.

In 1992, Keystone began to engage in an investment strategy that
involved the securitization of high risk mortgage loans. Between 1992
and 1998, Keystone originated nineteen securitizations. In general,
Keystone would acquire Federal Housing Authority 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 under-
writers to investors. The pooled loans were serviced by third-party
loan servicers, including companies like Advanta and Compu-Link.
Keystone retained residual interests (residuals) in each loan securit-
ization. The residuals were subordinated securities that would receive
payments only after all expenses were paid and all investors in each
securitization pool were paid. Thus, Keystone stood to profit from a
securitization only after everyone else was paid in full. The residuals
were assigned a value that was carried on the books of Keystone as
an asset. Over time, the residual valuations came to represent a signif-
icant portion of Keystone’s book value.

From 1993 until 1998, when the last loan securitization was com-
pleted, the size and frequency of these transactions expanded from
about $33 million to approximately $565 million for the last one in
September 1998. All told, Keystone acquired and securitized over
120,000 loans with a total value in excess of $2.6 billion.
4 ELLIS v. GRANT THORNTON LLP
The loan securitization business appeared to be quite profitable. On
paper, Keystone’s assets grew from $107 million in 1992 to over $1.1
billion in 1999. In reality, however, the securitization program proved
highly unprofitable. Due to the risky nature of many of the underlying
mortgage loans, the failure rate was excessive. As a result, the resid-
ual interests retained by Keystone proved highly speculative and, in
actuality, they did not perform well.

Keystone’s valuation of the residuals was greater than their market
value. J. Knox McConnell, Keystone’s largest shareholder until his
death, Terry Church (Church), another Keystone director, and others
concealed the failure of the securitizations by falsifying Keystone’s
books. Bogus entries and documents hid the true financial condition
of Keystone from the bank’s directors, shareholders, depositors, and
federal regulators.

Keystone’s irregular bank records drew the attention of the OCC,
which began an investigation into Keystone’s banking activities. This
investigation revealed major errors in Keystone’s accounting records
that financially jeopardized Keystone. In May 1998, the OCC
required Keystone to enter into an agreement obligating Keystone to
take specific steps to improve its regulatory posture and financial con-
dition. This agreement required Keystone to, among other things,
retain a nationally recognized independent accounting firm "to per-
form an audit of the Bank’s mortgage banking operations and deter-
mine the appropriateness of the Bank’s accounting for purchased
loans and all securitizations." (J.A. 3043). In August 1998, Keystone
retained Grant Thornton as its outside auditor.

Under the agreement between Grant Thornton and Keystone, Grant
Thornton was to, among other things, perform for Keystone, in accor-
dance with Generally Accepted Auditing Standards (GAAS), an audit
of Keystone’s consolidated financial statements as of December 31,
1998. Quay was the lead Grant Thornton partner on the Keystone
audit. Susan Buenger (Buenger), a junior manager, performed sub-
stantial work on the audit as well.

Grant Thornton performed the audit on Keystone’s 1998 financial
statements. Keystone’s 1998 financial statements reflected ownership
of more than $515 million in loans that it did not own. Due to negli-
 ELLIS v. GRANT THORNTON LLP 5
gence on the part of both Quay and Buenger, Grant Thornton’s audit
did not uncover the $515 million discrepancy.1 In fact, on March 24,
1999, Quay presented several members and prospective members of
Keystone’s board and Keystone’s shareholders with draft copies of
Keystone’s 1998 financial statements and told them that Keystone
was going to get an unqualified or "clean" audit opinion on its 1998
financial statements. (J.A. 2701).2 At the shareholders meeting the
1
Grant Thornton does not challenge the district court’s finding of neg-
ligence in this appeal, electing to assume, for the sake of argument, that
Quay and Buenger were negligent in preparing the audit and making any
statements concerning the soundness of Keystone’s financial condition.
Given Grant Thornton’s position, we, too, will assume, without deciding,
that Quay and Buenger were negligent in preparing the audit and making
any statements concerning the soundness of Keystone’s financial condi-
tion.
2
Although accountants provide a variety of services to clients, their
primary function is auditing. Samuel S. Paschall, Liability to Non-
Clients: The Accountant’s Role and Responsibility, 53 Mo. L. Rev. 693,
698 (1988). In a typical audit, the financial statements of an entity, usu-
ally a corporation, are verified by examining the corporation’s account-
ing records and supporting evidence. Id. After examining such records
and evidence, the accountant expresses an opinion as to whether such
statements fairly represent the corporation’s actual financial position in
accordance with the Generally Accepted Accounting Principles (GAAP).
Id. at 698-99. For practical reasons of cost and time, an accountant is
rarely able to examine every accounting transaction of a corporation.
Denise M. Orlinsky, Note, An Accountant’s Liability to Third Parties:
Bily v. Arthur Young & Co., 43 DePaul L. Rev. 859, 862 (1994). There-
fore, the performance of an audit requires a high degree of professional
skill and judgment, as the accountant can only test the output of the cor-
poration’s accounting systems. Id. In performing an audit, an accountant
follows procedures outlined in the GAAS. Id. The end result of an audit
is the audit report or opinion, which evaluates the information obtained
to determine whether the corporation’s financial statements fairly repre-
sent the financial position of the corporation in accordance with the
GAAP. Id. at 863-64. The audit opinion is usually expressed in a letter
addressed to the client and can be one of four types: an unqualified audit
opinion, a qualified audit opinion, an adverse audit opinion, or a dis-
claimer audit opinion. Id. at 864. An unqualified audit opinion is an
expression of opinion by the accountant without any exceptions, reserva-
tions, or qualifications that the financial statements of the corporation
6 ELLIS v. GRANT THORNTON LLP
next day, Quay also distributed copies of Keystone’s financial state-
ments. At that time, Quay reiterated that Keystone was going to get
a clean audit opinion on its 1998 financial statements.

On April 19, 1999, even though Keystone was, in fact, insolvent
as of the end of 1998, Grant Thornton issued and delivered to Key-
stone’s board its audit opinion stating that Keystone’s financial state-
ments were fairly stated in accordance with the GAAP and reflecting
a shareholder’s equity of $184 million. The intent of the report was
plainly stated on the first page of the report: "This report is intended
for the information and use of the Board of Directors and Manage-
ment of The First National Bank of Keystone and its regulatory agen-
cies and should not be used by third parties for any other purpose."
(J.A. 2903).

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.
Based on Grant Thornton’s audit report, Keystone’s board continued
to declare dividends and operate the bank.

B

In 1984, Gary Ellis was President of the Bank of Dunbar. The Bank
of Dunbar was later merged into United National Bank (United) at
which time Ellis joined the management team at United, eventually

represent its financial position and the results of its operations. Id. A
qualified audit opinion, on the other hand, states that improper account-
ing treatment has been applied to one or more items and that, conse-
quently, the financial statements are not in compliance with the GAAP.
Id. at 865. An adverse audit opinion is issued if any items have a material
and pervasive effect on the financial statement, thus destroying their fair-
ness of presentation. Id. A disclaimer audit opinion is issued if the
accountant is unable to form an opinion because of serious limitations on
the scope of the examination of the audit. Id. at 866. Typically, the cor-
poration then uses this audit opinion for its own business planning, and
the audit opinion is used to inform outside parties as to the financial
health of the audited company. Paschall, Liability to Non-Clients: The
Accountant’s Role and Responsibility, 53 Mo. L. Rev. at 699.
 ELLIS v. GRANT THORNTON LLP 7
becoming its president. From the time of the merger with the Bank
of Dunbar until the time Ellis left United, United more than doubled
in size. In 1998, United merged with George Mason Bankshares of
Virginia. In the spring of 1999, following the merger, Ellis voluntarily
began looking for employment outside United. Ellis had dealt with
Keystone in the past, and, on March 19, 1999, Billie Cherry (Cherry),
chairman of Keystone’s board, called Ellis and invited Ellis to attend
Keystone’s annual shareholders meeting on March 25, 1999. During
the call, Cherry suggested that Ellis should consider becoming presi-
dent of Keystone.

Ellis was not fired or told to leave United, had no deadline for leav-
ing United, and could have remained at United rather than leaving for
the Keystone position. Ellis attended Keystone’s board meeting on
March 24, 1999, at which the board granted Ellis’ request to review,
upon the signing of a confidentiality agreement, the financial condi-
tion of the bank. Although it is not clear from the record whether a
confidentiality agreement was signed, the Keystone board permitted
Ellis to discuss the financial condition of the bank with Quay and
other Keystone insiders with the understanding that the information
be kept confidential. Consequently, following the Keystone board
meeting on March 24, 1999, Ellis met Quay and two other outside
directors at a bar at the Fincastle Country Club. Quay spoke with Ellis
and the two outside directors because Keystone did not have a chief
financial officer, thus making Quay the only person capable of going
over the financial statements with the others. At the country club,
Quay told Ellis and the two outside directors that Keystone was going
to receive a "clean [audit] opinion." (J.A. 401). Ellis also attended the
March 25, 1999 shareholders’ meeting at which Quay informed the
group that Grant Thornton was going to give Keystone a clean audit
opinion for 1998. On March 30, 1999, Ellis visited Keystone. During
this visit, Quay told Ellis once again that Keystone would receive a
clean audit opinion for 1998.

On April 2, 1999, Ellis met with his attorneys to draft a proposed
employment agreement with Keystone. During the first two weeks of
April 1999, Ellis met with Church and others regarding their expecta-
tions for him. It was decided that Ellis would be responsible for the
"banking" business at Keystone as opposed to the mortgage loan
securitizations. On April 19, 1999, at a Keystone board meeting, Ellis
8 ELLIS v. GRANT THORNTON LLP
reviewed Grant Thornton’s final audit report on Keystone for 1998.
The board voted to approve Ellis’ hiring as president of Keystone.
Ellis officially resigned from United by letter dated April 20, 1999.
Ellis’ employment contract was signed on April 26, 1999.3 According
to Ellis, he relied on Grant Thornton’s audit, which was consistent
with Quay’s earlier March 1999 statements that Grant Thornton was
going to issue a clean audit opinion for 1998, in deciding to accept
the job as president of Keystone.

C

After being named as a defendant in the Gariety v. Grant Thornton,
LLP securities class action, Ellis filed a cross-claim against Grant
Thornton for negligent misrepresentation under West Virginia law in
which he sought to recover damages in the form of lost earnings. The
district court consolidated Ellis’ negligent misrepresentation claim for
trial with the claims asserted by the FDIC in FDIC v. Grant Thornton,
LLP, 1:00-cv-0655, (S.D.W.Va. January 15, 2004) (order). The case
was tried in the summer of 2004. In March 2007, the district court
ruled in favor of Ellis on his negligent misrepresentation claim and
found that he was entitled to $2,419,233 in damages. The district
court found that, in accepting the job as president of Keystone, "Ellis
relied on the financial statements Quay gave him," "Quay’s oral rep-
resentations," and the Grant Thornton audit report. (J.A. 2706). The
district court also found that "Quay intended and knew that Ellis
would rely on his statements." (J.A. 2707). In view of these findings
of fact, the district court concluded that Grant Thornton, as the auditor
of Keystone, was liable to Ellis under the West Virginia law of negli-
gent misrepresentation, citing First National Bank of Bluefield v.
Crawford, 386 S.E.2d 310 (W. Va. 1989), because Grant Thornton
(through Quay’s oral statements and the audit report) made negligent
misrepresentations concerning the financial condition of Keystone
knowing that Ellis would receive and rely upon those representations
in making his decision to accept or reject employment with Keystone.
After ruling in favor of Ellis, the district court deconsolidated Ellis’
negligent misrepresentation claim from the FDIC’s claims against
3
Ellis signed a two-year contract at a base salary of $375,000, plus
benefits including the use of a corporate vehicle and a country club mem-
bership. He also purchased $49,500 in Keystone stock.
 ELLIS v. GRANT THORNTON LLP 9
Grant Thornton and entered judgment in favor of Ellis in the amount
of $2,419,233. Grant Thornton noted a timely appeal.

II

On appeal from a bench trial, we may set aside the district court’s
findings of fact only if they are clearly erroneous. Minyard Enter.,
Inc. v. Southeastern Chem. & Solvent Co., 184 F.3d 373, 380 (4th Cir.
1999); Fed. R. Civ. P. 52(a). In determining whether a finding of fact
is clearly erroneous, we must give due regard to the opportunity of the
district court to judge the credibility of the witnesses. Fed. R. Civ. P.
52(a). A finding of fact is clearly erroneous when, "although there is
evidence to support it, the reviewing court on the entire evidence is
left with the definite and firm conviction that a mistake has been com-
mitted." United States v. United States Gypsum Co., 333 U.S. 364,
395 (1948).

As a federal court sitting in diversity, we have an obligation to
apply the jurisprudence of West Virginia’s highest court, the Supreme
Court of Appeals of West Virginia. Wells v. Liddy, 186 F.3d 505,
527-28 (4th Cir. 1999). In a situation where the state’s highest court
has spoken neither directly nor indirectly on the particular issue
before us, we are called upon to predict how that court would rule if
presented with the issue. Id. In this case, we are called upon to predict
whether, under the facts of this case, Grant Thornton owed Ellis a
duty of care under the West Virginia law of misrepresentation.

In Bank of Bluefield, the Supreme Court of Appeals of West Vir-
ginia addressed the question of whether the lack of privity of contract
between an accountant and a bank was a complete defense to the
bank’s suit against the accountant for professional negligence in pre-
paring a financial statement. 386 S.E.2d at 310-11. The court
answered that question in the negative. Id. at 315. In Bank of Blue-
field, the bank alleged that the accountant had been professionally
negligent in preparing a financial statement for a construction com-
pany upon which the bank had relied in determining whether to give
the construction company a loan. The parties stipulated that: (1) the
bank informed the accountant that it would need the financial state-
ment prior to the October 5, 1984 closing of the loan; (2) the financial
statement was delivered to the bank before the closing date; (3) the
10 ELLIS v. GRANT THORNTON LLP
bank alleged that it reasonably relied on the financial statement in
making the loan to the construction company; and (4) there was no
privity of contract between the bank and the accountant. The state
trial court in Bank of Bluefield held that, in the absence of contractual
privity between the parties, the bank could not recover from the
accountant. Id. at 311.

In resolving the issue before it, the court in Bank of Bluefield dis-
cussed the four approaches to resolving the question of under what
circumstances an accountant can be liable to third parties for a negli-
gent misrepresentation. Id. at 311-13. The first of these approaches
was announced in Ultramares Corp. v. Touche, 174 N.E. 441 (N.Y.
1931), which held that negligence actions were only permitted by par-
ties in privity of contract or in a situation so close as to approach that
of privity. Id. at 182-83. The second approach was also developed by
the New York Court of Appeals, which slightly modified the Ultra-
mares Corp. approach in 1985. See Credit Alliance Corp. v. Arthur
Andersen & Co., 483 N.E.2d 110 (N.Y. 1985) (relaxing the strict
Ultramares Corp. privity doctrine by requiring a relationship "suffi-
ciently approaching privity").4 The third approach is set forth in § 552
of the Restatement (Second) of Torts. Under this approach, a person
or a limited class of persons who the auditor can foresee as parties
who will (and do) rely upon financial statements are allowed to
recover. Restatement (Second) of Torts § 552(1)-(2). The fourth
approach is the reasonably foreseeable approach, which permits all
parties who are reasonably foreseeable recipients of financial state-
ments for business purposes to recover as long as they rely on the
4
Credit Alliance Corp. announced the following three-prong test for
determining whether an accountant can be held liable for negligence to
a third party who has detrimentally relied on inaccurate financial state-
ments: (1) the accountant must have been aware that the financial reports
were to be used for a particular purpose or purposes; (2) in the further-
ance of which a known party or parties was intended to rely; and (3)
there must have been some conduct on the part of the accountant linking
him to that party or parties, which evinces the accountant’s understand-
ing of that party or parties’ reliance. 483 N.E.2d at 118. The Credit Alli-
ance Corp. approach is often referred to as the "near-privity" approach.
First Nat’l Bank of Commerce v. Monco Agency, Inc., 911 F.2d 1053,
1058 (5th Cir. 1990).
 ELLIS v. GRANT THORNTON LLP 11
statements for those business purposes. See, e.g., H. Rosenblum, Inc.
v. Adler, 461 A.2d 138, 142-46 (N.J. 1983).5

After summarizing these four approaches, the court in Bank of
Bluefield adopted the Restatement § 552 approach for West Virginia,
finding that the rule stated therein was "more appropriate because it
imposes a standard of care only to known users who will actually be
relying on the information provided by the accountant." 386 S.E.2d
at 313; see also id. at 310 Syllabus of the Court ("In the absence of
privity of contract, an accountant is liable for the negligent prepara-
tion of a financial report only to those he knows will be receiving and
relying on the report.").6 In view of the court’s adoption of the
Restatement approach in Bank of Bluefield, the court answered the
certified question—was privity a defense—in the negative. Id. at 315.
Consequently, other than the adoption of the Restatement approach,
5
Although it is sometimes difficult to discern the differences between
the four approaches, appropriate lines can be drawn between the restric-
tive Ultramares Corp., Credit Alliance Corp., and Restatement
approaches and the nonrestrictive foreseeability approach. For example,
although the Restatement’s approach expands liability to a larger poten-
tial class of third parties than do the Ultramares Corp. and Credit Alli-
ance Corp. approaches, it does not extend liability beyond an identified
third party, a known third party, or third parties who enter into the same
type of transaction as originally contemplated. In other words, under the
Ultramares Corp. and Credit Alliance Corp. approaches, "the precise
identity of the informational consumer [must] be foreseen by the audi-
tor," Monco Agency, Inc., 911 F.2d at 1059, but, under the Restatement
approach, the precise "informational consumer" need not be known, id.;
rather the Restatement approach "contemplates identification of a narrow
group, not necessarily the specific membership within that group." Id.
Moreover, unlike the foreseeability approach, the Restatement approach
does not extend to "every reasonably foreseeable consumer of financial
information." Id. at 1060.
6
We note that the Bank of Bluefield court did not identify what consti-
tutes a "known" user, the definition of which is important to separate the
third parties entitled to recover under the Restatement approach and not
entitled to recover under the Ultramares Corp. and Credit Alliance Corp.
approaches. Such a demarcation, however, was not essential to the Bank
of Bluefield court’s rejection of these approaches, so its failure to employ
precise cabining language is understandable.
12 ELLIS v. GRANT THORNTON LLP
the Bank of Bluefield court gave no further meaningful guidance con-
cerning under what circumstances an accountant can be liable to third
parties for negligent misrepresentations under § 552.

Restatement (Second) of Torts § 552 provides in relevant part:

(1) One who, in the course of his business, profession or
employment, or in any other transaction in which he has a
pecuniary interest, supplies false information for the guid-
ance of others in their business transactions, is subject to lia-
bility for pecuniary loss caused to them by their justifiable
reliance upon the information, if he fails to exercise reason-
able care or competence in obtaining or communicating the
information.

(2) [T]he liability stated in Subsection (1) is limited to loss
suffered

(a) by the person or one of a limited group of per-
sons for whose benefit and guidance he intends to
supply the information or knows that the recipient
intends to supply it; and

(b) through reliance upon it in a transaction that he
intends the information to influence or knows that
the recipient so intends or in a substantially similar
transaction.

Restatement (Second) of Torts § 552(1)-(2). The Restatement
approach is deliberately restrictive to encourage the free flow of com-
mercial information. See id. § 552, cmt. ("By limiting the liability for
negligence of a supplier of information to be used in commercial
transactions to cases in which he manifests an intent to supply the
information for the sort of use in which the plaintiff’s loss occurs, the
law promotes the important social policy of encouraging the flow of
commercial information upon which the operation of the economy
rests."). It also seeks to protect suppliers of commercial information
from liability in instances in which they oblige themselves to provide
information but the terms of the obligation are unknown to them. See
 ELLIS v. GRANT THORNTON LLP 13
id. ("A user of commercial information cannot reasonably expect its
maker to have undertaken to satisfy this obligation unless the terms
of the obligation were known to him.").

Although the West Virginia Supreme Court of Appeals in Bank of
Bluefield did not set forth what must be proven by an injured third
party proceeding under § 552 against an accountant for the accoun-
tant’s negligent misrepresentations, other courts have set forth six ele-
ments that essentially track the language of the Restatement. See, e.g.,
N. Am. Specialty Ins. Co. v. Lapalme, 258 F.3d 35, 41-42 (1st Cir.
2001) (setting forth six elements). Under this authority, a finding of
liability requires the injured party to prove (1) inaccurate information,
(2) negligently supplied, (3) in the course of an accountant’s profes-
sional endeavors, (4) to a third person or limited group of third per-
sons for whose benefit and guidance the accountant actually intends
or knows will receive the information, (5) for a transaction (or for a
substantially similar transaction) that the accountant actually intends
to influence or knows that the recipient so intends, (6) with the result
that the third party justifiably relies on such misinformation to his det-
riment. Id. The third party has the burden of proving each of these
elements. Id. at 42. Moreover, the accountant’s "actual knowledge . . .
should be ascertained at the time the audit report or financial state-
ment is issued." Id. at 39, 42.

In this case, the record simply is devoid of evidence suggesting that
Ellis proved the fourth, fifth, and sixth elements. With regard to the
fourth element, it is clear that Ellis failed to show that Grant Thornton
knew (or intended) that potential employees, like Ellis, were intended
to receive the audit report for their benefit and guidance. The audit
report was delivered to the board of directors of Keystone. The audit
report plainly states that the audit report was not intended for use by
third parties. Rather, the audit report was prepared for the benefit of
Keystone and the OCC, which is entirely consistent with the agree-
ments between Keystone and the OCC and between Keystone and
Grant Thornton. Thus, Ellis, or any other potential employee, was not
a member of any limited group of persons for whose benefit the audit
report was prepared.

Perhaps recognizing the tenuousness of relying on the audit report
itself, especially since he signed his employment contract a week after
14 ELLIS v. GRANT THORNTON LLP
the audit report was issued to the board, Ellis relies heavily on Quay’s
statements in March 1999 indicating that Grant Thornton was going
to give Keystone a clean audit opinion.7 Of course, reliance on Quay’s
statements improves the position of Ellis, as Quay’s statements did
not include a disclaimer. However, the Restatement approach
instructs that we should assess cases in light of "[t]he ordinary prac-
tices and attitudes of the business world." Restatement (Second) of
Torts § 552, cmt. j. Viewed in this light, it is clear that Grant Thorn-
ton was Keystone’s auditor and was hired to conduct an audit for the
benefit of Keystone and the OCC. Grant Thornton was not hired to
go over with each potential employee the soundness of Keystone’s
financial condition. Indeed, throughout most of the course of the audit
report’s preparation, Ellis was an unknown, unidentified potential
employee of Keystone. Grant Thornton was not aware of the exis-
tence of the potential employment transaction between Ellis and Key-
stone until after Grant Thornton reached its decision to give Keystone
a clean audit opinion. If the scope of the audit involved potential
employees, one would expect at least some knowledge on the part of
Grant Thornton before they formed their audit opinion.

Moreover, Quay first informed the board of directors on March 24,
1999 that Grant Thornton was going to give Keystone a clean audit
opinion. Thus, the clean audit opinion information was disclosed for
the benefit of Keystone’s board and not potential employees such as
Ellis. Ellis’ attempt at turning Quay’s clean audit opinion statements
into ones for his benefit, by virtue of his meetings with Quay, ignores
the business reality that Grant Thornton was hired and performed the
audit for the benefit of Keystone and the OCC. It also ignores the fact
that any release of information to Ellis was done at the behest of Key-
stone, not Grant Thornton. There is no evidence in the record to sup-
port the conclusion that Ellis was a member of any limited group of
persons for whose benefit Quay’s statements were made.
7
Grant Thornton claims that oral statements can never form the basis
of liability under § 552 when such statements are made before the release
of the final audit opinion. We need not decide this issue because, even
assuming as we do for purposes of this appeal that oral statements made
before the release of the final audit opinion can form the basis of auditor
liability under § 552, Ellis cannot prevail.
 ELLIS v. GRANT THORNTON LLP 15
Our conclusion concerning the fourth element is buttressed by
Illustration 10 in § 552. That illustration provides:

A, an independent public accountant, is retained by B Com-
pany to conduct an annual audit of the customary scope for
the corporation and to furnish his opinion on the corpora-
tion’s financial statements. A is not informed of any
intended use of the financial statements; but A knows that
the financial statements, accompanied by an auditor’s opin-
ion, are customarily used in a wide variety of financial
transactions by the corporation and that they may be relied
upon by lenders, investors, shareholders, creditors, purchas-
ers and the like, in numerous possible kinds of transactions.
In fact B Company uses the financial statements and accom-
panying auditor’s opinion to obtain a loan from X Bank.
Because of A’s negligence, he issues an unqualifiedly favor-
able opinion upon a balance sheet that materially misstates
the financial position of B Company, and through reliance
upon it X Bank suffers pecuniary loss. A is not liable to X
bank.

Id. § 552, cmt. h, illus. 10. Illustration 10, we believe, is materially
indistinguishable from our case. Like the accountant in the illustra-
tion, Grant Thornton was not aware of an intended use of its audit
opinion beyond the customary business planning use of an audit opin-
ion by a corporation such as Keystone and the use by the OCC for
oversight, as it was hired "to conduct an annual audit of the customary
scope for [Keystone] and to furnish [its] opinion on [Keystone’s]
financial statements." Id. Indeed, Grant Thornton was not aware that
any potential employee of Keystone was going to base their decision
to seek employment with Keystone on the outcome of the audit.
Rather, in performing its audit function, Grant Thornton was aware
that its audit opinion and any statements made leading up to the issu-
ance of the audit opinion may be relied upon by shareholders, inves-
tors, and perhaps potential employees such as Ellis. However, more
than a tenuous awareness of this sort is required to impose liability
on Grant Thornton. To hold otherwise would transform the Restate-
ment approach into the foreseeability approach, which the court in
Bank of Bluefield clearly rejected. Ellis was required to show that
Grant Thornton knew that its audit opinion would be used by Key-
16 ELLIS v. GRANT THORNTON LLP
stone to assist potential employees in making their decision concern-
ing whether to come to work for Keystone. The record simply does
not demonstrate that Ellis made such a showing.

With regard to the fifth element’s substantiality requirement, we
examine two questions. First, we examine, from the accountant’s
standpoint, what risks he reasonably perceived he was undertaking
when he delivered the challenged report or financial statement.
Lapalme, 258 F.3d at 41. If the accountant is unaware of a potential
risk, then liability cannot attach. Next, we make an objective compari-
son between the transaction to which the accountant had actual
knowledge and the transaction that in fact occurred. Id. This compari-
son cannot be hypertechnical, but, rather, must be conducted in light
of customary business world practices and attitudes. Restatement
(Second) of Torts § 552, cmt. j. "The goal of this inquiry is to deter-
mine whether the two transactions share essentially the same charac-
ter. If so, the actual transaction is substantially similar to the
contemplated transaction (and, therefore, liability-inducing)."
Lapalme, 258 F.3d at 41.

When Grant Thornton issued its audit report, it was not assuming
the risk that third parties would rely on the report. As noted above,
the report itself states that it is not to be used by third parties. To the
extent that Ellis relied on Quay’s statements, it cannot be said that
Grant Thornton was assuming the risk of being liable for Ellis’ future
lost earnings. The audit opinion was formed by the time Quay met
with Ellis, and Quay was simply repeating information that was ear-
lier disclosed to the Keystone board in his presence.

With regard to the objective comparison, the liability of the maker
of a negligent misrepresentation extends "to all transactions of the
type or kind that the maker intends or has reason to expect." Restate-
ment (Second) of Torts § 552, cmt. j. For example, "independent pub-
lic accountants who negligently make an audit of books of a
corporation, which they are told is to be used only for the purpose of
obtaining a particular line of banking credit, are not subject to liability
to a wholesale merchant whom the corporation induces to supply it
with goods on credit by showing him the financial statements and the
accountant’s opinion." Id. Moreover, an accountant who negligently
conducts an audit for A corporation knowing that A corporation is
 ELLIS v. GRANT THORNTON LLP 17
going to show the audit to B corporation as a basis for the extension
of credit from B corporation is not liable to B corporation if B corpo-
ration buys a controlling interest in A corporation in reliance upon the
audit. Id. § 552, cmt. j, illus. 14. Thus, when the character of the
transaction materially changes, there is no liability. See Lapalme, 258
F.3d at 44 ("Even if the change involves a new transaction, rather
than merely a modification of the earlier (known) transaction, the
accounting firm might still be held liable if the identity of the third
party is unchanged, the type of transaction pretty much the same, and
the firm’s exposure relatively constant.").

Here, Grant Thornton was hired to conduct an audit of Keystone.
It was aware at the time it was hired and during the auditing process
that the audit was being done for the benefit of Keystone and the
OCC. It was not aware during this process that its audit was being
performed for the benefit of potential employees of Keystone. Indeed,
there simply is no evidence in the record that Grant Thornton cared
one way or the other who Keystone hired or whether Ellis became
president of Keystone. In fact, Ellis was not even on the radar screen
until after Grant Thornton concluded that it was going to issue Key-
stone a clean audit opinion. Moreover, any release of information to
Ellis was done at the behest of Keystone, not Grant Thornton. This
fact further suggests that Grant Thornton never intended to deviate
from its standard auditing functions. In short, to find the fifth element
satisfied, we would have to materially change the transaction from an
audit undertaken to benefit Keystone and the OCC to one intended to
benefit potential employees of Keystone. Such a material change to
the nature of the transaction is prohibited under the Restatement
approach.

Ellis fares no better on the sixth element. Unquestionably, given
that the audit report stated that it was not intended for use by third
parties, Ellis could not justifiably rely on the audit report in signing
his employment contract with Keystone. With regard to Quay’s oral
assurances, likewise, Ellis could not justifiably rely on those state-
ments. First, Ellis was aware at the time he signed his employment
contract that the audit report was not to be used by third parties. A
person as sophisticated and experienced in the banking business as
Ellis is, he knew he could not justifiably rely on Quay’s statements
when the report itself stated otherwise. Moreover, as previously
18 ELLIS v. GRANT THORNTON LLP
noted, Quay’s statements concerning the clean audit opinion were
offered by Quay to the board and the shareholders to apprise the
board and the OCC of Keystone’s financial condition. They were not
offered to induce individuals to accept employment with Keystone.
As such, it is difficult to discern how an individual as sophisticated
and experienced as Ellis would justifiably rely on this information in
accepting a job at Keystone.

III

For the reasons stated herein, the judgment of the district court is
reversed.

REVERSED