## Facts

- First National Bank of Keystone, a West Virginia community bank, pursued high-risk mortgage securitization and was later found to have overstated loan values by more than $515 million; regulators closed the bank as insolvent on September 1, 1999.
- During an intensified regulatory investigation, Keystone retained Grant Thornton LLP to audit Keystone’s 1998 financial statements.
- Gary Ellis was recruited in early 1999 to become Keystone’s president and alleged he accepted the job in April 1999 because he relied on (1) oral statements by Grant Thornton partner Stan Quay and (2) Grant Thornton’s 1998 audit report.
- Ellis contended the audit report represented that Keystone’s financial statements conformed to GAAP and fairly presented the bank’s condition, although Keystone was allegedly insolvent at the end of 1998.
- The audit report contained express limitations on intended use, indicating it was prepared for Keystone’s board of directors and regulators rather than for third parties such as prospective employees.
- Ellis sued Grant Thornton for negligent misrepresentation under West Virginia law; after trial, the district court entered judgment for Ellis and awarded damages.
- Grant Thornton appealed, disputing whether it owed Ellis a duty of care under West Virginia negligent-misrepresentation doctrine.

## Issues

1. Under West Virginia’s adoption of Restatement (Second) of Torts § 552, did an accounting firm owe a duty of care for negligent misrepresentation to a prospective employee who relied on an audit report and related oral assurances when the audit was prepared for the client and regulators and limited its intended users?
2. Did an auditor’s oral statements to the prospective employee expand the auditor’s § 552 duty beyond the report’s stated intended audience?

## Decision

- The Fourth Circuit reversed the judgment for Ellis.
- The court held Grant Thornton owed no duty of care to Ellis under West Virginia negligent-misrepresentation law because Ellis was not within the limited group of persons the auditor intended (or knew the client intended) to influence.
- The court concluded the audit’s explicit intended-use limitations and the context of the oral statements foreclosed treating Ellis as an intended beneficiary of the information.

## Legal Principles

- West Virginia applies Restatement (Second) of Torts § 552 to negligent misrepresentation claims against professionals who supply information for others’ guidance in business transactions.
- Under § 552, liability to third parties is limited to loss suffered by a person or member of a limited group for whose benefit and guidance the defendant intends to supply the information or knows the recipient intends to supply it.
- Foreseeability of reliance by an indeterminate class is insufficient; the plaintiff must fall within the specifically contemplated limited group and within the transaction (or a substantially similar transaction) the information was intended to influence.
- Express limitations in an audit report identifying intended users are strong evidence that the auditor neither intended nor knew the information would be used to guide decisions by outsiders such as prospective employees.
- Oral assurances connected to an audit prepared for specified users do not, without more, convert an unrelated third party into an intended § 552 beneficiary.

## Conclusion

The Fourth Circuit held that, under West Virginia’s § 552 framework, an auditor’s negligent-misrepresentation duty does not extend to a prospective employee who relies on an audit prepared for the client’s board and regulators and expressly limited to that audience; the post-trial judgment for the employee was therefore reversed.


Ellis v. Grant Thornton LLP, 530 F.3d 280 (4th Cir. 2008)