$23 million sum closes Keystone Bank saga
By BILL ARCHER
Bluefield Daily Telegraph The Bluefield Daily Telegraph Mon Aug 08, 2011, 05:00 AM EDT

KEYSTONE — Time tried and panic tested, the First National Bank of Keystone story came to a close earlier this week when the parties of the last outstanding federal civil complaint entered a joint stipulation in the case styled Grant Thornton LLP versus the Federal Deposit Insurance Corporation.

The parties agreed to a sum of $23,306,618 for the prevailing party — the FDIC. Following a trial in 2004, the U.S. District Court established the damages that Grant Thornton was responsible for at $23.7 million in 2010. On appeal, the Fourth Circuit Court of Appeals recommended an adjustment down to $23.1 million due to the appeals court’s computation of the settlement credit. The final stipulation figure reflects the computation of post-judgment interest worked out by the parties.

The FDIC claimed that Grant Thornton was liable for a portion of the losses incurred at FNB Keystone from April 19-Sept. 1, 1999 due to professional malpractice, alleging that Grant Thornton negligently performed an audit of Keystone in 1999. Senior Status Judge David A. Faber of the Southern District of West Virginia presided over the bench trial that lasted from mid-May to June of 2004.

From the summer of 1976 when the late J. Knox McConnell arrived in McDowell County to become president of FNB Keystone, the relationship between the bank and the auditors from the Office of the Comptroller of the Currency and the FDIC went from cordial to cold to frigid. During his 20-year career in banking prior to coming to Keystone, McConnell had sought out inventive ways to enhance bank earnings for investors, and he didn’t want federal regulators looking over his shoulder at everything he was doing.

The relationship between the banker and the feds didn’t reach critical mass until 1992 when McConnell traveled to California to attend a seminar on loan securitizations, and decided that Keystone should get involved in the high risk banking products. Keystone worked with West Coast Partners on the program that involved bundling of hundreds of loans into a potentially attractive investment product. While it might not benefit a major investor to purchase a few small loans as an investment, several hundred loans representing millions of dollars — all bundled together and professionally serviced and monitored — could be an attractive financial product.

On paper, FNB Keystone’s assets appeared to experience incredible growth, but in truth, none of the bank’s securitizations performed up to par, and subsequent loan pools with often made up of loans with increasingly greater risks, continued to perform poorly. Federal bank examiners were aware that FNB Keystone management personnel lacked the level of expertise necessary to work in that kind of high-risk banking products, but McConnell effectively managed to keep auditors at arms-length by flaunting his acquaintance with former President George H.W. Bush and by attempting to exploit redundancies in the supervisory authority of the OCC and FDIC.

Federal authorities were prepared to take action when McConnell died on Oct. 27, 1997. Regulators paused for a short time, just long enough to allow McConnell’s second in command, Terry Church, to draft a phony will and codicil and loot her late boss’ estate — an estate worth almost $20 million — that would have gone to McConnell’s alma mater, Waynesburg College in Waynesburg, Pa.

Through late 1997 and early 1998, the OCC ratcheted up its scrutiny of FNB Keystone, eventually assessing Civil Money Penalties against bank officers and directors due to faulty call reports, cash flow problems and dealing in brokered certificates of deposit — another high-risk financial product that troubled banks use to build luquidity or cash on hand. As part of its CMP, the OCC required Keystone to hire a bank president with expertise in loan securitization products and to hire a nationally known accounting firm to serve as an external auditor and examine the bank’s books. FNB Keystone hired Grant Thornton in response to the OCC’s CMP.

Keystone continued dealing with brokered CDs, and had limited success with retaining a new chief executive officer, but the events following Grant Thornton’s April 19, 1999 unqualified audit of the bank touched off a FNB Keystone bank share sell-off that made millionaires out of a few FNB Keystone employees, albeit for a short time. Later in the summer when the OCC and FDIC conducted a joint examination of the bank, Church and her staff went to great lengths to conceal the bank’s true operations, ultimately burying incriminating documents in a trench on Burke Mountain, 150-feet long, 10-feet wide and 10-feet deep.

The OCC declared Keystone insolvent on Sept. 1, 1999, citing apparent fraud and saying that the bank was carrying $515 million in