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{{11-30-98 p.TC-379}}
   [16,180] FDIC Docket Nos. 89-29e, 96-ej (8-20-97)

In the Matter of
DOUGLAS A WINTER,
individually and as
an institution-affiliated
party of
STATE BANK OF GREENWALD
GREENWALD, MINNESOTA
(Insured State Nonmember Bank)
DECISION AND ORDER
APPROVING
APPLICATION
TO MODIFY
ORDER OF PROHIBITION
FROM FURTHER
PARTICIPATION

FDIC-89-29e
FDIC-96-ej

STATEMENT OF THE CASE

A. Introduction:
   On October 18, 1995, Douglas A. Winter ("Respondent"), through a letter from his attorney ("Application") to the Acting Director of the Division of Supervision of the Federal Deposit Insurance Corporation ("FDIC"), and other FDIC officials, sought the FDIC's written consent to a broad modification of the FDIC's May 18, 1990 stipulated Order of Prohibition from Further Participation ("Order of Prohibition" or "Order"). If approved, the Application would allow Respondent to hold any office, or to participate in any manner, in the affairs of a mortgage banking division of any institution or agency cited in section 8(e)(7)(A) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(e)(A), or any such organization whose primary purpose is mortgage banking, provided Respondent is not involved in the purchase, sale, or trading of securities or the pricing of securities. This Application arises under section 8(e)(7)(B) of the Act. 12 U.S.C. 1818(e)(7)(B), and section 8(j) of the Act, 12 U.S.C. 1818(j).
B. Background:
(1) In General
   Respondent served with the State Bank of Greenwald, Greenwald, Minnesota ("Bank") since approximately 1980 when Respondent was 20 years old until the Minnesota Commissioner of Commerce closed the Bank on October 2, 1987. Respondent's father was the principal owner and chief executive officer of the Bank at that time. In August, 1983, Respondent's father died suddenly and Respondent was appointed to the Bank's board of directors soon thereafter. Respondent also was appointed as vice-president of the Bank and ran its daily operations.
   Respondent began engaging in speculative trading activities on behalf of the Bank in May, 1986. The trading activities were not authorized by the Bank, were in violation of the Bank's policies and were not recorded on the Bank's books. As a result of Respondent's activities, the Bank suffered losses in excess of $3,000,000. The Bank was closed by the Minnesota Commissioner of Commerce on October 2, 1987.
   On November 7, 1989, the FDIC issued a Notice of Intention to Prohibit From Further Participation ("Notice") charging that Respondent engaged or participated in unsafe or unsound banking practices, engaged in acts that constituted breaches of his fidu- {{11-30-98 p.TC-380}}ciary duty to the Bank and that such acts resulted in substantial financial loss to the Bank. On February 9, 1990, Respondent consented to an Order of Prohibition From Further Participation ("Order of Prohibition" or "Order"). The Order was issued by the FDIC on May 18, 1990.
(2) First Application to Modify Order
   On May 19, 1993, Respondent through his counsel sought the modification of his Order of Prohibition. Respondent had been employed by Sears Mortgage Corporation as a branch manager and the company was being acquired by PNC Bank Corporation. In light of the acquisition, Respondent requested the FDIC to permit him to remain in his position as branch manager which he had held for five years.
   In support of his request, Respondent stated that as branch manager he was closely supervised and would not be involved in any decision making with respect to the lending function of PNC Bank, Philadelphia National Bank, or Sears Mortgage Banking Group. Further, he stated that he had no policy making function at any level, was not involved in the purchase or sale of securities or the pricing of mortgage instruments.
   On October 21, 1993, the FDIC granted Respondent's application since his duties were closely supervised and he had no decision or policy-making authority.
(3) Second Application to Modify Order
   On February 1, 1996, Respondent submitted his second application for modification of the Order of Prohibition to the FDIC. The second application involved a request that Respondent be permitted to accept a position of employment with Norwest Mortgage Company as a regional manager. In support of his request, Respondent stated that he would have no policy making function at any level, would not be involved in the purchase or sale of securities or the pricing of mortgage instruments, and that he would have no lending authority and not be involved in credit decisions.
   On March 8, 1996, the FDIC granted Respondent's second application since his job responsibilities would be closely supervised and he would not have any decision or policy making authority. In addition, the approval stated that any expansion of his duties or employment at Norwest Mortgage Company would require another request for prior written consent for the modification of the Order. The approval did state that if Norwest Mortgage were acquired by another company, then Respondent would not need to seek prior written consent, provided he continued to exercise the same job duties.
C. Current Application:
   By letter dated October 18, 1955, Respondent Winter made application to the FDIC for written consent to a modification of the Order of Prohibition. The purpose of this present Application is to obtain a general approval from the FDIC that Respondent Winter may hold the same position and responsibilities with any new employer as he held with PNC Bank Corporation without having to seek the prior written approval from the FDIC.
   Specifically, the Application requests that Respondent be permitted to continue or commence to hold any office in or participate in any manner in the conduct of the affairs of a mortgage banking division of any insured depository institution or any agency specified in Section 8(e)(7)(A) of the Act. To make the Application receive favorable treatment from the FDIC, Respondent proposes to continue the prohibition from his engaging in any of the following activities: (1) the pricing of securities including mortgage loans on the secondary market; and (2) any trading, purchase, or sales activities with regard to securities.
   Respondent's rationale for seeking such a broad modification is that mortgage banking is a highly competitive business which is undergoing consolidation. Respondent argues that because he must seek the prior written consent of the FDIC every time he wants to pursue positions with greater responsibility in the mortgage banking field, he is effectively foreclosed from continuing on his career path. This presents a hardship for Respondent since the mortgage banking industry is so transient and he must change positions as mortgage companies are purchased and sold by various banking institutions.

FINDINGS OF FACT

   In his Application for modification of the Order of Prohibition, Respondent Winter sets forth several grounds for requesting such extensive relief. Respondent asserts that his conduct was not motivated by self-interest, selfdealing or personal financial gain. Rather, Respondent was only 23 years old at the time and his inexperience caused him to rely upon {{11-30-98 p.TC-381}}and place his trust in brokers who did not have his or the Bank's best interest in mind.
   Respondent also asserts that he has demonstrated his competence and integrity as a mortgage banker over the past nine years. He further states that his activities over the past years have enhanced the financial condition of his employers, not jeopardized them. Third, Respondent states that "his request offers no increase of risk from the previous approval granted by the FDIC" in 1993. Respondent has served "without any blemish on his record." The Application would "simply permit [] Mr. Winter to continue in the same capacity." (Emphasis added.)
   Finally, Respondent argues that the Order of Prohibition is unduly burdensome upon him. Specifically, he states that whenever he is recruited or applies for another position in a highly transient business, he must obtain the prior written consent of the FDIC and at least one other regulatory authority. The delay and expense of undertaking such an application have made Respondent's pursuit of his career path difficult.

DECISION AND ORDER

   Section 8(e)(7)(B) of the Act, 12 U.S.C. § 1818(e)(7)(B), states in pertinent part:
   (7) INDUSTRYWIDE PROHIBITION.—

***

   (B) EXCEPTION IF AGENCY PROVIDES WRITTEN CONSENT.—
   If, on or after the date an order is issued under this subsection which removes or suspends from office any institution-affiliated party or prohibits such party from participating in the conduct of the affairs of an insured depository institution, such party receives the written consent of—

    (i) the agency that issued such order; and
    (ii) the appropriate Federal financial institutions regulatory agency of the institution described in any clause of subparagraph (A) with respect to which such party proposes to become an institution-affiliated party,
   subparagraph (A) shall, to the extent of such consent, cease to apply to such party with respect to the institution described in each written consent.
12 U.S.C. § 1818(e)(7)(B).
   In reviewing applications to modify orders of removal and prohibition under section 8(e) of the Act, the FDIC is required to use its predictive judgment to protect the public. Sletteland v. FDIC, 924 F.2d 350, 353 (D.C.Cir. 1991) (change-of-control application). Orders of removal and prohibition under section 8(e) of the Act are remedial and are issued not to punish, but rather to protect the public, further underscoring the importance of the FDIC's predictive judgment. See United States v. Stoller, 78 F.3d 710 (1st Cir. 1996).
   In such applications to modify orders of prohibition, a respondent has a strong burden of proof to justify the modification that he seeks. To meet that burden of proof under section 8(e)(7)(B) of the Act, Respondent Winter must demonstrate: (1) his fitness to participate directly or indirectly in the conduct of the affairs of an insured depository institution, (2) his participation would not pose a risk to the institution's safety and soundness and (3) that his participation would not erode public confidence in the institution. In the Matter of Charles E. Floyd, FDIC Enf. Decs. ¶5177, pp. A-1976 & A-1978 (April 16, 1992); In the Matter of Frederick M. Pfeiffer, FDIC Enf. Decs. ¶5193A, p. A-1656 (February 28, 1991); FDIC-83-153e, FDIC Enf. Decs. ¶5117, p. A-1303 (August 9, 1988).
   Respondent Winter has sought to have the Order of Prohibition modified to permit him to hold any office in, or participate in any manner in the conduct of the affairs of a mortgage banking division of any institution or agency specified in section 8(e)(7)(A) of the Act, 12 U.S.C. § 1818(e)(7)(A), or in any institution or agency specified in that section whose primary purpose involved providing mortgage banking services.
   On or about March 14, 1997, Respondent through his counsel has modified his application. Respondent now has agreed to a limited modification, which, instead of requiring that he obtain the prior written consent of the FDIC, would require him to provide thirty (30) days prior notification to the State of Minnesota Commerce Department and the FDIC when Respondent changes employers, when an employer is purchased by another employer which is an insured depository institution, or when Respondent is promoted or receives additional responsibilities within the same organization.
   Upon review of the record as a whole, the FDIC finds that Respondent Winter has presented sufficient evidence to obtain a limited {{11-30-98 p.TC-382}}modification of his Order of Prohibition. First, Respondent has accumulated a satisfactory record in the mortgage banking industry. He has served in the industry over the past seven years and continues to obtain positions with greater responsibility in the industry. Second, Respondent was only twenty-three years old at the time that he engaged in the conduct which resulted in losses to the institution. With the intervening years, Respondent has shown that he is able to handle responsibility without causing losses to his employer. Finally, the administrative process in obtaining the prior written consent from the FDIC presents obstacles to Respondent in pursuing positions of greater responsibility in the mortgage banking field given the consolidation in the industry.
   In being granted a limited modification, Respondent is reminded that banking depends upon the commitment to the highest standards of fiduciary duty long required by law for bankers. See Briggs v. Spaulding, 141 U.S. 132 (1891); Docket No. 85-291k, FDIC ENFORCEMENT DECISIONS AND ORDERS, Par. 5072, A-964, A-975; Docket No. 85-356e, FDIC ENFORCEMENT DECISIONS AND ORDERS, Par. 5112, A-1228, A-1235; see also American Bankers Association, Focus on the Bank Director, 97–125 (1984); Schlichting, Rice & Cooper, Banking Law, 6.04 (1984). Directors of a bank are required to exercise ordinary care and prudence in the administration of the bank's affairs. Briggs v. Spaulding, 141 U.S. at 165–166. They have a duty to manage the bank and it is negligence to leave the management of its affairs...up to others. See Heit v. Bixby, 276 F.Supp. 217 (E.D. Mo. 1967). As was stated by the Court of Appeals for the Sixth Circuit:
    [I]t is not unusual for banks to meet disaster through malfeasance of trusted officials. This is one of the dangers to be apprehended and guarded against. For this reason the law requires and depositors have a right to expect that directors should retain and maintain a reasonable control of the [b]ank.... In the discharge of this duty the directors are required no only in the observance of their official oath but by common law...to use ordinary diligence; and by ordinary diligence is meant, that degree of care demanded by the circumstances. They have their own responsibilities which they may not put aside.
Atherton v. Anderson, 99 F.2d 883, 888 (6th Cir. 1938).

ORDER

   The Order of prohibition is hereby modified as follows:
   Instead of obtaining prior written consent from the FDIC, Respondent shall thirty (30) days prior to undertaking any of the duties or responsibilities related to a position, provide written notification to the FDIC and to the appropriate state financial institution regulator for insured depository institutions when: (a) Respondent changes employers; (b) his employer is purchased by another employer which is an insured depository institution; or (c) Respondent is promoted or receives any additional responsibilities within the same organization. Any notification to the FDIC shall be to the appropriate Regional Director or appropriate Regional Office. With regard to an insured institution that is part of a group of related institutions, the appropriate Regional Office is the regional office in which the group's major policy and decision makers are located or any other regional office the FDIC designates on a case-by-case basis. With regard to an insured institution that is not part of a group of related institutions, the appropriate Regional Office is the FDIC region in which the institution is located. The appropriate Regional Director is the head of the appropriate Regional Office (hereinafter, "appropriate Regional Director" or "appropriate Regional Office").1 The thirty (30) days notification shall run from the date of receipt of the notification by the appropriate Regional Director.
   Respondent must provide a full and complete written notification to the FDIC and to the appropriate state financial institution regulator for insured depository institutions which shall include, but is not limited to, a full disclosure of Respondent's job duties, responsibilities and pay, a description of the supervision and control management will have over Respondent's activities, including what reporting requirements Respondent will have, and the amount of influence and control Respondent will be able to exercise over the affairs and operations of the insured institution.
   The appropriate Regional Director shall have thirty (30) days from the date of receipt of the notification to determine in his or her


1 See 62 Federal Register 16662 (April 8, 1997) to be codified at 12 C.F.R. § 303.0(b)(12).
{{11-30-98 p.TC-383}}sole discretion: (i) whether, based upon the notification submitted, that the Regional Director has no objection to Respondent remaining in his present position, albeit under new management, or to Respondent's accepting a new position or additional responsibilities; or (ii) whether, based upon the notification submitted, the Regional Director has determined that the Respondent must submit a formal application requesting the prior written consent of the FDIC for a modification or termination of the Order of Prohibition pursuant to section 8(e)(7)(B) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(e)(7)(B).
   The FDIC shall notify Respondent of its decision in writing, and if it does not provide written notification to the Respondent within thirty (30) days from the date of receipt of the notification, then Respondent may assume the position. If the appropriate Regional Director objects, the Respondent must submit a formal application for prior written consent of the FDIC pursuant to section 8(e)(7)(B) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(e)(7)(B).
   The consent granted herein is limited to Respondent's activities in mortgage banking and shall not otherwise affect the existing prohibition on participating in the conduct of the affairs of an insured depository institution, including specifically the prohibition from engaging in activities involving the purchase, sale, or trading of securities or the pricing of securities.
   The consent so granted is limited as set forth above and all other provisions of the Order of Prohibition remain in full force and effect and any violation of the Order of Prohibition or of the limited consent so granted herein shall constitute a violation of sections 8(e) and 8(j) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(e) and (j).
   Respondent must also seek the prior written consent of the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the Act, 12 U.S.C. § 1818(e)(7)(D), should he wish to participate in the conduct of the affairs of an insured depository institution over which the FDIC does not have jurisdiction.
   Pursuant to delegated authority.
   Dated at Washington, D.C. this 20th day of August, 1997.

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