Federal Deposit
Insurance Corporation

{{4-1-90 p.A-136}}
   [¶5012] FDIC Docket No. FDIC-82-5k (3-22-83)

   Civil money penalty assessed against a bank director who was principal shareholder, chairman of the board, and president of the bank, for extensions of credit to the director in amounts exceeding 10% of the bank's capital and unimpaired surplus.

   [.1] Directors—Duties of President and Chairman of the Board
   A chairman of the board of directors and president of the bank is responsible for violations of applicable laws and regulations.

   [.2] Civil Money Penalties—FDIC Authority
   The FDIC has legal authority to impose a civil money penalty on a person participating in the affairs of a bank who caused, brought about, participated in, aided, or abetted violations of law.

   [.3] Extension of Credit—Defined
   An extension of credit is a making or renewal of any loan, a granting of a line of credit, or an extending of credit in any manner whatsoever, and includes: any other transactions as a result of which a person becomes obligated to pay money (or its equivalent) to a bank, whether the obligation arises directly or indirectly, or because of an endorsement on an obligation or otherwise, or by any means whatsoever.

   [.4] Civil Money Penalty—Notice of Hearing
   There is no requirement that a Notice of Hearing set forth all of the factual bases for the allegations against a bank director. It is sufficient that a Notice allege violations of law in that the bank director borrowed more from the bank than he was statutorily allowed to borrow as an officer and principal shareholder of the bank.

   [.5] Practice and Procedure—Hearsay—Business Records Exception
   Records prepared in the regularly conducted course of business may be received into evidence as an exception to the Hearsay Rule if it was the regular practice of the business to prepare such records as shown by the testimony of the custodian or other qualified witness, unless there is an indication of lack of trustworthiness.

   [.6] Practice and Procedure—Hearsay—Custodian of Bank Records
   A custodian of bank records at the time of a hearing is a proper person through which to introduce the documents.

   [.7] Practice and Procedure—Hearsay—Specifically Prepared Documents
   Exhibits that are specially prepared for a proceeding are admissible if the exhibit accurately reflects the data taken from the underlying or supporting documents, and opposing parties are permitted access to the underlying or supporting documents of the exhibit.

   [.8] Civil Money Penalties—Amount—Statutory Standard
   In determining the amount of a civil money penalty, the following factors must be considered: the appropriateness of the penalty with respect to the size of financial resources and good faith of the bank or person; the gravity of the violations; the history of previous violations; and such other matters as justice may require.

In the Matter of * * * , DIRECTOR
AND OFFICER, * * * (INSURED
STATE NONMEMBER BANK)



DECISION AND ORDER TO PAY
CIVIL MONEY PENALTY
FDIC-82-5K
   On January 25, 1982 the Board of Directors of the Federal Deposit Insurance Corporation, pursuant to the provisions of Section 18(j)(3) of the Federal Deposit Insurance Act (the "Act") (12 U.S.C. § 1828(j)(3)) and Part 308 of the FDIC's Rules and Regulations (12 C.F.R. Part 308 (1982)), issued a NOTICE OF ASSESSMENT OF CIVIL MONEY PENALTY, FINDINGS OF FACT AND CONCLUSIONS OF LAW, AND ORDER TO PAY {{4-1-90 p.A-137}}against * * * , in his individual capacity while serving as principal shareholder, chairman of the board and president of The Bank of * * *, charging violations of Section 22(h) of the Federal Reserve Act, as amended (12 U.S.C. § 375b), and Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 215) ("Regulation O") promulgated thereunder, made to apply to State nonmember banks under Section 18(j) of the Act (22 U.S.C. § 1828(j)):
   On May 13, 1982, an administrative hearing was held in * * *, before Administrative Law Judge John M. Vittone, who filed his Recommended Decision, with findings of fact and conclusions of law, on November 24, 1982.
   The Board of Directors of the FDIC has considered the record and the applicable law and has agreed with the findings of fact and conclusions of law of the Administrative Law Judge in their entirety.
   After taking into account the appropriateness of the penalty with respect to the financial resources and good faith of * * *, in his capacity as principal shareholder, chairman of the board and president of The Bank of * * *, the gravity of the violations, history of previous violations, and such other matters as justice may require, it is
   ORDERED, that the Board of Directors of the FDIC hereby adopts the findings of fact and conclusions of law of the Administrative Law Judge, a copy of which is attached hereto, in their entirety.
   FURTHER, ORDERED, that a penalty of $10,000 be, and hereby is, assessed against * * * pursuant to Section 215.4(c) of Regulation O (12 C.F.R. § 215.4(c)) and Section 18(j)(3)(A) of the Act (12 U.S.C. § 1828(j)(3)(A));
   FURTHER ORDERED, that the penalty imposed hereby shall be payable and collected not later than 60 days from the date of this ORDER.
   By direction of the Board of Directors.
   Dated at Washington, D.C. this 22nd day of March, 1983.
/s/ Hoyle L. Robinson
Executive Secretary

NOTICE OF ASSESSMENT OF CIVIL
MONEY PENALTY, FINDINGS OF
FACT AND CONCLUSIONS OF LAW,
AND ORDER TO PAY
FDIC-82-5k
RECOMMENDED DECISION OF THE
ADMINISTRATIVE LAW JUDGE

Background

   On January 25, 1982, the Board of Directors of the Federal Deposit Insurance Corporation issued a Notice of Assessment of Civil Money Penalty, Findings of Fact and Conclusions of Law, and Order to Pay Civil Money Penalty ("Notice") pursuant to section 18(j)(3) of the Federal Deposit Insurance Act (12 U.S.C. § 1828(j)(3)) against * * * ("respondent"), in his individual capacity while serving as principal shareholder, Chairman of the Board, and President of the Bank of * * *. The Notice charged that Mr. * * * had violated section 22(h) of the Federal Reserve Act, as amended (12 U.S.C. § 375(b)) and Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 215). Regulation O was made applicable to state nonmember banks under section 18(j) of the Federal Deposit Insurance Act (12 U.S.C. § 1828(j)).
   On February 16, 1982, the FDIC received a telegram from respondent's counsel requesting a hearing with regard to the Notice.
   On April 27, 1982, Counsel for FDIC petitioned the undersigned for Findings of Fact and Filing of Recommended Decision. FDIC's counsel demonstrated in the petition that respondent had failed to file a timely answer as required by section 308.06 of the Rules of Practice and Procedure (12 C.F.R. § 308.06). At the initiation of the undersigned a conference call was held between the parties and the judge. During that call, it became clear that respondent's counsel was operating under an earlier version of the FDIC's Rules of Practice. Accordingly, FDIC's petition was denied and respondent was ordered to respond to the Notice. Mr. * * * response was received on May 5, 1982. On May 11, FDIC counsel filed a Motion for Leave to File Reply to the respondent's late-filed response. The FDIC's motion was granted (Tr. 10).¹²

Findings of Fact

   1. The Bank, during all times pertinent to this proceeding, had its principal place of business at * * *, and was a state chartered bank insured by the FDIC but not a member of the Federal Reserve System. (Response of * * * at page 2, par. 1.)
   2. The Bank was at all times subject to the provisions of the Federal Deposit Insurance Act (12 U.S.C. §§ 1811, et seq ), the Rules and Regulations of the FDIC (12 C.F.R. Chapter III), and Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 215), as made applicable to the Bank under the provisions of 12 U.S.C. § 1828(j)(2). (Response of * * * at page 2, par. 2.)
   3. At all times pertinent to the proceeding, * * * was Chairman of the Board of Directors, President and principal shareholder of the Bank. (Response of * * * at page 2, par. 3.) As such, he was, at all times pertinent to this proceeding, subject to the provisions of Regulation O under 12 U.S.C. § 1828(j)(3)(A).
   4. From April 18, 1979 through July 25, 1979, the Bank extended credit to respondent in the amount of $74,000. During the same period of time, according to the Bank's report of condition filed as of March 31, 1979, which was the report of condition most recently filed prior to the April 18, 1979, transaction date, 10 percent of the Bank's capital and unimpaired surplus did not exceed $36,400. (TR 92; FDIC-1 and FDIC-8).
   5. From July 26, 1979 through December 23, 1979, the Bank extended credit to respondent in the amount of $74,000. At the time of the July 26, 1979, transaction, 10 percent of the Bank's capital and unimpaired surplus, as reflected by the June 30, 1979, report of condition, did not exceed $33,900. (TR 92; FDIC-1, FDIC-7 and FDIC-8).
   6. From December 24, 1979 through April 13, 1980, the Bank extended credit to respondent in the amount of $100,000. During the same period of time, 10 percent of the Bank's capital and unimpaired surplus was $36,000 according to the report of condition filed September 30, 1979 and $48,500 according to the report of condition filed December 31, 1979. (TR 93; FDIC-1, FDIC-7 and FDIC-8).
   7. From April 14, 1980 through December 22, 1980, the Bank extended credit to respondent in the amounts of $15,000 and $40,000. During the same period of time, 10 percent of the Bank's capital and unimpaired surplus was between $44,100 and $44,400 according to the reports of condition of March 31, 1980, June 30, 1980, and September 30, 1980. (Tr. 93–94; FDIC-1, FDIC-7, FDIC-8).
   8. From December 23, 1980 through December 29, 1980, the Bank extended credit to respondent in the amount of $65,000. During the same period of time, 10 percent of the Bank's capital and unimpaired surplus according to the September 30, 1980, report of condition did not exceed $44,100. (TR 94; FDIC-1, FDIC-7 and FDIC-8).
   9. From December 30, 1980 through March 1, 1981, the Bank extended credit to

Conclusion of Law

   1. The FDIC has jurisdiction over respondent and the subject matter of this proceeding.
   2. Regulation O (12 C.F.R. Part 215) was adopted by the Board of Governors of the Federal Reserve System in implementation of section 22(h) of the Federal Reserve Act (12 U.S.C. § 375b).
   3. From April 18, 1979 through April 13, 1980, and from December 23, 1980 through August 6, 1981, * * * was a "director," "executive officer" and "principal shareholder" of the Bank within the meaning of Regulation O (12 C.F.R. §§ 215.2(c), 215.2(d) and 215.2(j)).

   [.1] 4. As Chairman of the Board and President of the bank, respondent was responsible for violations of applicable laws and regulations, including section 22(h) of the Federal Reserve Act (12 U.S.C. § 375b) and Regulation O (12 C.F.R. Part 215).
   5. From April 18, 1979 through April 13, 1980, and from December 23, 1980 through August 6, 1981, the Bank extended credit to * * * in excess of the limitations prescribed in section 22(h) of the Federal Reserve Act (12 U.S.C. § 375b) and section 215.4(c) of Regulation O (12 C.F.R. § 215.4(c)) in violation of said statute and regulation.
   6. From April 18, 1979 through April 13, 1980, and from December 23, 1980 through August 6, 1981, * * * , as President and chief executive officer and a director of the Bank, was a person participating in the affairs of the Bank whose action caused, brought about, participated in, aided or abetted violations of section 22(h) of the Federal Reserve Act and section 215.4(c) of Regulation O (12 C.F.R. § 215.4(c)) within the meaning of section 18(j)(3) of the Federal Deposit Insurance Act (12 U.S.C. § 1828(j)(3)).

   [.2] 7. The FDIC has legal authority to impose a civil money penalty on * * * as a person participating in the affairs of the Bank who caused, brought about, participated in, aided or abetted violations of section 22(h) of the Federal Reserve Act (12 U.S.C. § 375b) and section 215.4(c) of Regulation O (12 C.F.R. § 215.4(c)).
   8. The civil money penalty was properly imposed by the FDIC against * * * for violations of Regulation O in accordance with the statutory standards and considerations contained in section 18(j)(3)(B) of the Federal Deposit Insurance Act (12 U.S.C. § 1828(j)(3)(B)).

Discussion

   The Notice charges that Mr. * * * , through his positions of Chairman of the Board, President, and principal shareholder of the Bank of * * *, violated section 22(h) of the Federal Reserve Act (12 U.S.C. § 375b) and Regulation O of the Board of Governors of the Federal Reserve System {{4-1-90 p.A-140}}(12 C.F.R. Part 215).⁴ In essence, Regulation O establishes a limit on the amount of money a bank may lend to its directors, officers, and principal shareholders. FDIC counsel argues that this case involves a willful violation of Regulation O by Mr. * * * which continued for over two years even through Mr. * * * knew that illegal practices were being engaged by him and the Bank.
   In 1978, Congress amended the Federal Reserve Act, in part, to impose a statutory limitation on the extension of credit to an executive officer and principal shareholders of banks that are members of the Federal Reserve System.⁵ The limitation is contained in section 22(h)(1) of the Federal Reserve Act and provides as follows:

   SEC. 22(h)(1). No member bank shall make any loan or extension of credit in any manner to any of its executive officers, or to any person who directly or indirectly or acting through or in concert with one or more persons owns, controls, or has the power to vote more than 10 per centum of any class of voting securities of such member bank...where the amount of such loan or extension of credit...would exceed the limits of loans of a single borrower established by section 84 of this title. (12 U.S.C. § 375b(1)).

   Aggregate Lending Limit. No member bank may extend credit to any of its executive officers or principal shareholders or to any related interest of that person in an amount that, when aggregated with the amount of all other extensions of credit by the member bank to that person and to all related interests of that person, exceeds the lending limit of the member bank specified in Section 215.2(f) above. (12 C.F.R. § 215.4(c)).

The "lending limit" for a member bank is an amount equal to the limit on loans to a single borrower established by section 5200 of the Revised Statutes, 12 U.S.C. 84. This amount is 10 percent of the bank's capital stock and unimpaired surplus or any higher amount permitted by section 5200 of the Revised Statutes for the types of obligations listed therein as exceptions to the 10 percent limit. A member bank's capital stock and unimpaired surplus equals the sum of (1) the "total equity capital" of the member bank reported on its most recent consolidated report of condition filed under 12 U.S.C. 1817(c)(3), (2) any subordinated notes and debentures approved as an addition to the member bank's capital structure by the appropriate Federal banking agency, and (3) any valuation reserves created by charges to the member bank's income.

   An extension of credit is a making or renewal of any loan, a granting of a line of credit, or an extending of credit in any manner whatsoever, and includes:...
   Any other transactions as a result of which a person becomes obligated to pay

money (or its equivalent) to a bank, whether the obligation arises directly or indirectly, or because of an endorsement on an obligation or otherwise, or by any means whatsoever. (12 C.F.R. § 215.3(a)(8)).

   The total indebtedness of Chairman of the Board * * * will be liquidated via cash payment no later than March 11, 1981.
   In addition, these loans should be reduced immediately via cash payment or sale of a participation to correct the existing violations of FIRA.⁸ Further, it is undisputed that Mr. * * * discussed the violations of Regulation O with Mr. * * * on at least two other occasions and promised to take corrective action. (TR

255-56, 261) Finally, Mr. * * * testified that the FDIC Report of Examination of July 24, 1981, which was prepared under his supervision, was served on the Bank. (TR 260) This report (FDIC-11) clearly raises the issue of Mr. * * * violation of Regulation O on pages 1-a and 1-b. (See also the Reports of Examination for February 1, 1980 (FDIC-12 at pp. 1, 1-b) and May 8, 1981 (FDIC-10 at pp. 1, 1-c)).

   [.4] Respondent is correct in his conclusion that the Notice does not set forth all of the factual basis for the allegations, but there is no requirement that the FDIC do so. While the Notice is not the model of clarity that FDIC counsels argues it to be, it is adequate to apprise respondent of the charge so that he could prepare his defense. The Notice specifically charges Mr. * * * with violating section 22(h) of the Act and section 214.4(c) of Regulation O in that he borrowed more from the Bank than he was allowed to borrow as an officer and principal shareholder under Regulation O limitations. The Notice states the regulation and statute violated, the nature of the violation, and the period during which the violation occurred.
   Any uncertainty on Mr. * * * part could have been clarified during the discovery period prior to the hearing in this proceeding. Mr. * * * made no request for clarification of the Notice. It is doubtful that Mr. * * * lacked the information he argues the Notice failed to provide. It is unchallenged that all three FDIC examiners testified that they discussed the violations of Regulation O with Mr. * * * and that he told Mr. * * * and Mr. * * * that he would take corrective action. ( See TR 197, 202, 226, 227, 246, 255, 261, 334, 339, 344-46).
   Respondent argues, among other things, that receipt of the FDIC evidence violates the business records exception to the Hearsay Rule, relying upon Rule 803(b) of the Federal Rules of Evidence, and that the FDIC was not the proper custodian of the Bank's records (FDIC-1).

   [.5,.6] The Bank's records (FDIC-1) were introduced through Ms. * * * who was appointed to be liquidator of the bank with the appropriate power of attorney. (FDIC-5, 6, TR 53). At the time of the hearing Ms. * * * was the custodian of the bank's records.⁹ Under Rule 803(b), records prepared in the regularly conducted course of business may be received into evidence as an exception to the Hearsay Rule if it was the regular practice of the business to prepare such records as shown by the testimony of the custodian or other qualified witness unless there is an indication of lack of trustworthiness. As noted above, Ms. * * * was the custodian of the bank records at the time of the hearing and was a proper person through which to introduce the documents.
   Respondent has not argued that FDIC-1 was not prepared in the regular course of the bank's business activity or that the document lacked trustworthiness. Presumably, in his position of President and Chairman of the Board, Mr. * * * would have done so if there was any basis for such arguments. Contrary to respondent's arguments, the better rule is that when the circumstances indicate trustworthiness, it is not necessary that the person who kept the record or even had supervision over its preparation testify. (United States v. Flom, 558 F.2d 1179 (5 Cir. 1977); United States v. Colyer 571 F.2d 941 (5 Cir. 1978); United States v. Pfeiffer, 539 F.2d 668 (8 Cir. 1976).
   Respondent argues receipt of the Bank Examination Reports (FDIC-10, 11, 12) was improper because the witnesses did not have direct knowledge of the compilation, accuracy and omissions. Respondent's arguments are without merit. The reports were received into evidence through the testimony of Examiners * * * and * * *. Both gentlemen testified that each was the examiner-in-charge of the examination of the Bank of * * *, that they had supervised the conduct of the examination, that they had prepared the reports of examination, and that they had discussed the reports with Mr. * * * and the other Bank officials. (TR 230 et seq, 324 et seq.) Both persons were

   [.7] Respondent has also challenged FDIC-7 and 8 on the basis that the exhibits were prepared specifically for this proceeding and do not qualify for admission under the business records exception. Respondent's argument is without merit. It is a common practice of Federal courts and administrative agencies to receive exhibits which summarize data from various documents into a chart format, and it is not a valid argument that such exhibits are specially prepared for a proceeding. It is only required that the exhibit accurately reflect the data taken from the underlying or supporting documents and that opposing parties be permitted access to the underlying or supporting documents of the exhibit.
   FDIC-7 and 8 were prepared by Mr. * * *, an employee of the FDIC, who took data from specific "call reports" and FDIC-1 and either summarized it (FDIC-7) or presented it in a chart from (FDIC-8). (TR 78 et seq.) Since these exhibits were not made available to respondent prior to the hearing, the call reports which form the basis for FDIC-7 were made available to respondent for his review and analysis after the hearing. Respondent's counsel was allowed almost two weeks in which to study the call reports to determine if there were any grounds to object to FDIC-7. (Tr 369-74) No objection was filed, and it can only be assumed that respondent did not find any errors in the exhibit.
   In its reply brief, respondent argues that the FDIC case fails to present any evidence of the nature or type of obligations incurred by Mr. * * * . Since this argument was raised in respondent's reply brief, FDIC has not had a fair opportunity to respond. Respondent argues that section 22(h) must be read in conjunction with section 84 (12 U.S.C. § 84) which provides that the 10 percent loss limitation is subject to various exceptions. In essence, respondent argues that since no evidence was introduced that the loan or extensions of credit to Mr. * * * did not fall within the exceptions of section 84, then the FDIC has failed to prove that respondent was actually in violation of "10 percent limit per 12 U.S.C. § 375(b)(1) qua 12 U.S.C. § 84(1)-(14)."
   The short answer to this argument is that FDIC has introduced substantial evidence that the loans and extension of credit to Mr. * * * were in violation of Regulation O and the Act. It did not have to prove that the 14 exceptions of section 84 did not affect the 10 percent limitation. Such evidence, if it existed, should have been offered by respondent who should know if any of the exceptions of section 84 affected the loans in question. Respondent did not offer any evidence on this point at the hearing.¹¹

Assessment of Civil Penalty

   [.8] In the Notice, the following order to pay a civil money penalty is provided:

   After taking into account the appropriateness of the penalty with respect to the size of financial resources and good faith of * * * individually, the gravity of the violations, the history of previous violations, the economic benefit that * * * obtained, and such other matters as justice may require, it is ORDERED ...a civil money penalty of $10,000 be, ...assessed against * * *...(Notice at 2)