Each depositor insured to at least $250,000 per insured bank



Home > Regulation & Examinations > Bank Examinations > FDIC Enforcement Decisions and Orders




FDIC Enforcement Decisions and Orders

ED&O Home | Search Form | Text Search | ED&O Help


{{4-1-90 p.A-290}}
   [5027] FDIC Docket No. FDIC-84-86g (7-30-84)

   FDIC entered an order continuing the suspension and prohibition from participating in the conduct of the affairs of a bank of a director who had been charged with systematic concealment of personal income, fraud, and falsification of income tax returns, even though he had not been charged with anything that has caused any monetary loss to the bank, or with any offense relating to the bank's business.

   [.1] Prohibition, Removal, or Suspension—Criminal Indictment
   If a bank officer has been indicted for the submission of false statements involving substantial sums of money, even though not connected with bank business, there is concern over the possibility of the submission of false statements in the bank's affairs, and a bank director may be suspended from and prohibited from further participation in the conduct of the affairs of the bank.

   [.2] Prohibition, Removal, or Suspension—Potential Threat to Depositors
   A threat to the a bank's depositors or impairment of public confidence need not actually have occured for the FDIC to suspend an officer or director and {{4-1-90 p.A-291}}prohibit further participation in the affairs of the bank. If there is a potential threat to the interest of depositors or a potential impairment of public confidence, the director or officer may be suspended or prohibited from further participation in the affairs of the bank.
* * * BANK (INSURED STATE
NONMEMBER BANK)




ORDER CONTINUING NOTICE OF
SUSPENSION AND PROHIBITION

FDIC-84-86g

   IT IS ORDERED, for the reasons stated in the Recommended Decision of Presiding Officer Daniel H. Hanscom, which is incorporated herein by reference, that the Notice of Suspension and Prohibition issued by the Board of Directors of the Federal Deposit Insurance Corporation against * * *, pursuant to section 8(g) of the Federal Deposit Insurance Act (12 U.S.C. § 1818(g)), on May 7, 1984, be, and hereby is, continued in effect until terminated by the Federal Deposit Insurance Corporation or until the final disposition of the indictment upon which the Notice of Suspension and Prohibition is based.
   By order of the Board of Directors.
   Dated at Washington, D.C., this 30th day of July, 1984.
/s/ Alan J. Kaplan (for)
Hoyle L. Robinson
Executive Secretary

BEFORE THE FEDERAL DEPOSIT INSURANCE CORPORATION

   Hearing under Section 308.59 of the FDIC's rules and regulations pursuant to the request of * * *, vice president and director of * * *, that the Notice of Suspension and Prohibition issued May 7, 1984, under Section 8(g)(1) of the Act of rescinded.

RECOMMENDED DECISION

   On June 20, 1984, a hearing was held in * * *, under Section 308.59 of the FDIC's Rules and Regulations on the written request filed by * * *, vice president and director of the * * * Bank, * * *, that the Notice of Suspension and Prohibition issued against him under Section 8(g)(1) of the Act of rescinded.
   On March 29, 1984, Mr. * * * was indicted on five (5) counts of alleged income tax evasion. A copy of the indictment was received by the * * * Regional Office of the FDIC on April 9, 1984, and on May 7, 1984, the Board of Directors of the Corporation adopted a resolution issuing a Notice of Suspension and Prohibition under Section 8(g) of the Act.
   On May 14, 1984, the Notice was served on Mr. * * * and on May 29, 1984, through the * * * Regional Office, the Executive Secretary's office received his request for a hearing. On June 7, 1984, the undersigned was appointed presiding officer and the hearing was set for June 20, 1984, in * * *.
   At the hearing, FDIC staff and counsel for Mr. * * * stipulated that the testimony offered by witnesses called in the case of Mr. * * * would be incorporated into this record and considered as if given with respect to Mr. * * *. Both Mr. * * * and Mr. * * * were officers and directors of the * * * Bank, * * *, being president and vice president respectively, and both were indicted on March 29, 1984, for alleged income tax evasion. Mr. * * * was acquitted on June 12, 1984. Mr. * * * is scheduled for trial early in September, 1984 (Request for hearing, p. 2).
   Mr. * * * was not personally present at his hearing June 20 in * * *. Through counsel, however, he offered 14 exhibits and, in addition to the stipulated testimony of witnesses who testified at the hearing with respect to Mr. * * *, called Mr. * * *, the chairman of the board, who with his family is the controlling stockholder of the * * * Bank, * * * (Tr. 249, * * * transcript).
   The FDIC staff introduced six exhibits and called one witness, Mr. * * *, Assistant Regional Director of the FDIC's * * * Regional Office. The record was kept open until the close of business June 27, 1984. A concise statement of the arguments of both sides were scheduled for filing on June 29, 1984, and the transcript was scheduled for delivery on that same date.

The Indictment

   Mr. * * * was indicted on March 29, 1984, by a Grand Jury in the U.S. District Court for the Eastern District of * * * ( * * * Division), and was charged with {{4-1-90 p.A-292}}five counts of willfully and knowingly attempting to evade Federal income taxes by filing false and fraudulent income tax returns during each year of a five year period from 1978 through 1982.
   The basis for each count was the allegation that Mr. * * * reported substantially less income than he had actually received in each of the years 1977 through 1981, and thus allegedly evaded the Federal income taxes due on such income.
   Credit life insurance is issued on loans granted by the * * * Bank, * * *, and commissions on the premiums paid by borrowers are distributed on a monthly basis to certain officers including Mr. * * *. It appears from the evidence that some or all of the income Mr. * * * allegedly failed to report to the IRS may have consisted of commissions on credit life insurance premiums distributed to him as vice president of the * * * Bank ( * * *, Tr. 19-27; Tr. 286-87, * * * transcript).
   In any event, according to the indictment Mr. * * * failed to report income of $10,116.35 in his income tax return failed April 12, 1978, failed to report income of $15,045.21 in his tax return filed April 13, 1979, failed to report $11,242.40 in his return filed April 14, 1980, failed to report $14,245.07 in his return filed April 14, 1981, and failed to report $17,697.59 in his income tax return filed on April 12, 1982. The total income charged to have been knowingly and willfully not reported over the foregoing five year period amounted to $68,346.
   The Federal income taxes allegedly evaded by the foregoing claimed failures to report income were $3660 in 1978, $5446 in 1979, $3837 in 1980, $5888 in 1981, and $7384 in 1982. The total Federal income taxes allegedly evaded over the five year period were $26,215.
   Section 7201 of the U.S. Code provides that any person who willfully attempts to evade Federal income taxes shall be fined not more than $100,000 or imprisoned not more than 5 years or both.

Mr. * * * evidence is support of his contention that the Notice of Suspension and Prohibition should be rescinded.

   In summary, Mr. * * * contended that, notwithstanding his indictment, his continued service and participation in the affairs of the * * * Bank, * * *, would not pose a threat to the bank's depositors and would not threaten to impair public confidence in the bank.
   Thirteen letters, to the FDIC were presented in support of his position. The chairman of the board of the bank wrote that he felt the suspension of Mr. * * * was unjust, that Mr. * * * had served as vice president of the bank since 1969 and had served the bank well, that Mr. * * * was a civic leader, that since his indictment the bank had operated just as successfully as it had in the past, and that many large depositors felt that Mr. * * * should not have been suspended (ltr from * * *, Rx 1).
   The manager of the * * * County Electric Cooperative Ass'n wrote that he thought Mr. * * * suspension was premature, that if Mr. * * *'s presence in the bank's management had been considered in any way damaging to the bank, the bank's board would have removed him, that Mr. * * * had been a valued officer for 15 years and that he felt Mr. * * *'s removal was more damaging to the bank than his continued service (ltr from * * *, Rx 2). The executive vice president of the bank wrote that Mr. * * * had been responsible as vice president over a 15 year period for much of the bank's growth, that there had been no deterioration of the bank's assets or loss of deposits to Mr. * * *'s indictment, and that he wished to see Mr. * * * restored to his position as vice president (ltr from * * *, Rx 3).
   Five directors wrote individual letters to the FDIC following Mr. * * * suspension stating generally their continued confidence in him despite his indictment, asserting that over a 15 year period he had been a good banker and civic leader, that his problems with the IRS in their view were personal not involving the bank, that the townspeople continued to have trust and confidence in Mr. * * *, and that there had been no deterioration in the bank's assets or deposits following Mr. * * *'s indictment (ltrs of * * *, * * *, * * *, * * *, and * * *, Rx 4 through 8).
   The Superintendent of the * * * Independent School District wrote that he did not feel threatened or afraid to leave school funds on deposit in the bank with Mr. * * * as vice president and that he had full confidence in him (ltr from * * *, Rx. 9).
   The mayor of * * *, endorsed Mr. * * *, stated that he was generally familiar {{4-1-90 p.A-292}} with the level of confidence reposed by the citizens in the abilities of Mr. * * *, that such confidence had been and continued to be at a very high level, and that he believed his views were shared by the citizens of the town (ltr from * * *, Rx 10).
   The bank's largest depositor stated that he kept $800,000 on deposit in the * * * Bank, that his confidence in the bank was not impaired with Mr. * * * conducting the affairs of the bank but probably would be affected if Mr. * * * continued to be suspended (ltr from * * *, Rx. 11).
   The Chief Justice of the Court of Appeals, * * *, wrote the FDIC asking that Mr. * * * not be suspended stating that the charges against Mr. * * * in no way related to his work at the bank, that Mr. * * * was impeccably honest and trustworthy, that suspension of Mr. * * * from his position in the bank could hurt the bank, and requested the agency to exercise its discretion to allow Mr. * * * to continue to serve (ltr from * * *, Rx 12).
   A majority of the stockholders and directors of the bank wrote a joint letter stating that they were some of the largest depositors and did not believe that continued service by Mr. * * * would pose a threat to the interest of the bank's depositors or would threaten to impair public confidence in the bank. On the contrary they were apprehensive that public confidence might decline if Mr. * * * continued to be suspended. They advised that lobby traffic had been within normal range following the indictment (ltr dtd April 6, 1984, Rx 13).
   A spread sheet showing loans, deposits, reserve, and stockholders equity from March 31, 1983, through May 11, 1984, was introduced by counsel for Mr. * * * (Rx. 14). It did not indicate any deterioration in the bank's assets, deposits or financial soundness (see * * *, Tr. 200-04, * * * transcript).
   It was stipulated that the testimony of the witnesses who testified on behalf of Mr. * * * on June 5, 1984, could be considered in all respects as if they had testified to the same effort for Mr. * * *.
   The chairman of the board and with his family, the controlling stockholder of the bank, Mr. * * *, however, appeared again at Mr. * * *'s hearing. He testified that he had known Mr. * * * for 24 or 25 years, that his character and integrity were good, and that he was highly regarded in the community. According to this witness, Mr. * * *'s continued service did not pose a threat to the bank or threaten to destroy public confidence in the bank, and he was anxious to have Mr. * * * back as vice president (* * *, Tr. 15-18, 52). Mr. * * *, had an interest and held high office in a substantial number of banks in * * *, and had over 50 years of banking experience. He was present when the board of the * * * Bank discussed the indictment against Mr. * * *. The board did not vote to suspend Mr. * * * because the board did not believe he had done anything wrong to the bank, but had done a good job for the bank over the years (Tr. 253-54, * * * transcript). If Mr. * * * had believed that Mr. * * * had done anything to harm the bank or its depositors he would have fired him on the spot (Tr. 259. * * * transcript). According to Mr. * * *, the indictment of Mr. * * * has not affected the bank's blanket bond insurance respecting dishonesty by bank officers or employees (* * * Tr. 48-51).
   A number of directors, shareholders, and substantial depositors in the * * * Bank, * * *, would have testified, if they had been called as witnesses for Mr. * * *, that they did not believe he should have been suspended without a trial, that they did not believe his employment as vice president and director of the bank posed any threat to depositors or threatened to erode public confidence in the bank, that Mr. * * *'s reputation for honesty and integrity was good, that they did not want Mr. * * * suspended from his position or prohibited from participation in the affairs of the bank, that his removal from the bank would cause more harm to the bank than his continued participation in the bank's affairs, and that nothing that Mr. * * * had done had caused any loss to the bank (* * *, Tr. 48–50; * * *, Tr. 73–84; * * * Jr., Tr. 84–97; * * *, Tr. 168–174). One of the foregoing directors was manager of the * * * County Electric Cooperative Association and testified that the association kept an average of about $400,000 on deposit in the * * * Bank and would have no fear from Mr. * * * being active in the bank's affairs regardless of his indictment (* * *, Tr. 74–78, * * * transcript). Two major depositors in the * * * Bank testified, One, who was Superintendent of Schools at * * *, testified that the school district kept approximately $5 million dollars on deposit in the bank, testified that he had utmost confidence in Mr. * * *'s integrity, that he thought he should not have been removed before being tried, and that as Superintendent of Schools he wanted Mr. * * * back on duty in the bank (* * *, Tr 127-34; * * * transcript). Another depositor who maintained a large sum in the bank, well above the limit insured by the FDIC, testified to the same effect (* * *, Tr. 136-42; * * * transcript).

{{4-1-90 p.A-293}}
   The executive vice president of the bank testified that since the return of the indictment against Mr. * * * traffic in the bank had been normal, and no different from before, that customers of the bank were behind Mr. * * * and very strong against his removal, that many expressed a desire to write letters and to help Mr. * * *, that the return of Mr. * * * to his position as vice president would not threaten depositors or impair confidence in the bank, that the people in the community felt he should not have been removed before trial and wanted him restored to his position (* * *, Tr. 194-200, * * * transcript).

Evidence offered by FDIC staff.

   The FDIC staff introduced six exhibits; the indictment, the letter to the Board of the * * * Bank notifying of the suspension of Mr. * * * and Mr. * * *, the letter to Mr. * * * notifying him of his suspension, a certified copy of the resolution of the Board of the FDIC adopting a Notice of Suspension and Prohibition suspending Mr. * * * from his office as director and vice president of the * * * Bank and prohibiting him from further participation in its affairs, the Notice itself and the fidelity bond insuring the * * * Bank against loss due to dishonesty of employees.
   FDIC staff cross-examined the witnesses relied on by Mr. * * *. Although the chairman of the board of the * * * Bank testified that Mr. * * * posed no threat to depositors or to public confidence in the bank, he had not read the indictment (* * *, Tr. 38-41). Nor had the indictment been read by the board of directors of the bank, many of whom also testified in the same vein as the chairman of the board (id.; see also * * *, Tr. 51–52; * * *, Tr. 105-07; * * * Tr. 133-34; * * *, Tr. 175; * * *, Tr. 205-06; all * * * Transcript). The chairman of the board did not know that Mr. * * * had been charged with failing to report approximately $68,000 of income and was somewhat incredulous when advised of this figure (* * * Tr. 44–45). Nor was this figure reported to the bank's board of directors when the indictment of Mr. * * * was considered (* * *, Tr. 55–58; * * * transcript; * * *, Tr. 41–42).
   The FDIC staff called Mr. * * *, Assistant Regional Director, * * * Regional Office. Mr. * * * testified that when he learned of Mr. * * *'s indictment he and the Regional Director had two meetings with Mr. * * *, chairman of the board of * * * Bank, one with Mr. * * * by himself, and the second when he was accompanied by counsel. The possibility of Mr. * * * voluntarily stepping down from his position as director and vice president was discussed. No commitment on this score was received so Mr. * * * and the Regional Director decided to recommend suspension of Mr. * * * to headquarters. The nature of Mr. * * *'s indictment was considered, and the possibility of a threat to depositors and erosion of public confidence in the bank discussed, as well as the position Mr. * * * held as vice president and director. Mr. * * * testified that the relatively high position of Mr. * * * in the bank was discussed, as well as the support for Mr. * * * shown by those who wrote letters to the FDIC. On cross-examination, Mr. * * * agreed that other than the indictment he did not have "anything" or "any fact" that Mr. * * *'s presence in the bank would pose a threat to depositors or impair public confidence in the bank (* * *, Tr. 56–66).

Opinion

   Mr. * * * is now under indictment for a serious Federal offense involving dishonesty. Whatever one may think about certain aspects of the income tax laws, there is no uncertainty about the obligation of every taxpayer to report income honestly and without willful and fraudulent concealment. Mr. * * *, of course, at this juncture has not been found guilty of anything, he has only been charged. But the charges do not involve minor infractions or small dollar amounts. As stated earlier, Mr. * * * has been charged with willfully and knowingly failing to report between $10,000 and $15,000 of income in each year for five consecutive years until the investigation of

{{4-1-90 p.A-295}}
   Mr. * * * by the IRS commenced. The indictment of Mr. * * * involves allegations of systematic concealment of income, fraud and falsification of income tax returns. This is the type of offense rightly viewed with particular concern by agencies such as the FDIC charged with overseeing the nation's banking system because it inevitably raises a question as to an individual's integrity in conducting bank affairs.
   As reported earlier in this decision, nine responsible members of the community testified on behalf of Mr. * * * and it was stipulated that they would testify to the same effect for Mr. * * *. Based on their testimony and the stipulation, these persons had the fullest confidence in Mr. * * *'s integrity notwithstanding the charges against him, and wanted him back as vice president and director of the bank. In weighing this testimony, however, it must be considered that seven of these individuals were colleagues of Mr. * * * in managing the * * * Bank. They were long term associates and friends. All were directors and shareholders with Mr. * * * and their support may reflect the cohesiveness of management and the ties of friendship. Also, they viewed the charges against Mr. * * * as a personal matter between him and the IRS, not involving the bank. This is also true of those who wrote or signed letters of support but did not testify (Rx 6, Rx 13), except for the mayor of * * * who wrote that his confidence in Mr. * * * continued at a very high level and that he believed his view was shared by the citizens of * * * (Rx 10).

   [.1] The undersigned accepts the view that Mr. * * * has not been charged with anything that has caused any monetary loss to the bank, and has not been charged with any offense relating to the bank's business. But what the witnesses who testified in his behalf, or wrote letters supporting Mr. * * *, have not addressed is that he has been indicted for an offense involving dishonesty and willful and knowing submission of false statements. Where an officer has been indicted for the submission of false statements involving substantial sums of money, even though not connected with bank business, there must be concern over the possibility of the submission of false statements in the bank's affairs. The potential for harm to the public in banking is greater than in many other areas of the business world. For example, the submission of false information in connection with bank business can conceal unsafe or unsound banking practices with the capacity to damage depositors and erode public confidence. Likewise false statements in conducting bank business can frustrate national policy in controlling currency transactions.
   There was evidence on behalf of Mr. * * * that depositors with large sums in the bank did not withdraw or plan to withdraw money from the bank, that lobby traffic in the bank was normal, and that confidence in the bank in the community continued high. In other words, the witnesses and letter writers did not believe Mr. * * *'s return to the bank posed any threat to its depositors or would impair public confidence in the bank. The spread sheet offered in evidence (Rx 14) also showed no deterioration in the bank's assets or deposits.

   [.2] The use of the word "may" in Section 8(g)(1) establishes that a threat to the bank's depositors or impairment of public confidence need not actually have occurred for the Corporation to suspend an officer or director and prohibit further participation in the affairs of the bank. The statute is satisfied if there is a potential threat to the interest of depositors or a potential impairment of public confidence. Were it otherwise, the Corporation would have to wait until loss or damage to a bank or its depositors had occurred, or confidence had been impaired, and would not be able to act to prevent such loss or damage, or impairment of confidence. Such would be ineffective regulation and was not the intention of Congress. Manges v. Camp, 474 F.2d 97 (5th Cir. 1973); Feinberg v. Federal Deposit Insurance Corp., 420 F. Supp. 109 (D.C. D.C. 1976).
   The testimony and letters from highly placed directors and shareholders, and from two depositors of large sums, that confidence in the bank continued high and would not be affected by Mr. * * *'s resumption of his position as vice president and director may not be truly representative of the attitudes of the general public. And the opinion of these persons that Mr. * * *'s return to vice president and director would represent no threat to the interest of depositors must be weighed alongside the charges against Mr. * * * for an alleged {{4-1-90 p.A-296}}pattern of falsification of his tax returns over a prolonged period. Mr. * * * is a mature official with many years of banking experience (* * *, Tr. 15-16).
   In deciding this matter, Mr. * * *'s position with the bank must be also considered. As vice president and director he stands in a fiduciary relation to the bank's depositors. Vice president is a high position and one of trust, particularly in a relatively small community. As a director, Mr. * * * is part of the board which governs the bank and determines policy, business courses, loans, banking practices, and other important aspects of the banking business. To have confidence in a bank the public must have confidence in the bank's officers and directors. Charges of falsification and misrepresentation are of the very kind to create cause for concern where a high ranking bank official is involved and where the statutory standards are potential threat to depositors or potential to impair public confidence in the bank. Ordinary bank customers and the general public must be able to view a bank's vice president and director as a trustworthy person without doubt or uncertainty. Where charges of dishonesty and the submission of false statements involving money have been preferred by a Grand Jury against a bank official there is an obvious potential for doubt and uncertainty. Such may impair public confidence and damage a bank. It is not too much to require that a bank's officers and directors be above suspicion.

Conclusion and recommendation

   Based upon the record as a whole and all the circumstances, the undersigned concludes that in view of the charges of willfully and knowingly attempting to evade income taxes due by the filing of false and fraudulent income tax returns the continued participation by Mr. * * * in the affairs of the * * * Bank, * * *, may pose a threat to the interest of the bank's depositors and may threaten to impair public confidence in the bank.
   It is recommended that the Notice of Suspension and Prohibition issued May 7, 1984, against Mr. * * * be continued in effect. If he is acquitted in September, the Notice may be rescinded.
/s/ Daniel H. Hanscom
   Presiding Officer
   Former Chief Administrative
   Law Judge, Federal Trade Commission

ED&O Home | Search Form | Text Search | ED&O Help

Last Updated 6/6/2003 legal@fdic.gov