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FDIC Enforcement Decisions and Orders

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   [5048] FDIC Docket No. FDIC-84-207e (8-19-85).
   A majority shareholder and former chairman of the board of directors of a bank was prohibited from participating in any affairs of the bank, and in the affairs of any other bank insured by the FDIC, for engaging in unsafe or unsound banking practices, violating laws or regulations, and engaging in acts, omissions, or practices that constitute a breach of a director's fiduciary duty. (This decision was affirmed by the U.S. Court of Appeals for the Sixth Circuit, 842 F.2d 332 (1988) (unpublished)).

   [.1] Directors—Prohibition, Removal, or Suspension—Unsafe or Unsound Practices
   FDIC may prohibit from further participation bank personnel responsible for specific violations of law or unsafe or unsound banking practices.

   [.2] Prohibition, Removal, or Suspension—Liability—Dishonesty
   When a bank director's violations of law, acts, omissions, or practices evidence that degree of personal dishonesty and willful or continuing disregard for the safety or soundness of the bank, the director may be prohibited from any participation in the affairs of the bank or any other bank insured by the FDIC.

In the Matter of * * * MAJORITY
SHAREHOLDER and FORMER
CHAIRMAN OF THE BOARD OF
DIRECTORS OF * * * BANK OF * * *
(INSURED STATE NONMEMBER BANK)


DECISION AND ORDER OF
REMOVAL AND PROHIBITION
FROM FURTHER PARTICIPATION

FDIC-84-207e

   In an uncontested proceeding, the Administrative Law Judge ORDERED that * * * be, and hereby is, prohibited from further participation in any manner in the conduct of the affairs of * * * Bank of * * * , or of any other bank insured by the FDIC. (See Initial Decision and Order dated May 24, 1985.)
   The Board hereby adopts the Administrative Law Judge's Initial Decision and Order and incorporates it by reference herein.*
   Alternatively, since Mr. * * * failed to appear at the hearing, he is by statute, "deemed to have consented to the issuance of" this Order. (See, 12 U.S.C. 1818(e)(5).)
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 19th day of August, 1985.

/s/ Hoyle L. Robinson
Executive Secretary

FDIC-84-207(e)

* * *, Esquire
For the Federal Deposit
Insurance Corporation


* Judge Heifetz, in his Initial Decision and Order, incorrectly cited subsection (4) of section 8(e) of the FDI Act as authority for his action. Judge Heifetz should have cited section 8(e)(5) as the authority for Mr. * * * removal.
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Before: ALAN W. HEIFETZ
Administrative Law Judge

INITIAL DECISION AND ORDER

Statement of the Case

   This administrative action was instituted by the Board of Directors of the Federal Deposit Insurance Corporation ("FDIC") on December 17, 1984 when it issued a Notice of Intention to Prohibit from Further Participation ("Notice") and an Order of Prohibition from Further Participation ("Order"). Both the Notice and Order were issued against * * * ("Respondent"), majority shareholder and the former chairman of the Board of Directors of the * * * Bank of * * * ("Bank"), pursuant to sections 8(e)(1) and (2) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §§ 1818(e)(1) and (2); section 8(e)(5) of the Act, 12 U.S.C. § 1818(e)(5); and the FDIC Rules of Practice and Procedure ("FDIC Rules and Regulations"), 12 C.F.R Part 308, et. seq. The Notice and Order charged Respondent with having committed violations of law and regulations; with having engaged or participated in unsafe or unsound practices in connection with the operation of the bank; and with having committed or engaged in acts, omissions or practices which constituted a breach of his fiduciary duty as a director of the Bank. The Notice further alleged that the Bank has suffered or will probably suffer substantial financial loss or other damage; that the interests of the Bank's depositors could be seriously prejudiced by reason of such violations, practices and breach of fiduciary duty; and that Respondent has received financial gain by reason of such violations, practices and breach of fiduciary duty. Accordingly, because such alleged violations, practices or breach of fiduciary duty are alleged to demonstrate a willful or continuing disregard for the safety and soundness of the Bank; involve personal dishonesty; and demonstrate an unfitness to serve as a director or officer and/or to continue to participate in the conduct of the affairs of the Bank or any other bank insured by the FDIC, the FDIC sought to prohibit Respondent from further participation in the affairs of the Bank.
   By letter dated January 30, 1985, the matter was referred to me for hearing and the issuance of an Initial Decision.
   Respondent was duly served with process1 but failed to plead or otherwise defend as provided by section 308.06 of the FDIC Rules and Regulations. Accordingly, the FDIC filed a timely Motion for Entry of Default and for Default Judgment pursuant to section 308.06(d)1 of the FDIC Rules and Regulations. Upon the record submitted, I make the following findings and conclusions:

Findings of Fact

   * * * Bank is a State Chartered Bank with deposits insured by the FDIC. The Bank is subject to the Act, 12 U.S.C. §§ 1811-1831d, the FDIC Rules and Regulations, 12 C.F.R. Chapter III, and the laws of the State of * * *.
   The Board of Directors of the FDIC, Washington, D.C., is an independent three-member agency of the United States Government, responsible, inter alia, for promoting and preserving public confidence in banks and for protecting the money supply through provision of bank deposit insurance coverage and periodic examinations of insured State-Chartered banks which are not members of the Federal Reserve System.

   [.1] In the performance of its duties, the FDIC may, inter alia, prohibit from further participation bank personnel responsible for specific violations or unsafe or unsound practices. (12 U.S.C. § 1818(e))
   At all times pertinent to this administrative action, Respondent has served as a director of the Bank and/or has participated in the conduct of the affairs of the Bank, and has been the Bank's majority shareholder.
   At all times pertinent to this administrative action, Respondent has been a principal shareholder of the Bank within the meaning of sections 215.2(b)(1) and (c) of Regulation O of the Board of Governors of the Federal Reserve System ("Regulation O"), 12 C.F.R. §§ 215.2(b)(1) and (c). Regulation O implements section 22(h) of the Federal Reserve Act and is made applicable


1 Included in the record is a copy of a Certificate of Service stating that copies of the Notice and Order were served on Respondent's wife by personal delivery, at their residence, on February 28, 1985 at 4:10 p.m.
In a cover letter to the copy of the Certificate of Service, Counsel for the FDIC also noted that the documents were initially sent to Respondent by certified mail, but were subsequently returned, marked "unclaimed."
{{4-1-90 p.A-478}}to insured State Nonmember banks by section 18(j)(2) of the Act, 12 U.S.C. § 1628(j)(2).

The Infusion of Additional Capital and Issuance of Stock

   On June 29, 1984, Respondent used a $750,000 cashier's check dated April 18, 1984, drawn on * * * to provide additional capital to the Bank. Credit was immediately given for the cashier's check, but funds in payment were not received from the issuing bank. The transaction was carried on the Bank's books until September 6, 1984, at which time Respondent used the proceeds of a loan from another financial institution to reimburse the Bank. The Bank suffered financial loss as no interest was charged or earned on this cash item for a period of approximately 70 days.
   As a result of this capital infusion transaction, the Bank and Respondent engaged in unsafe or unsound banking practices. Upon receipt of the $750,000 cashier's check, the Bank issued common stock certificates and increased its equity capital accounts on its books by $750,000. Because issuance of the stock was based solely on receipt of the cashier's check which proved to be worthless, the Bank's true financial condition was misrepresented on its financial statements. This action could render the Bank liable to claims of third parties who may have relied on those financial statements.

The Under-collateralized Loan Made to Respondent and His Wife

   On July 17 1984, Respondent and his wife borrowed $204,332 from the Bank. On July 23, 1984, proceeds of the loan were deposited to the account of * * *, a purported interest of Respondent's wife. The proceeds were deposited in this account for the purpose of paying an insufficient funds check drawn on the account of * * * and made payable to * * *. The check was dated July 20, 1984, and was in the amount of $199,000.
   Collateral on the loan to Respondent and his wife was a second lien on Respondent's residence2 which purportedly had an appraised value of $450,000 and a prior mortgage lien in the original amount of $300,000.
   On its face, the loan was collateral deficient and represented a greater than normal degree of risk of repayment. The loan exceeded the Bank's lending limit, in violation of section 215.4c of Regulation O, 12 C.F.R. § 215.4(c), and, concerning adequacy of the collateral, was granted on preferential terms in violation of section 215.4(a) of Regulation O, 12 C.F.R. § 215.4(a).

The Extension of Credit to * * *

   On July 24, 1984, Respondent caused the Bank to extend credit in the amount of $51,000 to * * *. On July 26, 1984, the proceeds were deposited into * * * account. A check in the amount of $10,000, drawn on the account of * * *, and made payable to Respondent, was returned for insufficient funds, but was later re-presented and paid.

The Transfer of Funds to The * * * Bank

   On June 18, 1984, Respondent caused the Bank to transfer $305,000 to The * * * Bank, * * *. The funds were deposited into the account of the * * *. The Bank's board of directors had passed a resolution establishing a correspondent banking relationship with The * * * Bank, and the Bank's books indicated a cash balance due from The * * * Bank. No reason for the credit of funds to the * * * was given. However, Respondent himself had a banking relationship with the European * * *

The Bank's Indemnification of The * * * Bank

   The letter dated July 30, 1984, Respondent caused the Bank to indemnify The * * * Bank for claims of any person, firm, or other entity with respect to the collecting of funds transferred to The * * * Bank which were credited to * * *. The letter also indicated that the indemnification agreement covered payment of attorney fees and other costs incurred by The * * * Bank with respect to the funds.
   The letter constituted a guarantee of the obligation of another in violation of section 332.1 of the FDIC's Rules and Regulations, 12 C.F.R. § 332.1, and was made without the knowledge of the Bank's board of directors.


2 In support of this loan, Respondent furnished an unsigned financial statement dated December 31, 1983, which purportedly failed to reflect the liability for the prior mortgage on the asset pledged.
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The Bank's Investment in * * *

   On July 20, 1984, Respondent caused the Bank to invest $240,000 in * * *, Inc. The contract concerning this transaction is unclear as to how the Bank was to profit, and the documentation held in support of this investment was inadequate. The investment was not approved by the Bank's board of directors.

Other extensions of Credit to Respondent
in Violation of the Bank's Lending Limit

   In addition to the July 17, 1984, personal loan described above, from June 29, 1984 to September 11, 1984, Respondent received the following extensions of credit which exceeded the Bank's aggregate lending limit, in violation of section 215.4(c) of Regulation O, 12 C.F.R. § 215.4(c):

   (1) Respondent received immediate credit for a $750,000 cashier's check drawn on a foreign bank which resulted in the Bank carrying a cash item for an extended period of time.
   (2) On July 26, 1984, Respondent received part of the proceeds of a loan to * * *.
   (3) Respondent reimbursed the Bank with proceeds of a loan to * * * which had originated on September 11, 1984. On September 11, 1984, the proceeds were credited to the account of Respondent's wife, and the proceeds were used by Respondent to reimburse the Bank.

Conclusion and Order

   Based on the transactions, above, as set forth by the FDIC and left unrebutted by Respondent, I conclude that Respondent, as majority shareholder, former chairman of the Bank's board of directors, and a participant in the conduct of the affairs of the Bank has:
   (1) committed violations of law, rules and regulations;
   (2) engaged or participated in unsafe or unsound practices in connection with the operation of the Bank; and
   (3) committed or engaged in acts, omissions, or practices which constituted a breach of his fiduciary duty as director of the Bank.
   Furthermore, I conclude that:
   (1) the Bank has suffered or will probably suffer substantial financial loss or other damage;
   (2) the interests of the Bank's depositors could be seriously prejudiced by reason of such violations, practices and breach of fiduciary duty; and
   (3) Respondent has received financial gain by reason of such violations, practices and breach of fiduciary duty.

   [.2] These violations, acts, omissions or practices, as committed by Respondent, evidence that degree of personal dishonesty and willful or continuing disregard for the safety or soundness of the Bank which necessitates the conclusion that Respondent is unfit to serve as a director or officer of the Bank, and to continue any participation in the affairs of the Bank or any other bank insured by the FDIC.
   Accordingly, pursuant to section 8(e)(4) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(e)(4), IT IS HEREBY ORDERED, that * * * be, and hereby is, prohibited from further participation in any manner in the conduct of the affairs of * * * Bank of * * *, or of any other bank insured by the FDIC.
/s/ Alan W. Heifetz
Chief Administrative Law Judge
U.S. Department of Housing and Urban Development
451 7th Street, S.W., Room 2156
Washington, D.C. 20410
(202) 755-0132
Dated: May 24, 1985

CERTIFICATE OF SERVICE

   I hereby certify that copies of this INITIAL DECISION AND ORDER issued by ALAN W. HEIFETZ, Chief Administrative Law Judge, Docket No. FDIC-84-207e, were mailed to the parties listed below on this 24th day of May, 1985.
Helen L. Shepard
* * * , Esquire
* * * , Esquire
Counsel
Hoyle L. Robinson
Executive Secretary
Arthur L. Beamon, Esquire
Assistant General Counsel
Federal Deposit Insurance Corporation
550 - 17th Street, N.W.
Washington, D.C. 20429

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