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FDIC Enforcement Decisions and Orders

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{{4-1-90 p.A-894}}
   [5066] FDIC Docket No. FDIC-85-18b (6-16-86).

   Bank was required to correct its previously filed Reports of Condition and Reports of Income that contained materially false or misleading financial information. Bank ordered to cease and desist from filing inaccurate reports in the future.

   [.1] Call Reports—Amendment Required
   Reports of Condition and Reports of Income ("Call Reports") instructions provide that contingencies which might result in gain should not be recognized prior to "realization."

   [.2] Call Reports—Functions
   Call Reports are important tools for monitoring the condition of each reporting bank between bank examinations, and provide data upon which bank regulators, bankers, and the public can make analyses, including peer group comparisons. Call Reports can serve these purposes effectively only if the filings are complete, accurate, and timely, and every bank reports on a basis consistent with all other banks.

   [.3] Loans—Setoff—Loss Contingency
   A setoff that remains the subject of an unresolved dispute or litigation may be disallowed by the FDIC as premature.

   [.4] Practice and Procedure—Depositions Permitted
   Depositions are to be used in lieu of trial testimony, and not as a general discovery device. FDIC regulations require the bank to show that the proposed witness will be unavailable at the hearing, that the testimony will be material, and that the deposition will not result in undue burden or delay of the proceeding (12 C.F.R. §308.08(a)(2)[¶2108]).

   [.5] Practice and Procedure—Depositions Permitted
   When a deposition is intended purely for discovery purposes, it is not authorized by the FDIC's regulations and is properly denied.

   [.6] Practice and Procedure—Evidence—Federal Rules
   An ALJ is not bound by the Federal Rules of Evidence in an administrative proceeding.

   [.7] Practice and Procedure—Evidence—Examiners Report—Admissibility
   A Uniform Bank Performance Report may be admitted by the custodian or other qualified witness unless the source of information or method or circumstances of preparation indicate a lack of trustworthiness. An expert bank examiner, as such, can be expected to be familiar with, and to regularly rely on, UBPRs in forming his opinions and, without more, is a qualified witness to sponsor admission of relevant UBPRs.

   [.8] Shareholders—Disclosure
   It is important that shareholders (who have a pecuniary interest in the bank) be apprised of the bank's reporting practices. The substance of the FDIC's order must be disclosed to the shareholders.

{{4-1-90 p.A-895}}
   [.9] Call Reports—Functions
   Call Reports are a uniform, standardized method of reporting that enables the FDIC to perform its bank supervisory and surveillance function in a consistent manner, and ensure reasonable, accurate data to other federal and state regulatory authorities, as well as to the general public.

   [.10] Loans—Setoff—Loss Contingency
   Realization of income does not occur until the litigation is resolved (i.e. when the state court rules on the propriety of the setoff).

   [.11] Call Reports—Falsification
   It is not necessary for the FDIC to show that the users of the bank's Call Reports acted to their detriment in relying on false data. It is enough to show that the bank willfully filed materially false Call Reports that are relied on by federal and state regulatory agencies and the general public with the possible consequences of abnormal risk, loss, or damage.

In the Matter of: * * *BANK
(Insured
State Nonmember Bank)
DECISION
FDIC-85-18b

STATEMENT OF THE CASE

   This proceeding arises under Section 8(b) of the Federal Deposit Insurance Act (the "Act") (12 U.S.C. §1818(b)). On January 16, 1985, the Board of Review of the Federal Deposit Insurance Corporation (the "FDIC") issued a written Notice of Charges and of Hearing ("Notice") to * * * Bank * * * ("Bank"), pursuant to Section 8(b) of the Act and the FDIC's Rules of Practice and Procedures (12 C.F.R. Part 308). The Notice charged the Bank with having engaged in unsafe or unsound banking practices and violating laws, rules and regulations. More specifically, the Notice alleged that the Bank filed consolidated Reports of Condition with the FDIC which contained materially false or misleading financial information in violation of 12 C.F.R. §304.2, which requires the filing of accurate reports. The Notice sought an Order under Section 8(b)(1) of the Act, requiring the Bank to correct its previously filed reports and to cease and desist from filing inaccurate reports in the future.
   On July 10-12, 1985, a hearing was conducted before Administrative Law Judge Timothy J. O'Leary (the "ALJ"). Following the hearing, both parties were afforded an opportunity to submit Proposed Findings of Fact, Conclusions of Law, and briefs, and to reply to opposing counsel's submissions. On January 28, 1986, the ALJ issued a Recommended Decision and Proposed Order to Cease and Desist. The Bank submitted exceptions to the ALJ's Findings of Fact, Conclusions of Law, and Proposed Order to Cease and Desist.

   [.1] In his Recommended Decision, the ALJ made the following factual findings: (1) the Act and regulations are unambiguous and require banks to file Reports of Condition and Reports of Income ("Call Reports") upon the forms and in the manner prescribed by the FDIC (12 U.S.C. §1817 and 12 C.F.R. §304.2); (2) the Call Report instructions provide that contingencies which might result in gain should not be recognized prior to "realization" (FDIC Exhibit 37 at 16); (3) Bank, in certain Call Reports, set off its $1,000,000 subordinated capital note against certain losses that either had occurred or were expected to occur; (4) the FDIC informed the Bank that the setoff was unacceptable following an examination of the Bank and after receipt of certain of the Call Reports involved in this proceeding; (5) Bank's right of setoff was the subject of litigation in state court and contingent upon the outcome of that litigation; and (6) Bank did not have a legal right of setoff prior to a ruling by the state court.
   The ALJ concluded that the Bank's practices in filing Call Reports constituted unsafe or unsound banking practices within the meaning of Section 8(b) of the Federal Deposit Insurance Act, and he recommended entry of a cease-and-desist order.

OPINION

   [.2] Call Reports are very important tools for monitoring the condition of each reporting bank between bank examinations. Call Reports also provide data upon which bank regulators, bankers, and the public can {{4-1-90 p.A-896}}make analyses, including peer group comparisons. Call Reports can only serve these purposes effectively if the filings are complete, accurate, and timely and every bank reports on a basis consistent with all other banks. This proceeding arose, and the Order herein is being issued, because commencing with its December 31, 1983 Call Report, Bank failed and refused to complete its Call Reports on the consistent basis required by the Call Report instructions.

I. Background

   A brief factual summary is useful in putting this matter in perspective. On August 1, 1976, Bank borrowed $1,000,000 from * * * Bank * * * under a ten-year subordinate capital note. This $1,000,000 subordinated capital note appeared as a liability on the Bank's books. Subsequently, commencing on December 9, 1981, and continuing for the next year, Bank acquired loan participations from * * *. The aggregate face value of the loan participations Bank acquired from * * * exceeded $5,000,000.
   On February 14, 1983, the Commissioner of Banking of the State of * * * closed * * *. The FDIC was appointed receiver and certain assets of * * * , including the subordinated capital note, were purchased by * * * Bank, * * * Bank learned that as a result of alleged fraud it might not be able to collect some of the amounts due on the loan participations purchased from * * *. Bank then sought advice of counsel on whether its liability on the subordinated capital note could be set off against Bank's actual or anticipated losses on the loan participations. Bank's attorneys opined that, based on certain factual assumptions and subject to the risks of litigation, these items could be set off. Bank then eliminated the $1,000,000 subordinated capital note from its liabilities by transferring this amount to its capital account, and then further transferring it to Bank's reserve for loan losses. In essence, that $1,000,000 setoff was treated as a bad debt recovery on the loan participations. This setoff was first reflected in Bank's December 31, 1983, Call Reports.
   Assuming arguendo that Bank's loan loss reserves after this setoff were at a proper level, the setoff resulted in Bank's 1983 reported income being $1,000,000 more than would otherwise have been the case. The net effect on Bank's balance sheet was to show net capital and reserves of $1,000,000 more than would have been shown at that time had the setoff not been done.

   [.3] In January 1984 the FDIC conducted an examination of the Bank. In the Report of Examination dated January 3, 1984, the setoff was disallowed by the FDIC as premature, because it remained the subject of an unresolved dispute. On February 8, 1984, Bank filed a declaratory judgment action in state court requesting, inter alia, that the court declare that the $1,000,000 dollar subordinated capital note could be set off against Bank's losses on the loan participations. After that state court suit was filed, * * * reconveyed the subordinated capital note to the FDIC, and the FDIC was added as a defendant in the state court action. The state court had not ruled upon the Bank's case at the time this hearing was held before the ALJ. The state court proceeding was settled on October 28, 1985.

II. The ALJ's Recommendations

   The Board of Directors ("Board") finds that the ALJ's careful and detailed Recommended Decision (appended hereto) is in all material respects fully supported by the evidence in the record. We therefore adopt the ALJ's Recommended Decision and incorporate it herein by this reference. The only limitation on our adoption of the ALJ's Recommended Decision is that insofar as the ALJ's Proposed Conclusion of Law 1 recommends an order different than the one adopted by the Board, we do not adopt that Conclusion of Law.
   We supplement the ALJ's Proposed Conclusion of Law 4 (which lists improper Call Reports filed by Bank) by adding at the end thereof the following:
   e. Call Report of December 31, 1984.
   f. Call Report of March 31, 1985.
   For reasons discussed more fully below, the Board's Order in this matter differs from the ALJ's Proposed Cease and Desist Order. The substantive provisions of the Board's Order are fully supported by the ALJ's Recommended Decision.

III. The Bank's Exceptions to the ALJ's Recommended Decision

   Bank's exceptions to the ALJ's Recommended Decision include assertions of (A) unsupported findings of fact, (B) failure to adopt supported findings and conclusions, (C) procedural irregularities, and (D) erroneous evidentiary rulings. We have exam- {{4-1-90 p.A-897}}ined the record in light of all of Bank's exceptions to the Recommended Decision and find that all of these exceptions lack merit. More notable exceptions are discussed below.

   A. Exception to ALJ's Findings of Fact

   Bank asserts that the ALJ's Findings of Fact regarding the proper time to effect a setoff were made without legal support or authority. Bank argues that the ALJ erred in making independent findings on this issue rather than merely accepting the legal opinions of the Bank's counsel. Bank further claims that the ALJ's finding of noncompliance with the Call Report instructions was erroneous. Bank's argument is nothing more, or less, than a claim that Bank's arguments and evidence should have been accepted and the FDIC's rejected.
   We reject Bank's argument. As stated above, based upon the record of this proceeding we find the ALJ's Findings of Fact to be supported in all material respects by a preponderance of the evidence. For example, we find support for the ALJ's findings regarding the proper timing for a setoff in the evidence introduced, including the Call Report instructions, the FDIC regulations, and the testimony on the interpretation of those instructions, the regulations, and APB Opinion (Accounting Principal Board) #10 and FASB (Financial Accounting Standards Board) #5. Further discussion of this matter is unnecessary here, since the ALJ's Recommended Decision, which we have adopted, provides a careful and detailed analysis of the merits of the case.

   B. The ALJ's Refusal to Adopt Certain Proposed Findings of Fact and Conclusions of Law

   Without detailed explanation, Bank takes exception to the ALJ's failure to adopt Bank's proposed findings of fact: 9, 11, 12, 14, 16-28, 32, 37, and 38, and the ALJ's failure to adopt Bank's proposed Conclusions of Law 2-14, 17-19, 21-26, and 28-30.
   The substance underlying most of these exceptions is that the ALJ did not agree with certain of Bank's arguments and evidence. For example, Bank's Proposed Conclusion of Law 10 states, "The FDIC had no basis in law or accounting principles for its assertion that the exercise of the set-off by the Bank was premature. . .." No purpose would be served by repeating here the ALJ's Recommended Decision, which details why the ALJ, and the Board, reject this and the other proposed findings and conclusions that are inconsistent with the ALJ's and the Board's conclusions concerning the merits of this case.
   Certain other of Bank's proposed findings and conclusions while perhaps accurate are either totally irrelevant or largely immaterial. For example, Bank's Proposed Finding of Fact 19 states that an FDIC Report of Examination concerning Bank treats the subordinated capital note in the manner the FDIC advocated in this proceeding. That finding is certainly true, but no purpose would have been served by adopting that finding, and the failure to adopt it, and others like it, certainly did not prejudice Bank.
   As a final example, Bank's proposed Conclusion of Law 23 asserts that there "has not [been] shown a likelihood of future violations of the Federal Deposit Insurance Act or of the Regulations by the Bank." That assertion is simply wrong. Bank filed its first inaccurate Call Report as of December 31, 1983, and Bank continued to file inaccurate Call Reports each quarter through at least March 31, 1985, the date of the last Call Report available as of the July 10, 1985 hearing.1Thus, it is clear that the subject violation continued even after the FDIC filed this proceeding. That is more than sufficient evidence to demonstrate a continuing violation and to justify provisions in the Order to deal with continuing and prospective violations.

   C. Procedural Matters

   Bank argues that the FDIC's submission to the ALJ of a proposed Order to Cease and Desist along with the Notice of Charges was in violation of 12 C.F.R. §308.07(k). 12 C.F.R. §308.07(k) concerns the Board's, and an ALJ's, authority to reopen a hearing. It has no relevance to the Bank's contention. In any event, submission of a proposed Order is in essence submission of a detailed prayer for relief. Accordingly, we find that the submission to the ALJ of a proposed Order along with the Notice of Charges was proper.


1 The record does not disclose whether the June 30 and September 30, 1985, Call Reports continued this same treatment of the subordinated capital note, but if they did, those reports, too, were inaccurate.
{{4-1-90 p.A-898}}Next, the Bank argues that it was improperly denied discovery when the ALJ refused to issue a subpoena for discovery depositions of FDIC's witnesses. The Bank was not improperly denied discovery.

   [.4.5] The rules governing issuance of a subpoena for depositions prior to an FDIC administrative hearing are set forth in the FDIC's Rules of Practice and Procedure (12 C.F.R. §308). Depositions are to be used in lieu of trial testimony, and not as a general discovery device. The regulations require the Bank to show that the proposed witness will be unavailable at the hearing, that the testimony will be material, and that the deposition will not result in undue burden or delay of the proceeding (12 C.F.R. §308.08(a)(2)). No such showing was made in Bank's request for the subpoena. Rather, it is clear both from the nature of this exception and from the papers seeking the deposition that the deposition was intended purely for discovery purposes. Consequently, the deposition was not authorized by the FDIC's regulations and the subpoena was properly denied.
   Further, depositions are to be taken no sooner than ten days after the parties have been given notice of the application for the subpoena (12 C.F.R. §308.09(a)). This proceeding was commenced on January 16, 1985, but Bank did not apply for the subject subpoena until June 24, 1985, the eve of a July 10 hearing date. Bank's belated June 24, 1985, application was to depose an FDIC witness on or before Monday, July 1, 1985—less than ten days later. On this ground as well, the ALJ's refusal to issue the subpoena was proper, since Bank failed to comply with the ten day requirement contained in 12 C.F.R. §308.09(a).2In sum, the ALJ's refusal to issue a subpoena was in accordance with FDIC's regulations and proper in light of the circumstances surrounding that request.

   D. Evidentiary Rulings

   Bank also takes exception to the ALJ's admission of FDIC exhibits 32 through 35. These exhibits are four Uniform Bank Performance Reports ("UBPRs") relating to Bank.3Bank argues that these reports were improperly introduced through Mr. * * * , an FDIC employee, and expert bank examiner, who was not the "custodian" of the documents. Bank argues that the admission of these documents was not in accordance with Rule 803(6) of the Federal Rules of Evidence.

   [.6.7] The ALJ properly admitted these exhibits. First, the ALJ was not bound by the Federal Rules of Evidence in this administrative proceeding.4Even if the Federal Rules of Evidence were applicable, Rule 803(6) was not violated. Under Rule 803(6), business records are not excluded as hearsay if they are kept in the course of a regularly conducted business and if it was the regular practice of that business to make the record or data compilation. UBPRs meet those criteria. The record may be admitted by the custodian or other qualified witness, unless the source of information or method or circumstances of preparation indicate a lack of trustworthiness.
   Mr. * * * is an expert bank examiner and, as such, can be expected to be familiar with, and to regularly rely upon, UBPRs in forming his opinions. Without more, he is a qualified witness to sponsor admission of relevant UBPRs. In this case, Mr. * * *'s qualifications go far beyond that. For example, Mr. * * * is the FDIC's voting member on the Federal Financial Institutions Examination Council's reports task force. That Council is the body responsible for preparation of the UBPRs (Transcripts Vol. I, p. 203-205). Moreover, the Board is fully familiar with UBPRs, and absent evidence that specific UBPRs lack trustworthiness, we would expect them to be admissible


2 Bank asserts that denial of the subpoena violated its right to due process, and cites NLRB v. Rex Disposables, Div. of DHJ Industries, Inc., 494 F.2d 588 (5th Cir. 1974) and U.S. v. Cabbage, 430 F.2d 1037 (6th Cir. 1970) as supporting its position.
   Bank was not deprived of due process, and those cases are not to the contrary. Indeed, in the NLRB case, the Fifth Circuit held that a denial of discovery before that administrative proceeding was not prejudicial. 494 F.2d at 592. In U.S. v. Cabbage, which concerns a criminal prosecution for a Selective Service violation, the Sixth Circuit did hold that due process rights were violated. However, the facts are readily distinguishable. In that criminal case the appellant had no knowledge of the existence or contents of an FBI report which contained adverse information. The court found that due process rights were violated because there appellant was not afforded an opportunity to explain or contradict the FBI report. 430 F.2d at 1039. No such facts are present in the instant case.

3 Exhibit 32 is a "Bank Performance Report" prepared before this type of report became the "Uniform Bank Performance Reports."

4 Under the Administrative Procedures Act, ALJ's may receive "relevant evidence" (5 U.S.C. §556(c)(3)). The same standard of "relevant evidence" is contained in the FDIC's Rules of Practice (12 C.F.R. §308.07(b)(6)).
{{4-1-90 p.A-899}}whenever they contain relevant evidence.5In sum, FDIC exhibits 32 through 35 were properly admitted.

IV. THE ALJ'S PROPOSED ORDER

   The Board concludes that the Recommended Decision and the record as a whole fully support issuance of an order requiring the Bank to cease and desist from filing inaccurate Call Reports and requiring Bank to amend the inaccurate Call Reports that it has filed. Consequently, Bank is required by the Board's Order to amend each and every Call Report filed between December 31, 1983 and October 28, 1985, which does not show the $1,000,000 subordinated capital note as a liability. Bank is also required to file amended post October 28, 1985, Call Reports is amendments are necessary in order to accurately show recognition of the setoff on or about October 28, 1985.
   Bank takes exception to a provision in the ALJ's Proposed Order to Cease and Desist requiring Bank to give written notice to the FDIC at such time as Bank intends to use brokered deposits. We have examined the record in light of this exception and conclude that substantial evidence was not presented on the question of brokered deposits. Consequently, this provision will not be included in the Board's Order.
   Bank objects to a provision in the ALJ's Proposed Order to Cease and Desist requiring it to amend all financial reports available to the public since December 31, 1983. We similarly find an absence of evidence in the record establishing the necessity of amending the Bank's publicly available financial reports6since December 31, 1983. Consequently, this provision will not be included in the Board's Order.

   [.8] Bank takes exception to a provision in the ALJ's Proposed Order to Cease and Desist requiring Bank to notify its shareholders of the contents of the Order. It is important that shareholders (who have a pecuniary interest in the Bank) be apprised of its reporting practices. Thus, as a policy matter there is a need for full disclosure to the shareholders of the substance of the Order. Further, requiring disclosure is peculiarly appropriate here, since the substance of this dispute between Bank and the FDIC was referred to in footnotes to financial statements previously distributed to Bank's shareholders. See Bank's exhibits 4 at 5-6 and 6 at n.6. On these grounds, a shareholder notification provision is included in the Board's Order.
   To assure clarity, we have set forth our Order to Cease and Desist in full test. That Order is appended hereto.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 16th day of June, 1986.

/s/Hoyle L. Robinson
Executive Secretary

ORDER TO CEASE AND DESIST

FDIC-85-18b

   IT IS HEREBY ORDERED that the * * * Bank * * * ("Bank"), its directors, officers, employees, agents, successors, and assigns, and other persons participating in the conduct of the affairs of the Bank, cease and desist from the following unsafe or unsound banking practice:
   1. Submitting inaccurate Reports of Condition and Reports of Income.
   IT IS FURTHER ORDERED that the Bank, its directors, officers, employees, agents, successors, and assigns, and other persons participating in the conduct of the affairs of the Bank, take affirmative action as follows:
   2. Within ten (10) days of the effective date of this Order the Bank shall file amended Reports of Condition and Reports of Income as of, without limitation, December 31, 1983, March 31, 1984, June 30, 1984, September 30, 1984, December 31, 1984, and March 31, 1985. These amended reports shall accurately reflect the Bank's reserve for loan losses, the Bank's capital accounts, and the Bank's liability on subordinated capital notes. Amendments shall include, but not be limited to, the following:


5 In its argument Bank relies upon NLRB v. First Termite Control Co., Inc., 646 F.2d 424 (9th Cir. 1981) and Tashnizi v. Immigration and Naturalization Service, 585 F.2d 781 (5th Cir. 1978). Tashnizi does not concern inadmissible business records nor other matters relevant to this issue. First Termite holds that a witness with no knowledge of how another company prepared a bill cannot properly sponsor that bill as an exhibit to be used to prove the truth of matters stated in the bill. That is simply not the case here, where Mr. * * * , an expert witness, is a fully qualified sponsor for the subject exhibits.

6 Obviously, when the Bank's exception, and the Board's response, speak of publicly available financial statements, this does not include Call Reports.
{{4-1-90 p.A-900}}(a) reversal of the elimination of the Bank's liability for subordinated capital notes of $1,000,000; (b) reversal of the recognition of such $1,000,000 as a loan loss recovery; and (c) any additional revisions or corrections of Bank's Reports of Condition and Reports of Income (of whatever date) as may be necessary in light of the amendments required herein. The Bank shall also implement procedures that ensure that all subsequent Reports of Condition and Reports of Income will be filed in accordance with applicable reporting requirements.
   3. Following the effective date of this Order to Cease and Desist ("Order"), the Bank shall either send this Order to its shareholders or furnish a description of this Order to its shareholders, in conjunction with (a) the Bank's next shareholder communication and (b) the Bank's notice or proxy statement preceding the Bank's next shareholder meeting. The description shall fully describe this Order in all material respects. The description and any accompanying communication, statement, or notice shall be sent to the FDIC at Washington, D.C., for review at least fifteen (15) days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.
   4. The effective date of this Order shall be thirty (30) days from the date of this issuance.
   The provisions of this Order shall be binding upon * * * Bank * * * , its directors, officers, employees, agents, successors, and assigns, and other persons participating in the affairs of the Bank.
   The provisions of this Order shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this Order shall have been modified, terminated, suspended or set aside by the FDIC.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 16th day of June, 1986.

/s/Hoyle L. Robinson
Executive Secretary

RECOMMENDED DECISION

FDIC-85-18(b)

PROCEDURAL HISTORY

   The Federal Deposit Insurance Corporation (hereinafter FDIC), pursuant to Section 8(b)(1) of the Federal Deposit Insurance Act (hereinafter "Act") (12 U.S.C. Sec. 1818(b)(1)), and Part 308 of the Federal Deposit Insurance Corporation Rules of Practice and Procedure (12 C.F.R. Part 308) issued on January 16, 1985, a written Notice of Charges and of Hearing to * * * Bank * * * (hereinafter "Bank" or * * *1charging the Bank with having engaged in unsafe or unsound banking practices and violations of law.
   Specifically, it is charged that the Bank filed with the FDIC Consolidated Reports of Condition (Call Reports) reflecting the Bank's financial condition as of December 31, 1983; March 31, 1984; June 30, 1984; and September 30, 1984, which contained information that was materially false or misleading. In those Call Reports, the Bank overstated its valuation reserve for loan losses by $1,000,000 and understated its liability on subordinate capital notes by $1,000,000. The filing of correct Reports of Condition is required by Section 304.2 of the FDIC's Regulations (12 C.F.R. Sec. 304.2). On February 22, 1985, the Bank filed its Answer to the Notice of Charges wherein it admitted that while it filed the Consolidated Report(s) of Condition with the FDIC for the dates specified, it denied that such reports were materially false or misleading, and that it did not overstate its valuation reserve for loan losses by $1,000,000 nor did said reports understate its liability on subordinate capital notes by $1,000,000. (ALJ-1, Notice, Answer)
   After due notice, a prehearing conference was held on July 8, 1985, in * * * , and the formal hearing commenced on July 10, 1985, and continued on consecutive days through July 12, 1985, before the undersigned. Upon notice by the undersigned that the record had been filed and transmitted as provided in Section 308.08(h) of the FDIC's Rules, the parties timely filed with the undersigned proposed findings of fact, conclusions of law, and proposed order together with supporting arguments and memoranda. Thereafter, the parties filed reply


1 The * * * Bank * * *, changed its name to * * * Bank * * *, and subsequently changed its name back to "* * * Bank * * *,". The designations "Bank" or "* * *" shall refer to the * * * Bank * * * and its successors.
{{4-1-90 p.A-901}}briefs within the time periods provided by Section 308.13(a) of the FDIC's Rules.

FINDINGS OF FACT

1. JURISDICTION

   The Notice of Charges and of Hearing alleges, and the Bank's Answer admits, that the Bank is a corporation existing and doing business under the laws of the State of * * * and having its principal place of business at * * *. The Bank is, and has been, at all times pertinent to the charges herein, an insured state nonmember bank, subject to the Act (12 U.S.C. Sec. 1811-1831(d)) and the FDIC's Rules and Regulations (12 CFR Chapter III) and the laws of the State of * * *. The FDIC has jurisdiction over the Bank and the subject matter of this proceeding. (ALJ-1) Notice, Answer)

2. CHRONOLOGY OF EVENTS

   a. The Offset Transaction:

   Beginning approximately in 1975, * * * and * * * were owners of * * * , with * * * being * * * President and * * *, Chairman of the Board (Vol. III, TR. 64, 118-120).* On August 1, 1976, * * * executed a subordinated capital note (debenture) whereby * * * borrowed $1,000,000.00 from * * * Bank of * * * (hereinafter * * *) with the principal due on August 1, 1986, and with annual interest payments due on August 1 (FDIC-5, ALJ-1, Exhibit A to Attachment B).
   Between December 9, 1981 and December 6, 1982, * * * acquired certain loan interests in parts of loans originated by * * * to its third party customers by execution of loan participation agreements. (FDIC-12; ALJ-1, Exhibit B, C, D, E and F to Attachment B, Vol. III, Tr. 1042The aggregate value of the loan participation was in excess of $5,000,000.00.
   On "Valentines Day," February 14, 1983, the Commissioner of Banking of the State of * * * closed and took possession of * * * and the FDIC was appointed Receiver of * * *. On or about February 15, 1983, * * * Bank, * * * (hereinafter * * *) purchased the assets including the debenture note executed by * * * (ALJ-1, Exhibit A, Tr. 222, Vol. III, Tr. 119).
   After the failure of * * * , * * * endeavored to assess its position with regard to its various transactions with * * * by dispatching its attorneys and accountants to * * * , and attempting to obtain information from * * * and the FDIC Receiver. It soon became apparent to * * * that it might not be repaid on portions of the outstanding participation loans, however, it was felt that the Bank may have a right of setoff with respect to the $1,000,000.00 debenture note. Accordingly, * * * requested * * * , the Bank's attorney, to give a written opinion on the matter. By letter dated May 20, 1983, * * * advised * * * that the Bank could establish claims against * * * as successor to * * * , which are proper for setoff (Vol. III, Tr. 67-69; 110-121; R 2 FDIC-5).3
   On August 1, 1983, the annual interest payments became due on the one million dollar debenture note. By letter dated August 12, 1983, * * * made demand on * * * that the interest payment was past due and advised that it would accelerate the principal due date if the interest was not paid within thirty (30) days (FDIC-5). * * * and * * * averred that * * * had already made the decision to offset the debenture note against uncollectable receivables, however, the Bank was not in a position to do so because of business and legal considerations and, accordingly, the Bank made the 1983 interest payment on the


*Hereinafter the transcript will be cited as follows: Tr. and page number refers to the two unnumbered volumes of the proceedings held July 10, 1985. Vol. II, Tr. and page number refers to the transcript of the proceeding held July 11, 1985. Vol. III, Tr. and page number refers to the transcript of the proceedings held on July 12, 1985.

2 The Loan Participation Agreements reflect * * * acquired loan interest in the amounts specified with the following entities: (1) $405,000.00 - * * *; (2) $1,400,000.00 - * * *; (3) $400,000.00 - * * *; (4) $2,600,000.00 - * * *; and (5) $470,584.35 - * * *.

3 The May 20, 1983, * * * letter is a 13-page document which, in essence, expresses the opinion that any redress * * * had against * * * is available against * * * as a result of the purchase and assumption transaction. * * * opined that the $1,000,000.00 debenture owed can be set off against fraudulently induced purchases of worthless receivables (See also FDIC-8, P.2).
{{4-1-90 p.A-902}}debenture note (Vol. III, Tr. 66-70; 119-128).4
   By December, 1983, after various conferences among the Bank's accountants, attorneys and officials, * * * felt it has sufficient information to earmark against which of the uncollectable receivables it could offset the debenture note (Vol. III. TR. 65, 128, 129, Vol. II, 221-243). The Bank requested and received from its attorney a letter dated December 30, 1983, wherein * * * opined that * * * had valid claims on certain of the loan participations in excess of one million dollars5against which the Bank could setoff the debenture note (FDIC-4, R-1).
   On or about December 31, 1983, * * * offset its liability on the one million dollar debenture against the losses or anticipated losses of the loan participations agreements (Tr. 43-45; FDIC-1, 1-a; R-1; Vol. II, Tr. 219-235; Vol. III, Tr. 71, 129). Prior to taking the offset, the Bank considered the one million debenture note to be a liability on its books (Stipulation Tr. 62-63; 181-182). The Bank accomplished the offset on its books by eliminating the one million dollars from the liabilities, transferring the amount to its capital accounts, and then transferring it to the Bank's reserve for loan losses, stating in essence, that it was a recovery on the loan participation agreements the Bank had purchased and charged off as uncollectable (Tr. 44–45, FDIC-3).

   b. The FDIC Discovery and Aftermath:

   Between January 3, 1984, and January 27, 1984, the FDIC conducted an examination of the Bank's condition (Tr. 43-52, FDIC-1; Vol. III p.28-30). During the Bank's examination, the FDIC discovered the offset transaction and disallowed it in the Bank Examination Report (Tr. 45-56; 124-127; 130-132; FDIC-1; at 1-a). In essence, the FDIC disallowed the setoff as being "premature" (Vol II. TR. 171; 182; Vol. III, Tr.38).
   The Bank's December 31, 1983, Call Report was signed on January 25, 1984; and the amended Report was filed by the Bank on September 17, 1984 (FDIC-22). The Call Report reflected the setoff transaction by eliminating the one million dollar debenture note, (which previous call reports had included) making a counterbalancing entry to reflect a one million dollar recovery for loan losses (FDIC-22; Tr. 62-63; 181-182).6
   On February 8, 1984, * * * filed a complaint for Declaratory Judgment against * * * in the * * * Chancery Court requesting inter alia that the court declare the one million dollar debenture discharged against the loan participations the Bank set them off against (FDIC-12 and ALJ-1, Attachments).
   On February 14 and 15, 1984, FDIC * * * Regional Director, * * * and members of her staff had conversations with Bank officials including * * * and * * *, Bank president,7to discuss the recent Bank examination including the setoff transaction. In essence, the FDIC advised it would disallow the setoff transaction. The Bank asserted that prior to making the setoff entries on its books, it had secured an opinion from its attorneys (the * * * letter) and had lengthy discussions with its accountants who were in agreement that the setoff entries were in compliance with various accounting principles utilized by the "Big Eight" accounting firms (Tr. 64–69, FDIC-3; FDIC-1, at 1-a-1; Vol. II, Tr. 169–170; Vol. III, Tr. 32–36).8


4 * * * asserted three reasons why * * * paid the 1983 interest on the debenture note although the Bank had made the decision to offset the debt against uncollectable receivables. First, at that point in time the Bank had insufficient information as to whether the uncollectable receivables totaled the full million or only a portion of it. Second, * * * held the debenture note and also owed * * * money so as a practical matter if * * * offset against * * * would in turn set off the money it owed to * * *. Thirdly, * * * attorneys advised that if a lawsuit were filed over the setoff, it was better for the Bank to have it filed in * * * where the Court was much more aware of the circumstances surrounding the demise of * * * than the * * *, court (Vol. III, Tr. 67-70; 119-128, 135-137).

5 The December 30, 1983, * * * letter asserts that four of the five-listed loan participation agreements set forth in footnote 2, herein, as the "valid claims" against which the debenture note was to be set off. The basis of the setoff was that the note originator, * * *, had failed to remit payment on collections, forged notes, restructured notes, released and altered collateral and had a default on a note (FDIC-4, R-1). Apparently, the * * *, participation agreement was not included in the setoff as * * *, was collecting and remitting monies to * * * on this loan (Vol. III. Tr. 126–127).

6 The placing of the one million dollar setoff in the loan loss reserve necessarily lowered the Bank's total expenses by not otherwise requiring the Bank to take another one million dollars as an operating expense and place in the loan loss reserve which, in turn, would allow the Bank to increase its equity capital by reporting the one million dollars as higher net income or a one million dollar lower net loss (Tr. 177-178; 194-195).

7 * * * became bank president and * * * moved to Chairman of the Board on October 1, 1983 (Vol. III. Tr. 8; Tr. 63, 64).

8 Following the meetings, * * * by letter dated March 5, 1984, to * * * , reiterated the Bank's argument that the setoff transaction should be considered appropriate and submitted a copy of the * * * letter (FDIC-4) (See Fn. 5 (Continued)

{{4-1-90 p.A-903}}
   On April 12, 1984, the FDIC forwarded to * * * a copy of the January, 1984, Bank examination report. In the cover letter, the FDIC stated that the setoff transaction did not meet the instruction requirements for preparation of the call reports as it overstated the Bank's valuation reserve and did not reflect the outstanding debenture note. It was requested that the Bank submit an amended call report reflecting the proper condition of the Bank (FDIC-6). The Report of Examination reflects that * * * received an improved composite rating, going from a "4" to a "3" rated bank (FDIC-1, at 1-a-2).
   On April 26, 1984, * * * signed its March 31, 1984, Call Report. The setoff transaction was handled in the same manner as the December 31, 1983, Call Report, as were all subsequent Call Reports including amended reports through March 31, 1985 (Tr. 197-200; FDIC Exhibits 23, 24, 25, 26, 27 and 28).
   On May 3, 1984, * * * and members of her staff met with * * * , the Bank's new Chief Executive Officer, and another Bank official and discussed among other topics, the setoff transaction. * * * reiterated the Bank's basic arguments favoring its handling of the transaction. In addition to the * * * letter, * * * had a written opinion from * * * the Bank's CPA with Arthur Anderson & Co., dated May 2, 1984, wherein * * * opined that the Bank's handling of the offset was in accordance with generally accepted accounting principles. * * * also referred to an "adversary relationship" with the FDIC in regard to the litigation of the participation loans purchased from * * *. Although * * * requested additional time, * * * requested that the amended Call Report be submitted by June 30, 1984 (FDIC-7, FDIC-9; FDIC-12, Attachment; R-5: Vol. II Tr. 170-174).
   On an unknown date, * * * sold certain of the * * * assets it had previously purchased including the one million dollar debenture note back to the FDIC Receiver. On June 19, 1984, * * * filed an Amendment to its Declaratory Judgment action in the * * * Chancery Court adding the FDIC Receiver as a party defendant (FDIC-12).
   On June 26, 1984, * * * and a member of her staff had a discussion with * * * and another Bank official concerning the offset transaction. At the meeting, * * * hand-delivered a letter to * * * which reiterated the Bank's position in regard to the setoff. Attached to the letter was a letter dated May 2, 1984, from * * * , the Bank's attorney handling the * * * Chancery litigation, wherein * * * opined that while it was not possible to predict the outcome of court proceedings, he was of the opinion that * * * had a right of offset in regard to the debenture note. There was discussion in regard to delaying the amended Call Reports pending possible compromise of the Chancery litigation. At the conclusion of the meeting it was agreed that the parties may meet again sometime in late July prior to the Bank's submission of its June 30, 1984, Call Report (FDIC-12; FDIC-12A; Vol. III, Tr. 54, 55).
   The June 30, 1984, Call Report was filed by * * * on August 6, 1984. The setoff transaction was handled in the same manner as the December 31, 1983, Call Report (FDIC-25).
   On August 28, 1984, the FDIC examiners made a periodic visit to * * *. It was noted that the Bank continued to reflect the one million dollar offset transaction (Tr. 89-91, 112, FDIC-14).
   On September 21, 1984, Arthur Anderson & Co. issued its audit report of * * * as of December 31, 1983. Footnote 7 of the report explains the one million dollar debenture setoff in a manner consistent with the Bank's previously espoused position including the fact that the FDIC "questioned the timing" of the transaction (R-4, at pages 5 - 6).9
   On October 23, 1984, the Bank submitted its Call Report of September 30, 1984, recording the setoff transaction in the same
8 Continued:above). By Memorandum dated April 4, 1984, * * * submitted documentation presumably supplied by the Bank to * * * of the FDIC's Washington Office, and solicited an opinion as to the propriety of the setoff transaction (FDIC-5). By Memorandum dated April 23, 1984, * * * advised * * * that it was the FDIC Washington's Office opinion that the Bank's financial statements should not reflect the results of the setoff transaction until such time as the Bank became reasonably certain that its position would prevail in court (FDIC-8).

9 The record includes * * * April 10, 1985, Audit Report of * * * as of December 31, 1984. Footnote 6 of this report contains another explanation of the setoff transaction including a reference to the Bank pursuing its remedies with the FDIC concerning the setoff in regulatory Reports and Financial Statements (R-6).
{{4-1-90 p.A-904}}manner as the December 31, 1983, Call Report (FDIC-26).10
   On November 7, 1984, * * * , * * * successor as the FDIC * * * Regional Director, recommended initiation of the instant action and so notified * * * of his intent (FDIC Exhibits 15, 16 and 17).
   On January 16, 1985, the instant proceeding was instituted pursuant to the Notice of Charges and of Hearing.
   On October 28, 1985, the Chancellor in * * * issued an Agreed Order of Dismissal in * * * Declaratory Judgment suit against the FDIC Receiver on the basis that the parties had an agreed upon compromise. Germane to the instant matter, the settlement provided that upon payment of $8,512.26 by * * * , the one million dollar debenture note would be cancelled.11

   c. The Call Reports

   As noted supra, the Call Reports filed by * * * which are subject to the FDIC Notice of Charges are for December 31, 1983, March 31, 1984, June 30, 1984 and September 30, 1984 (FDIC-22 thru FDIC-26).12
   Section 7 of the Act (12 U.S.C. Sec. 1817) and Section 304.2 of the FDIC Regulations (12 C.F.R. Sec. 304.2) require banks to file Call Reports upon the forms and in the manner prescribed by the FDIC (See FDIC-39, Tr. 221). The FDIC issues written instructions for completion of Call Reports. The 1980 and 1984 FDIC instructions were applicable to * * * for the completion of the Call Reports in issue herein (Tr. 216, 219,-220, FDIC-37; FDIC-38).13The instructions require that the Call Reports accurately reflect the financial condition of the bank and the filing of Amended Reports when significant errors are found (FDIC-37, at page 4,5; FDIC-38, at page 3,4).
   While it is the intention of the Call Report instructions to normally follow generally accepted accounting principles (GAAP), and the opinions and statements of the Accounting Principles Board (APB) or the Financial Accounting Standards Board (FASB), the instructions do not in all cases follow such statements and opinions because of the special supervisory, regulatory, and economic policy needs served by these reports. Questions concerning such accounting matters are to be directed to the appropriate Federal Agency (Tr. 216; FDIC-37, at page 13; FDIC-38, at page 9).14
   * * * , FDIC Bank Accounting and Reports Specialist,15testified that in his opinion * * * handling of the one million dollar debenture setoff does not accurately report the Bank's condition, nor is the Bank's treatment of the transaction in the Call Reports consistent with the FDIC's law and regulations as they are false, misleading and contrary to GAAP principles (Tr. 174, 176, 177, 222, 224). According to * * * , the FDIC's instructions for Call Reports follow GAAP unless the supervisory purposes of the FDIC determine a different treatment (Tr. 168, 198, 220, 221; FDIC-37, at page 13; FDIC-38 at page 9). Both the 1980 and 1984 Call Report instructions refer to loss contingencies. The 1980 instructions state: "Contingencies which might result in gains should not be recognized prior to their reali-


10 After the filing of the Notice of Charges, the Bank filed Call Reports for December 31, 1984, and March 31, 1985, wherein the setoff transaction was reflected in the same manner as the previously filed reports (FDIC Exhibits 27 and 28). It is also noted that on September 17, 1984, the Bank filed Amended Call Reports for December 31, 1983, and March 31, 1984, however, the amended changes did not include a departure from the Bank's previous or subsequent handling of the setoff transaction (FDIC Exhibits 22 and 24).

11Following the close of oral proceedings and submission of briefs, etc., * * * counsel by letter submitted copies of the Mutual Release (settlement) and a copy of the Agreed Order of Dismissal which documents are hereby received into evidence as Respondent's Exhibits 9 and 10.

12* * * also filed Call Reports reflecting the disputed setoff in the same manner as the previous reports for December 31, 1984, and March 31, 1985 (FDIC-27 and 28).

13The instructions are issued by the three federal bank regulating agencies: The Federal Reserve Bank, Comptroller of the Currency, and the FDIC (Tr. 216).

14It is noted that the 1984 instructions concerning the use of GAAP, APB, FASB, appear to be more strongly worded than the 1980 instructions. For example, it provides that in reporting transactions not covered in principle by these instructions, banks may follow GAAP. However,. . .in all such circumstances, a specific ruling shall be sought promptly. . .(FDIC-38, at page 9).

15* * * academic qualifications include a B.S. degree magnum cum laude from Muhlenburg College, and an M.B.A. with academic distinction from Wharton Division of the University of Pennsylvania. He has a CPA in the State of * * * where he received the * * * Gold Medal award for the highest grade in the CPA exam and received a Watts Sales award for being in the Top 100 grades at the national level. * * * has been an employee of FDIC for twelve years beginning as an examiner trainee with progressive promotion to his current position. He is the FDIC's alternative voting member of the Federal Financial Institution Examination Council which is a Federal interagency group consisting of the Federal Reserve, Comptroller of the Currency and the FDIC. From 1981 to 1984, he was involved in the revision of the Call Report instructions (Tr. 159-166, 204-205, 216).
{{4-1-90 p.A-905}}zations (emphasis in original)" (Tr. 220 FDIC-37 at page 16). The 1984 instructions states: "A contingency that might result in a gain, for example, the filing of an insurance claim, shall not be recognized as income prior to realization" (Tr. 217-219; FDIC-38, at page A-26). * * * noted that the Call Report instructions refer to FASB No. 5 which, in pertinent part, states:
    (a) Contingencies that might result in gains usually are not reflected in the accounts since to do so might be to recognize revenue prior to its realization.
       (b) Adequate disclosure shall be made of contingencies that might result in gains, but care shall be exercised to avoid misleading implications as to the likelihood of realization (Tr. 174, 217-218; Vol. II, Tr. 71–72; 76–77; FDIC-40, at para. 7).

   * * * averred that he also relied upon APB Opinion No. 10 in expressing his opinion. Paragraph 7 of that publication states inter alia that it is a general principle of accounting that the offsetting of assets and liabilities on the balance sheet is improper except where a right of setoff exists (Tr. 222-223; Vol. II, Tr. 33-48; FDIC-41, at para. 7).
   * * * stated that he reviewed the documents relied upon by the Bank in its handling of the setoff transaction including the attorney opinion letters and the Bank's accountant opinions. * * * opined, based upon the Call Report instructions and GAAP guidelines, that while the Bank was reasonable in asserting that a right of setoff may exist and in pursuing such a claim, it was inappropriate for the Bank to treat the setoff in the manner which it did in the Call Reports as the actual right of setoff had not been "established" or "realized" as it was contingent upon pending court litigation (Tr. 175-177; 217-219; Vol. II, Tr. 33-48). * * * further opined that even if in the future the Bank was successful in its declaratory judgment suit and did not have to repay the debenture note, the Bank's previously submitted Call Reports would still be false, misleading, and contrary to GAAP principles (Tr. 223-224).
   * * * a contract CPA testified on behalf of the FDIC (Vol II, Tr. 86-98; 123-126). * * * averred that he had reviewed the documentation of record including the Bank's attorney letters, accountant opinions and the Call Reports. * * * testified that the Bank's Call Reports and financial statements were not prepared in accordance with FDIC instructions and GAAP (Vol. II, Tr. 100-101). According to * * * , the accounting for the transaction can be viewed in two ways; either as a question of "offset" or as one of "contingencies" (Vol II, Tr. 101, 106-107). In regard to considering the transaction under the principal of "offset", * * * cited APB No. 4, which in pertinent part states: "Assets and Liabilities in the balance sheet should not be offset unless a legal right of offset exists." (Vol II, Tr. 102-104). * * * referred to APB No. 10 as authority and noted that FASB No. 76 at paragraph 41 concludes that there is no need to create an additional exception to the APB No. 10 opinion that the offsetting of assets and liabilities in the balance sheet is not proper, except if the right of offset exists (Vol. II, Tr. 105-106). * * * opined that due to the pending litigation over the debenture note, the "legal right" of offset had not been established at the time the Call Reports were prepared (Vol. II, Tr. 106-107).
   * * * stated that viewing the transaction from the standpoint of "contingencies", FSAB No. 5 (supra.) would be applicable. According to * * * , the substance of the transaction involved a subordinate note payable to * * * and, in turn, to the successors; and on the other side, the uncollectable loan participation agreements. * * * felt that FSAB No. 5 required immediate recognition of the probable losses from the fraudulent or forged loan participations and would be appropriately charged to expense at the time the Call Report and financial statements were prepared. However, the debenture note would be accounted for only after legal process and if the legal right of offset is upheld by the court and the debt forgiven. * * * stated that essentially when the cash is in hand, then it is the appropriate time to recognize it as income. In summary, * * * opined that the instant transaction was more in the area of contingency accounting than offset at the time the Call Reports and financial statements were prepared (Vol. II, Tr. 106-110).
   * * * testified on behalf of * * * that he is a CPA and employed by Arthur Anderson (Vol. II, Tr. 215-219). * * * stated that he participated in discussions with Bank offi- {{4-1-90 p.A-906}}cials in December, 1983, concerning the accountability of the setoff transaction and completed the December 31, 1983, Bank Audit Report (Vol. II, Tr. 220–228). * * * opined that the Bank's handling of the setoff transaction in its financial reports was in accordance with GAAP (Vol. II, Tr. 233). * * * stated that upon request of the Bank he embodied his opinion in a letter dated May 2, 1984 (Vol. II, Tr. 224–232; R.-5).
   * * * testified that he relied on "common sense" in accountability of the setoff transaction (Vol. II, Tr. 236, 242, 244, 245). He initially consulted FASB No. 5 and APB No. 10 and felt that the Bank was faced with a loss contingency. * * * reasoned that * * * had incurred significant losses on the loan participation agreements from * * * and charged the losses off its books. The Bank had secured a strong attorney's letter (* * * letter) that indicated there was a remote possibility that the Bank would be unsuccessful in litigation over an offset of the debenture note against these losses. Accordingly, * * * felt that the Bank had a legal right of offset and exercised that right in December, 1983. Having exercised the right, the Bank had a loss contingency in that it was a remote possibility that the Bank might have to make a future payment on the debenture note. * * * stated that in the unlikely possibility that the Bank would lose the offset litigation, the Bank would have a million dollar "expense." The alternative accounting of the setoff transaction would be to wait until the matter was fully litigated and the million dollars would have dropped in as income through no effort of management (Vol. II, Tr. 241–245).16
   * * *, a CPA with * * *, testified on behalf of * * * (Vol. III, Tr. 76–79). * * * stated that he was responsible for the December 31, 1984, Financial Report of * * * (Vol. III, Tr. 79, R-6). * * * averred that in the preparation of the financial reports, the accountability of the setoff transaction was considered and nothing indicated that it was not in accordance with GAAP (Vol. III, Tr. 80–83).17 According to * * *, at the end of 1983, * * * had 7.3 million dollars in troubled loans originating from * * * of which 5.1 million dollars had been charged off by * * * with only $56,000 in recoveries on these loans. * * * was pursuing the loss through surety bond claims against some of the people involved (allegations of fraud). The write-off of these loans in 1983 was clearly proper. When an account is uncollectable prudence dictates that the Bank go after whatever collateral or asset it can. * * * had received one million dollars in cash from * * * on the debenture note. There were legal opinions from two different law firms which opined that * * * had a right of offset on the debenture note. * * * averred that FASB No. 15 clearly provides that in accounting for a loss on a troubled debt, the loss should be the net of any recovery (Vol. III, Tr. 84–90).18
   * * * testified that he carefully considered FASB No. 5 and felt that it did not preclude the setoff. * * * stated that the participation loans which were charged off by * * * met FASB No. 5's two-part test for "loss contingencies" because the loans were impaired (not collectible) and the amount of the impairment (loss) could be accurately measured. This is consistent with FASB No. 14, which requires accrual of losses when they are reasonably estimated. FASB No. 15 which is authority for recording the loss on receivables, net of recoveries requires taking into consideration all recoveries (the setoff supported by the attorney opinions) that are available (Vol. III, Tr. 90–93). * * * opined that the gain contingency provisions of FASB No. 5, did not preclude the setoff. * * * reasoned that the transaction as a whole must be considered. * * * was misled in the purchase of the loan participations originated by * * *. * * * incurred a loss from these loans and had attorney opinions that a setoff of the debenture note was appropriate. The misleading of * * * gave rise to the claim against the debenture note. It was * * * opinion that the transaction would not be reflected as a "gain contingency" (Vol. III, Tr. 94–98).
   * * * proffered * * * as an expert on bank examinations and the preparation and
16 * * * stated that he consulted with some of his partners who did not necessarily follow his line of reasoning, although they arrived at the same conclusion. One approach was to interpret the transaction as a gain contingency inasmuch as the Bank already had the million dollars which it borrowed several years before and had then exercised its right of offset and "realized" the amount. Another approach was that premised on the strength of the legal opinion (attorney letters) it could be interpreted as meeting the high standards of FASB No. 5 for recording a gain contingency because "realization" was "assured" (Vol. II, Tr. 243).

17 Upon request, * * * submitted a letter to * * * dated April 1, 1985, wherein he confirmed his opinion (R-7).

18 FASB No. 15, states in pertinent part: "The excess of (i) the recorded investment in the receivable satisfied over (ii) the fair value of assets received is a loss to be recognized..." (R-8)
{{4-1-90 p.A-907}}application of Call Reports and Call Report instructions (Vol. III, Tr. 149). * * * had worked fifteen years for the FDIC * * * office and was a Review Examiner at the time he left the FDIC employment in 1983 (Vol. III, Tr. 146). * * * averred that he "helped write sections" of the 1984 Call Report instructions (Vol. III, Tr. 147). On voir dire * * * stated that he reviewed the 1984 draft instructions and authored a memorandum which went to the FDIC's Washington office over the signature of the * * * FDIC Regional Director (Vol. III, Tr. 150–153). * * * admitted that he never reviewed Call Reports under the 1984 Call Report instructions while with the FDIC as he had left that employment before they were effective (Vol. III, Tr. 154–155). * * * testified that he attended special training classes on the application of principles of Call Reports which was ably taught by * * * (Vol. III, Tr. 156–157). * * * stated he reviewed the documents of the instant case and opined that the Call Reports filed by * * * adequately and fairly reflected the position of the Bank and did not "mislead anyone significantly" (Vol. III. Tr. 158–159). Asked about "mislead significantly," * * * explained that "significant" would be the difference of the Bank going under or not, but as the debenture note in the instant case was less than one per cent difference, "It's just not that big a deal" (Vol. III, 159, 161, 172–173). However, on cross-examination, * * * conceded that one million dollars to the Bank's capital is "material" (Vol. III, 163). Of all witnesses who testified in the instant case, * * * testimony was the least persuasive. He overstated his qualifications by asserting that he "helped write" the 1984 Call Report instructions. He may well have, as he testified, written comments and suggestions, but unlike * * *, he was never involved in the actual writing (Vol. III, Tr. 206). He never actually applied these 1984 instructions as he left his employment with the FDIC before they were implemented. His special training on the principles of Call Reports came from * * *, the FDIC expert, who, by far, is better qualified to offer opinion. The undersigned also noted from * * * demeanor and response to questions that he was overly hostile to the FDIC's case, he answered questions with questions. For example, on cross-examination by FDIC's counsel, when asked how many shareholders * * * had, * * * responded "You tell me" (Vol. III, Tr. 167, see also 169). Although * * * testimony to the effect that the Bank's Call Reports were not "significantly misleading," tends to support the FDIC's position more so than * * *. I have given his testimony little weight. Wherever his testimony differs with other witnesses, particularly the FDIC's witnesses, I have accepted the latter's version.

   d. Call Report Functions:

   [.9] Call Reports are a uniform, standardized method of reporting which enables the FDIC to perform its Bank supervisory and surveillance function in a consistent manner, and ensure reasonable, accurate data to other federal19 and state regulatory authorities as well as to the general public (Tr. 138, Vol. III, Tr. 39; Tr. 176–178) Specifically, the FDIC relies on Call Reports for surveillance and analytical purposes such as the preparation of surveillance screening ratios and the integrated monitoring system (IMS).20 The FDIC utilizes Call Report data to generate Uniform Bank Performance Report(s) (UBPR) which are analytical reports for each bank in the United States prepared by the Federal Financial Institutions Examination Council (FFIEC), and distributed to each primary bank supervisory agency, the bank itself, and available to the general public.21 The FDIC also uti-


19 * * *, Vice-President of the Federal Reserve Bank (FRB) of * * *, testified that the FRB utilizes Call Reports to approve holding company applications and also for the supervision of a holding company as well as for monitoring and surveillance purposes. * * * averred that it is important that Call Reports accurately reflect the Bank's condition (Tr. 135–139).

20 The FDIC runs a set of 12 screening ratios against the Call Report data on all banks it supervises. Screening ratios include looking for declining equity capital and loan loss allowance account to assets. For example, if the dollar amount of equity capital is overstated, the improper figure could calculate a ratio that is acceptable; whereas, if the correct figures had been reported on the Call Report, the calculated ratio may be unacceptable which would identify the Bank for further follow-up, surveillance or trigger an investigation (Tr. 189–191; Vol. II, Tr. 19–22). Although it is conceded that bank examination reports are available to various branches and divisions of the FDIC, the data extrapolated from Call Reports is not adjusted by information from bank examination reports and FDIC monitoring personnel tend to rely primarily on Call Report data (Vol. II, Tr. 19–21, 28; 194, 199).

21 UBPRs are used by FDIC bank examiners prior to examinations to note trends and identify potential problem areas. UBPRs are utilized by the public to make their own determination about the condition of a bank. Call Reports(Continued)

{{4-1-90 p.A-908}}lizes Call Report data in the handling of applications for mergers, new branch offices, and relocations. Other than the examination process, the Call Reports are the only source of information to regularly examine the capital ratios of a bank (Tr. 206–208).

3. ANALYSIS

   There is no serious dispute as to the basic facts giving rise to the instant matter as it originates from the Bank's accounting of the one million dollar setoff transaction on the December 31, 1983, Call Report. It is clear that once the FDIC became aware of the transaction during the January, 1984, bank examination, it consistently22 took the position that the Bank's handling of the transaction was "premature" in that the validity of the setoff was being disputed in State Court and subject to the risk of litigation. From the outset and during the filing of the subsequent Cali Reports, the FDIC consistently23 took the position that the Bank should amend these reports to conform with the FDIC's view of the transaction. The Bank has refused or failed to comply with the FDIC's request.
   The Act and the FDIC's regulations are unambiguous and require banks to file Call Reports upon the forms and in the manner prescribed by the FDIC (12 U.S.C. Sec. 1817 and 12 C.F.R. Sec. 304.2). The FDIC issued applicable written instructions for the completion of Call Reports (FDIC-37 and FDIC-38). The announced intent of these instructions is to normally follow GAAP. The conflict in the instant case arises from the parties' divergent opinions concerning whether * * * handling of the setoff transaction was in accordance with GAAP. For the reasons set forth infra, it is the conclusion of the undersigned that the FDIC's position is well taken.

   [.10] * * * and * * *24, the FDIC's expert witnesses, reasoned that the setoff transaction is best viewed as a loss contingency. Both the 1980 and 1984 Call Report instructions provide that contingencies which might result in gains should not be recognized prior to "realization." FASB No. 5, which the instructions refer to, in like manner, provide that contingency gains are not recognized prior to "realization." The setoff transaction was the subject of litigation in State Court and, accordingly, contingent upon the outcome of that lawsuit. The fact that the Bank physically had the one million dollars from the debenture note in hand, does not diminish the attendant risk that a court might not allow the setoff and require the repayment of the principle plus interest. Although the Bank may reasonably rely upon the "strong attorney" opinion letters in pursuing the setoff claim in court litigation, in the final analy-


21 Continued: are made by the banks themselves, and the FDIC does not unilaterally change the data on the reports. The FFIEC and general public do not have access to bank examination reports (Tr. 200–206; Vol. II, Tr. 26–28).

22 During the hearing, * * * adduced testimony, primarily from * * * to the effect that Bank Examiner * * * initially agreed with the Bank's position on the transaction and would so reflect it in the Examination Report; however, on the instructions of the FDIC's * * * office, reversed his position (Vol II, Tr. 36–37). * * * did not testify at the hearing (Vol. II, Tr. 6, 7). The Bank Examination Report received into evidence disallowed the setoff transaction (FDIC-1; at 1-a). No "drafts" of the Bank Examination Report ever existed which took a position different to the FDIC in regard to the setoff transaction (Tr. 130–131). All other documents received into evidence clearly reflect that the FDIC would not allow the setoff transaction. Assuming arguendo, which I do not find, that * * * made the statements attributed to him, it was, at best, innocuous banter as in the final analysis his Examination Report disallowed the transaction.

23 * * * testified that there was a lot of discussion about the setoff transaction and the litigation. Initially, some consideration was given to await the outcome of litigation, if it was immediate; however, the matter dragged on with the realization that the call report issue had to be resolved (Vol. II, Tr. 191). * * * testified that there was no question in his mind that the FDIC wanted the Call Reports amended (Vol. III, Tr. 51).

24 * * * assertion that the testimony of FDIC's witnesses should be discounted is found totally without merit. The Bank argues that * * *, having no practical experience as a CPA in bank audits, is less qualified to express accounting opinions. To the contrary, of all the witnesses who testified, * * * is easily the best and most reliable. He has impeccable academic qualifications far beyond any other witness who testified at the hearing. His duties with the FDIC and the Federal Interagency Group included work on the Call Report instructions which clearly gives him the unique advantage of being intimately acquainted with the intent the regulators had in formulating the Call Report instructions. The Bank's allegation that * * * was biased because he is under contract with the FDIC and his firm lost an account to the firm of one of the Bank's expert witnesses is also rejected. It is not unusual for expert witnesses to be paid for their participation in litigation, nor is it unusual for CPA firms, like other business enterprises, to compete in the open market for accounts. The undersigned has carefully observed the demeanor of all witnesses including * * *, who testified in a forthright and honest manner consistent with other record evidence. The undersigned concludes there is no foundation to support a contention that * * * was in any manner biased. Nor do I find, as urged by the Bank, that the fact that the FDIC's experts formulated their technical opinions in preparation for the trial of the instant matter somehow detracts from their validity. The opinion expressed by the FDIC experts are founded on the FDIC's consistent theory of prematurity in the booking of the setoff transaction. A contention I find most rational given the instant factual situation.
{{4-1-90 p.A-909}}sis, it is not the Bank's attorneys but rather the Court who would ultimately "establish" the legal rights of the parties. Indeed, the very language of the attorney letters relied upon by the Bank are couched in tentative phraseology such as "subject to the risks inherent in all litigation" and the impossibility to "predict with absolute accuracy the outcome of any court proceeding involving this matter..." (R-1 and R-3). It, thus, is clear to the undersigned that in the instant case "realization" as contemplated by the FDIC's regulation and FASB No. 5, would not occur until the State Court ruled on the propriety of the setoff.
   This conclusion is consistent with the clear language of APB No. 4 and APB No. 1025 which, in essence, provides that a setoff of assets and liabilities should not be recorded unless a "legal right exists." The setoff transaction was subject to the risk of litigation and, consequently, did not "exist". No matter how strong or how many attorney opinions the Bank was able to solicit, the legal existence of the right of setoff could not be established prior to a ruling of the State Court. From the outset the FDIC has taken the position that the Bank's accounting of the setoff transaction was "premature." Viewing the transaction from a timing standpoint leads to the conclusion that the only safe and sound method of recording the transaction was at the time the controlling forum - the Court - ruled on the matter and established the legal existence of the setoff. No such ruling had been made at the time any of the Call Reports in question were completed and filed with the FDIC.
   The testimony of the Bank's expert witnesses does not persuade me to draw the opposite conclusion. According to * * *, the Bank had sustained and charged off significant losses from the * * * loan participation agreements. Premised upon strong attorney opinions the Bank exercised its right of setoff which was permissible under APB No. 10 and FSAB No. 5. It was a remote possibility that the Bank would have to repay the debenture note. In the unlikely event the Bank was unsuccessful in litigation, the million dollars would be an "expense." The alternative method, which made less sense to * * *, was to await the outcome of the litigation and let the money come in as income. According to * * *, FASB No. 15 provides that the accounting of a loss is the net of recovery. * * * had been "misled" by * * * and suffered substantial losses on the loan participation agreements. The Bank had one million dollars from * * * from the note and attorney opinions to the effect that the setoff was appropriate. Therefore, the loss could be calculated. * * * further reasoned that FASB No. 5 did not "preclude" the Bank's handling of the setoff transaction. The common thread that runs through both * * * and * * * rationale is the reliance placed on the attorney opinions. As noted supra, while such opinions may be a reasonable basis to pursue a claim, they are not the final arbiter of the legal right; the safer, sounder, and more prudent manner from a bookkeeping standpoint is to await the outcome of litigation. The Bank's expert witnesses proffer no persuasive arguments why the accountability of the transaction should not have awaited the outcome of the lawsuit. The fact, as suggested by * * *, that the Bank wanted to put its "unfortunate experience" behind it, while probably true, is not a controlling basis upon which to book a transaction that is embroiled in litigation.
   Furthermore, the Bank's expert witnesses' interpretation of the transaction arises more in the context of completing Financial Statements rather than in the submission of Call Reports. Neither * * * nor * * * completed any of the questioned Call Reports. In their respective Financials, * * * and * * * fully disclosed the dispute in regard to both the State Court litigation and the FDIC's objection to the transaction. While Financial Statements and normally Call Reports are subject to GAAP
25 While it is true, as the Bank contends, that APB No. 10 and FSAB No. 5 nor any other accounting principal requires that a right of setoff must be litigated to its conclusion before it is recorded, these same authorities likewise do not say that it should not be so. It is assumed that if GAAP principals specifically dealt with a factual situation identical to the instant case, this matter would not be the subject of litigation in two different forums. The closest any authority comes to the instant facts by analogy is the 1984 Call Report instructions which provide that the filing of an insurance claim shall not be recognized as income prior to realization. As applied to the instant case, the filing of the setoff lawsuit should not be recognized as prevailing in litigation prior to the Court's ruling. Notwithstanding, it is the conclusion of the undersigned that lack of a specific GAAP opinion which governs the facts presented, is not dispositive of the instant case.
{{4-1-90 p.A-910}}guidelines, the latitude of footnote explanation enables * * * and * * * to interpret the transaction in a liberal fashion. Conversely, the Call Reports contain no footnotes.26 The fundamental purpose and use of the Call Reports dictates against such a procedure. The purpose of the Call Report is to provide a standardized method of reporting. Uniformity of reporting is not achieved by granting exception or permitting diverse interpretations through footnotes or otherwise. The FDIC utilizes Call Report data for screening ratios in its surveillance function and to generate UBPR reports. This complex task would surely be reduced to chaos if the FDIC would have to provide exceptions to the interpretation of its own regulations. The notice of changes in the instant case arise from the Bank's filing of specific Call Reports. It is well settled that "great weight" or "great deference" is afforded to the construction and interpretation of the statutes by the Agency charged with their implementation. Udall v. Tallman, 380 U.S. 1, 16(1965); Jones v. FDIC, 748 F2d 1400, 1404, (CA 10, 1984). It is, therefore, concluded that the FDIC has sustained its burden of proof27 that * * * recordation of the setoff transaction commencing December 31, 1983, was not in the form and manner prescribed by the FDIC, and comprised a violation of law.
   By way of defense, the Bank argues that the FDIC was arbitrary and capricious in the instant case in that at no time prior to the hearing did it advise the Bank of the specific basis upon which it asserted that the Bank's Call Reports failed to comply with Call Report instructions or GAAP. This argument smacks of estoppel or laches. Barring a showing of "affirmative misconduct" by the federal government, this doctrine cannot be invoked against the FDIC. FDIC v. European American Bank & Trust Co., 567 F.Supp. 950, 958, (U.S. Dist. Ct. S.D.N.Y., 1983). In fact, the converse appears to be true as the Bank did not seek other administrative remedies available to it. The Call Report instructions provide that GAAP principals are not followed in all cases and in reporting a transaction not covered in principle, banks should obtain a specific ruling from the FDIC. * * *, made no request for a formal ruling in this matter. Notwithstanding, the evidence is clear that from the outset and continuously thereafter, the FDIC did inform the Bank that its handling of the setoff transaction was "premature." Thus, the Bank was well aware of the essence of the FDIC's position. The FDIC also advised the Bank specifically how the Call Reports were improperly completed i.e., the April 12, 1984, correspondence (FDIC-6). Furthermore, it is noted that Respondent's experts apparently had no difficulty ascertaining the technical aspects of applicable GAAP principles. For example, * * *, who completed the Bank's December 31, 1983, financial statements stated that he "initially" reviewed FASB No. 5 and APB No. 10, in considering the propriety of booking the setoff transaction. Accordingly, there is no showing that the FDIC acted in an arbitrary or capricious manner.
   The Bank also contends that the FDIC acted in bad faith in pursuing this administrative proceeding in that the FDIC is the current holder of the debenture note and the real purpose of this proceeding is for the FDIC to obtain a benefit in the State Court litigation by asserting that the note is still due and owing. This argument is without merit. It is true that the FDIC reacquired the debenture note prior to the administrative proceeding in its capacity as receiver of * * * assets. However, the FDIC is pursuing the instant case in its supervisory and regulatory capacity. The FDIC's position in the instant matter does not urge nor require a finding as to the validity of the setoff transaction, but rather involves a question of timing. That is, whether it was proper for the Bank to record the setoff transaction as it did while the propriety of the setoff was pending resolution by a State Court. The undersigned, therefore, finds that the FDIC did not act in bad faith in instituting these proceedings.
   It is apparent to the undersigned, having found that the Bank's accounting of the setoff transaction was not in accordance with law and regulation, that the Call Reports were false. * * * testified, without contradiction, which line items of the Call
26 At the hearing, * * * offered by way of settlement to put footnotes in the Call Reports, which was rejected by the FDIC.

27 Section 8(h) of the Act (12 U.S.C. Sec. 1818(h)) provides that the instant hearing under Section 8 of the Act is subject to the requirements of the Administrative Procedure Act (5 U.S.C. Sec. 500, et seq.) (hereinafter APA). Section 7(c) of the APA (5 U.S.C. Sec. 556(d)) as interpreted by the United States Supreme Court requires the standard of proof to be a preponderance of the evidence. Steadman v. S.E.C., 450 U.S. 91, 103 (1981).
{{4-1-90 p.A-911}}Reports were affected by the Bank's booking of the setoff. In essence, it caused a "domino" effect. Thus, the Bank did not state its correct liability for the debenture note and by placing the one million dollars in the loan loss reserve, it necessarily lowered the Bank's total expenses by not otherwise requiring another million dollars to be placed in the loan reserve which, in turn, allowed the Bank to increase its equity capital. This series of entries being found incorrect, necessarily gave an inaccurate picture of the Bank's financial condition. The purpose and use made by the FDIC of Call Report data demonstrates that these entries were materially false. For example, the FDIC uses Call Report data to analyze the Bank's capital ratio. If the equity is overstated, the improper figure could calculate a ratio that is acceptable whereas the correct figure would be unacceptable. Inasmuch as the FDIC uses in its supervisory and surveillance responsibilities these calculations to monitor banks, the incorrect figure may not alert the FDIC to a potential problem or trigger an investigation. The Bank's argument that the FDIC has sources other than Call Report data, such as the bank examination report, to figure ratios does not withstand scrutiny. The FDIC uses the Call Report data which is submitted on a quarterly basis to surveil banks between bank examinations. It is absolutely vital to the FDIC to have accurate data upon which to rely in performing this function.28 The purpose of intermittent bank monitoring is thwarted by tolerating the submission of false data, not to mention that the integrity of the entire system, which is relied upon by other regulatory bodies and the general public to supply accurate standardized data, is equally undermined. Nor can the Bank explain away its false reporting by asserting that the incorrect figures submitted were de minimis.29 In discharging its supervisory responsibilities, the FDIC utilizes Call Report data to study trends and potential risks. The object is to identify and eliminate problems before a bank is in immediate danger or in actual failure. It is unnecessary for the FDIC to establish that the Bank's inaccurate Call Report entries specifically concealed a bona fide problem area in concluding that such entries were materially false. It is sufficient that the potential risk existed.

   [.11] It is self-evident that the Bank's materially false entries on the Call Reports are misleading. As noted, supra., the fundamental purpose and uses of the Call Reports require that they be uniform and accurate. Once false entries infect the system, users who rely on the inaccurate data are subject to unforeseen risks which may influence them to take action not otherwise contemplated. The Bank contends that the FDIC has failed to prove that the FDIC, other regulators, or any other user of the Call Reports have been actually misled. The Bank's assertion is akin to a theory of common law fraud. It is unnecessary for the FDIC to show that the users of the Bank's Call Reports acted to their detriment in relying on the false data. The Act and regulations require no such burden. It is sufficient, as the FDIC did in the instant case, to demonstrate that the Bank willfully filed materially false Call Reports which are relied upon by Federal and State regulatory agencies and the general public with the possible consequences of abnormal risk, loss or damage.
   The Bank contends that the FDIC could not have been misled by its Call Reports as it had fully revealed its handling of the setoff transaction in the January, 1984, Bank Examination, in discussions and correspondence with the FDIC, and in its Financial Statements. The Bank further argues that the users of the Call Reports had this material available to them. This assertion is without merit. The FDIC is responsible for supervising a large number of banks at the national level. In order to effectively accomplish its missions, the FDIC must have a system which allows it to gather accurate standardized information which it can screen and analyze to an efficient manner to identify problem areas. Culling correspondence files and bank examination reports for each individual bank would be an impractical method involving vast and costly resources. It is clear that the Call Reports fulfill this function. The Bank further asserts that it could not have misled other government agencies or the general public


28 This is especially true when the number of banks that the FDIC has authority over and the recent number of bank failures is considered.

29 The Bank points to the increased rating it received following the January 1984, bank examination to support this contention.
{{4-1-90 p.A-912}}as the Bank has no responsibility to file such information with agencies other than the FDIC. The Bank, therefore, argues if any misleading has been done, it was done by the FDIC when it republished or furnished the Call Reports to other agencies. This contention is totally without merit. Call Reports are authorized by the banks and the FDIC does not unilaterally change the data. The Call Report instructions require that the reports be accurate and that an amended report be filed when errors are found. In the instant case, the FDIC has disallowed the setoff transaction and attempted to get the Bank to file amended Call Reports. The Bank has refused to do so. The FDIC is now seeking by the procedure of obtaining a Cease and Desist Order to compel the Bank to make such amendments. The undersigned is satisfied that * * * Call Reports are materially false and misleading.
   As noted supra, the Notice of Charges assert that the Bank has engaged in unsafe or unsound banking practices and violations of law by filing materially false and misleading Call Reports. Although the phrase "unsafe and unsound" has been in the Act for over 50 years, the Act does not specify, identify or define what acts or practices are to be deemed unsafe or unsound. However, the legislative history of the Act30 and judicial interpretation31 of the phrase indicate that unsafe or unsound practices as contemplated by Section 8(b) of the Act is a general concept which includes any action, or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which would be abnormal risk, loss, or damage to the Bank, its depositors or shareholders, or to the insurance fund administered by the FDIC.
   The undersigned has concluded that a preponderance of the evidence establishes that * * * has filed Call Reports that are not in the form and manner required by the FDIC; that were materially false and misleading and in violation of law and regulation. The evidence recited supra, further establishes that such practices by * * * pose as a natural consequence abnormal risk of loss or damage to at least the FDIC and other users of the Call Reports. It is therefore found that such action on the part of * * * comprised unsafe and unsound banking practices which must be remedied by an appropriate Cease and Desist Order.
   Subsequent to the closing of the record in the instant matter, the Chancellor in the State Court litigation issued an Order dismissing * * * Declaratory Judgment suit in view of a compromise settlement which extinguished the one million dollar debenture note upon payment of approximately $8,500.00. The Bank argues that the resolution of this action vindicates its position as it demonstrates that it was correct in December, 1983, when it initially booked the setoff transaction on the Call Reports and other Financial Statements and, thus, renders this proceeding moot. I disagree. The fact that the Bank was ultimately successful in State Court and does not have to repay the debenture note does not justify its initial and intermittent handling of the transaction. At the time the Bank completed and filed the questioned Call Reports, the risk of litigation was real and ultimate success uncertain. The booking of the transaction in the quarterly Call Reports was premature. The fact that approximately two years later the Bank may now be entitled to book the transaction does not change the false and misleading entries previously recorded. The Bank willfully elected not to follow the FDIC's clear instructions and amend its Call Reports to accurately reflect the setoff transaction in the appropriate time sequence. Having flagrantly chosen to follow the path, a Cease and Desist Order is warranted to set the matter right. Moreover, the clear language of the Act (12 U.S.C. Sec. 1818(b)(1), provides that once the specifications of the Notice of Charges have, as in the instant case, been established, a Cease and Desist Order may issue. Such an Order is necessary to deter future abuses, and to correct past unsafe and unsound banking practices.

PROPOSED CONCLUSIONS OF LAW

   1. The FDIC has jurisdiction over the Bank under Section 8(b) of the Act to issue an Order to Cease and Desist requiring that the Bank cease and desist from unsafe or unsound banking practices and violations of law, and also requiring that the Bank take affirmative action to correct the conditions resulting from such practices and vio-


30 Hearings on S. 3158 before the House Comm. on Banking and Currency, 89th Cong., 2d Sess. 49–50 (1966).

31 First National Bank of Eden v. Department of the Treasury, 568 F2d 610, 611 Fn2 (CA 8, 1978); Groos National Bank v. Comptroller of the Currency, 573 F2d 889, 897 (CA 5, 1978).
{{4-1-90 p.A-913}}lations as set forth in Appendix I to this decision.
   2. The Bank has engaged in practices which are unsafe or unsound within the meaning of Section 8(b) of the Act.
   3. The Bank has engaged in unsafe or unsound practices within the meaning of Section 8(b) of the Act by failing to file Call Reports:
   a. in accordance with law;
   b. in the form and manner required by the FDIC;
   c. that are accurate and not materially false;
   d. that are not misleading;
   e. in a manner consistent with the instructions for, and uses of, those Reports;
   f. that appropriately state its valuation reserve for loan losses;
   g. that appropriately state its liability for subordinated capital notes; and
   h. that properly account for transactions.
   4. The Bank has committed violations of Section 304.2 of the FDIC Regulations 12 C.F.R. Sec. 304.2, in its filing of each of the following Call Reports and in its failure to file properly amended versions of those reports:
   a. Call Report of December 31, 1983
   b. Call Report of March 31, 1984
   c. Call Report of June 30, 1984
   d. Call Report of September 30, 1984
   DATED at * * *, this 28th day of January, 1986.
/s/ Timothy J. O'Leary
Administrative Law Judge

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