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FDIC Enforcement Decisions and Orders

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   [5082] FDIC Docket No. FDIC-85-25e,-85-112k,-85-113k (2-3-87)

   Civil money penalty assessed against a person who participated in the conduct of the affairs of a bank, but who was not an officer, director, employee, or agent of the bank, for engaging in conduct which resulted in substantial financial loss to the bank, evidencing his willful or continuing disregard for the safety and soundness of the bank.

   [.1] Lending and Collection Policy and Procedures—Unsafe or Unsound Practices—Adequacy of Documentation
   The practice of making loans with poor or no loan documentation (e.g. without financial statements at the bank on the named obligors) is contrary to normal and prudent banking practices.

   [.2] Deposits—Brokered—Premature Withdrawal of Certificates of Deposit— Penalties
   A bank that takes a large volume of brokered deposits in the form of one-year certificates of deposit subjects the bank to above normal risk since this one-year funding source was used to make seven-year loans with no prepayment penalties for premature withdrawal of the deposits and with a fixed interest rate for the loans only during their first year.

   [.3] Change in Bank Control Act—Acquiring Person
   Only "acquiring persons"—persons who acquire control of a bank directly or indirectly or through or in concert with one or more other persons—have an obligation to comply with and can violate the Change in Bank Control Act. No penalty can be assessed against a person who is not an acquiring person.

   [.4] Participants in Conduct of Affairs—Actual Authority
   Actual authority is not a prerequisite for finding a person participated in the affairs of a bank.

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   [.5] Participants in Conduct of Affairs—Trusted Aide
   A person who is the alter ego of the majority shareholder and chairman of a bank, giving orders himself, perceived by the officers and directors of the bank as the personal representative of the majority shareholder and chairman, but who is not an officer or director of the bank, is one who participates in the affairs of the bank. There is no reason to distinguish between the owner and his trusted aide. Both are knowingly involved in a course of conduct that affects the bank.

   [.6] Participants in Conduct of Affairs—Duty of Care
   Persons involved in banking are held to higher duty of care than ordinary businessmen. Ignorance of banking law, regulations, or practice is not a defense to activity that violates those laws, regulations, or practices.

   [.7] Participants in Conduct of Affairs—Removal No Defense
   The purpose of the removal statute would be substantially weakened if a person could make restitution at any time prior to a removal order, or, as in this case, experience and good fortune of having someone else make restitution through no effort or intervention on his own behalf.

   [.8] Participants in Conduct of Affairs—Prohibition
   A person whose conduct has evidenced a willful or continuing disregard for a bank's safety or soundness, as well as "unfitness to participate in the conduct of the affairs of such insured Bank," may be prohibited from further participation in the affairs of a bank.

   [.9] Civil Money Penalties—Parties—Participant in Bank Affairs
   A person who participates in the conduct of the affairs of a bank in such a way as to cause, bring about, or aid or abet a violation of any provision of Regulation O, is subject to assessment of a civil money penalty in the same manner as an officer, director, or principal shareholder.

   [.10] Civil Money Penalties—Defenses—Reliance on Others
   The defense that one's conduct was merely misguided or was based on the representations of others does not provide an exemption from a civil money penalty because of the duty to make a reasonable inquiry.

   [.11] Civil Money Penalties—Amount of Penalty—Statutory Standard
   In assessing a civil money penalty, the FDIC is required to take into account a number of factors, including the good faith of the person involved, the gravity of the violations, financial resources of the person involved, and other matters as justice requires.

In the Matter of * * *, individually, as
an officer, director, and as an acquiring
party, and * * *, individually and as a
participant in the conduct of the affairs of
and * * * Bank (INSURED STATE
NONMEMBER BANKS)


DECISION, ORDER TO PAY CIVIL
MONEY PENALTIES AND ORDER OF
PROHIBITION FROM FURTHER
PARTICIPATION

FDIC-85-25e, FDIC-85-112k, FDIC-85-
113k
(Consolidated Action)

I. INTRODUCTION

   This proceeding is a consolidation of three separate actions brought by the Federal Deposit Insurance Corporation ("FDIC"): a civil money penalty action against * * *, individually and as an acquiring party and * * * ("Respondent") individually and as a participant in the acquisition of * * * Bank ("* * * Bank"), and * * * Bank ("* * * Bank") (collectively referred to as the "Banks"), pursuant to section 7(j)(15) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1817(j)(15), for knowing violations of the Change in Bank Control Act ("CBCA"); a second civil money penalty action against * * *, Respondent * * *, and * * *, president of * * * Bank at all times pertinent to this proceeding until October 3, 1984, pursuant to section 18(j)(3) of the FDI Act, 12 U.S.C. § 1828(j)(3), for alleged violations of section 22(h) of the Federal Reserve Act, 12 U.S.C. § 375(b), and Regu- {{4-1-90 p.A-996}}lation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 215 ("Reg. O"); and a removal and prohibition action against * * *, as a director and officer, and Respondent * * *, as a participant in the conduct of the affairs, of the Banks pursuant to section 8(e)(1) and (2) of the FDI Act, 12 U.S.C. § 1818(e)(1) and (2).
   All three actions are based on the circumstances surrounding Mr. * * *' acquisition of control of the Banks in mid-1984 and the subsequent conduct and activities of Messrs. * * *, * * * and * * * with regard to those Banks. The proceedings were consolidated and, prior to the commencement of the hearing on the consolidated action, Mr. * * * and Mr. * * * reached a settlement with the FDIC. Only Respondent * * * contested the FDIC's allegations and proposed relief at the hearing held May 5–8, 1986, before Administrative Law Judge Frederick J. Graf (the "ALJ").
   The Board of Directors of the FDIC ("Board") has reviewed the record, the parties' briefs and the Recommended Decision of the ALJ. The Board agrees with the ALJ's determination that the FDIC lacks authority to assess a civil money penalty against the Respondent for violations of the CBCA because Respondent * * * is not a person covered by the CBCA. The Board, however, disagrees with the ALJ that the FDIC lacks authority to assess a civil money penalty against the Respondent for violation of Reg. O and to remove and prohibit him from any further participation in the conduct of the affairs of the Banks as well as any other FDIC insured bank. The record contains substantial credible evidence supporting a determination that the Respondent was a "participant in the conduct of the affairs" of the Banks within the meaning of sections 8(e)(2) and 18(j) of the FDI Act, 12 U.S.C. §§ 1818(e)(2), and 1828(j). Moreover, the record shows that Respondent * * *, participated in violations of various provisions of Reg. O and engaged in conduct which resulted in substantial financial loss or other damage to the Banks, which evidenced a willful or continuing disregard for the safety and soundness of the Banks and which manifested his unfitness to participate any further in the affairs of the Banks.
   The Board, therefore, finds that an appropriate order removing Respondent * * * and prohibiting his participation in the conduct of the affairs of the Banks should be adopted. The Board also finds that Respondent * * * should be assessed a civil money penalty for the violations of Reg. O in the amount of $10,000.

II. STATEMENT OF THE CASE1

   Respondent * * * was hired in 1981 by Mr. * * * to "work out" his existing tax problems and, thereafter, to manage his tax affairs (Tr. p. 430–31). Respondent carried out this charge with the purchase in mid- 1984 of * * * Bank and * * * Bank as vehicles for creating tax deductions for * * * (Tr. p. 438, 449). * * * located the Banks, negotiated the purchase transactions, corresponded with the FDIC regarding CBCA requirements, filed the Notices of Acquisition of Control ("Control Notices") for * * * (Tr. p. 438-44; 446-49) and then installed himself as de facto manager of the Banks.

A. Facts Related to Charges of Violations of
the CBCA
.

   In mid-1984, * * * acquired more than 10 percent of the stock of both * * * Bank and * * * Bank. Prior to the purchases, and pursuant to the requirements of the CBCA, Control Notices for both Banks were filed with the FDIC on behalf of Mr. * * *. Although both Control Notices were signed by Mr. * * *, they were prepared by his personal accountant and tax planner, * * *. The Control Notice for acquisition of * * * Bank stated that Mr. * * * would purchase that Bank's stock with cash raised from the liquidation of long term real estate contracts. The Control Notice for acquisition of * * * Bank stated that the purchase would be with cash and a contract of sale, and that no indebtedness would be incurred as part of the purchase.
   Therefore, except for the portion of the * * * Bank transaction governed by the contract of sale, the Control Notices informed the FDIC that no borrowed funds would be used, either directly or indirectly, by Mr. * * * to acquire control of the


1 Citations to the record herein shall be as follows:
—to the Recommended Decision: "R.D. at —";
—to the transcripts of testimony: "Tr. p —";
—to the exhibits: "FDIC Exh. —" and "Resp. Exh. — ;" and
—to the Findings of Facts: "F.F. No. —."
{{4-1-90 p.A-997}}Banks. Moreover, staff in the * * * Regional Office of the FDIC, in correspondence with Respondent * * *, made it clear that any changes in the terms of financing the acquisitions must be reported to the FDIC. At no point did Respondent * * * or Mr. * * * notify the FDIC that the purchase of control of the Banks would be accomplished by any means other than that which had been reported in the Control Notices. Based on the representations in the Control Notices and Respondent * * *' correspondence, the FDIC interposed no objection to Mr. * * *' purchase of the Bank's stock.
   Contrary to the information contained in the Control Notices, not only was borrowed money used to purchase control of both * * * Bank and * * * Bank, but the credit in both cases was extended by * * * Bank. A little over a month after Mr. * * * allegedly purchased * * * Bank's stock with nonborrowed funds, Respondent * * * caused * * * Bank to make four, 90-day, unsecured loans to four shell corporations for which Respondent * * * possessed and exercised borrowing authority. The proceeds of the four loans were, in turn, disbursed to the sellers of * * * Bank stock. Respondent * * *, without properly documented authority to do so, established and made draws on a $150,000 line of credit to Mr. * * * at * * * Bank. The proceeds of these draws were, in turn, disbursed to the seller of * * * Bank to cover the cash portion of the purchase transaction. Despite being aware that * * * purchase of the Banks involved the use of borrowed money, Respondent * * * did not disclose these facts in the two Control Notices or file amendments to them to disclose these facts.

B. Facts Supporting Charges of Violations of
Reg. O
.

   [.1] The second civil money penalty action against Respondent * * * is based on violations of Reg. O resulting from the four, 90-day, unsecured loans he arranged to be made by * * * Bank to his shell corporations. Contrary to normal and prudent banking practices, each loan had poor or no loan documentation, e.g., there were no financial statements at the Bank on the named obligors. The loans also contravened * * * Bank's formal loan policies in that they were unsecured, did not receive the required approval of the Bank's board of directors prior to disbursement, were made to out-of-territory corporations without explanation, and were used for purposes different from those documented in the Bank's files. Lastly, the loans were not repaid on a timely basis and, in fact, were never repaid by the named obligors, i.e., Respondent * * *, shell corporations, or by Respondent * * *.
   These loans, although ostensibly made to shell corporations controlled by Respondent * * *, went to the ultimate benefit of the Bank's majority shareholder, Mr. * * *, since they relieved him of his obligation to pay the sellers of * * * Bank stock. As such, the loans are governed by the requirements of Reg. O, the federal regulatory provision dealing with insider transactions and, in fact, violated several provisions of Reg. O:

       (1) The loans violated section 215.4(a) of Reg. O, 12 C.F.R. §215.4(a), in that they were preferential, i.e., extended without proper documentation and prior board approval, and in that they possessed above normal levels of risk, i.e., they were unsecured and without documented ability of the borrower to repay;
       (2) The loans violated section 215.4(b) of Reg. O, 12 C.F.R. §215.4(b), in that they did not receive the approval of a disinterested majority of the Bank's board of directors prior to their disbursement; and
       (3) The loans also violated section 215.4(c) of Reg. O, 12 C.F.R. §215.4(c), in that the aggregate total of the loans, $560,000, exceeded the Bank's legal lending limit.
C. Facts Related to Charges Pursuant to
Section 8(e)(2)
.

   [.2] The practices and conduct engaged in by Respondent * * * also undermined the financial stability of the Banks. For example, he arranged the loan agreements used to purchase * * * Bank stock and made the unauthorized draws on Mr. * * *' line of credit in order to raise capital for the purchase of * * * Bank. The transactions not only violated the CBCA and Reg. O, they also constituted unsafe and unsound banking practices in that * * * Bank's assets were used to purchase its own stock. Respondent * * * also arranged for and forced the Banks to take a large volume of brokered deposits in the form of one year {{4-1-90 p.A-998}}certificates of deposit ("CD") in direct contravention of the policies of both Banks' boards of directors. These deposits subjected the Banks to above normal risk since this one year funding source was used to make seven year loans with no prepayment penalties for premature withdrawal of the deposits and with a fixed interest rate for the loans only during their first year.
   Respondent * * * also engaged in conduct that caused the Banks to violate the regulations of the Depository Institutions Deregulation Committee ("DIDC"), 12 C.F.R. § 1204.103(b), when he caused the Banks to permit withdrawal of $1,900,000 in CDs without assessment of an early withdrawal penalty, thereby causing the already weak Banks to lose the penalty income. He was also responsible for * * * Bank's loss of approximately $90,000 when he caused it improperly to rebate to Mr. * * * a large portion of an origination fee for a related loan secured by the CDs. Mr. * * * disbursed the $90,000 to the seller of the * * * Bank stock. Lastly, Respondent * * * billed * * * Bank and * * * Bank paid him for services he had rendered to Mr. * * * prior to the acquisition of the Bank.
   FDIC enforcement counsel alleged that these facts established that Respondent * * *' conduct in both Banks evidenced a willful or continuing disregard for the Bank's safety and soundness and his unfitness to participate further in the affairs of the Banks. Moreover, FDIC enforcement counsel alleged that the conduct resulted in substantial financial loss or other damage to the Banks. On this basis, the FDIC sought to prohibit Respondent * * * from any further participation in the conduct of the affairs of the Banks.

D. Administrative Law Judge's Recom-
mended Decision
.

   The ALJ adopted all but six of FDIC enforcement counsel's Proposed Findings of Fact. However, he found against the FDIC on each of the substantive violations and the remedies sought against Respondent. The ALJ's decision is based primarily on his conclusion that as a matter of law the Respondent was not a person participating in the conduct of the affairs of the Banks.

III. DISCUSSION

   The Board has thoroughly reviewed the entire record herein and agrees that the Findings of Fact proposed by FDIC enforcement counsel and adopted by the ALJ are supported by substantial evidence on the record as a whole. Therefore, the Board also adopts the Findings of Fact adopted by the ALJ. In addition, as specifically discussed below, the Board finds that the six Proposed Findings of Fact rejected by the ALJ are also supported by the record and adopts those Findings.2 The Board, as discussed below, also modifies certain other findings or comments made by the ALJ in his discussion of the Findings of Fact.3 However, based on our review of the factual record in this proceeding, the Board cannot agree with many of the ALJ's conclusions of law or his Recommended Decision and declines to adopt those conclusions and that decision for the reasons set forth herein.

A. No Penalty Can Be Assessed Against Re-
spondent * * * for Violation of the Change
in Bank Control Act
.

   FDIC enforcement counsel maintained that Respondent * * * violated the CBCA by virtue of misrepresentations in and omissions from the Control Notices for * * * Bank and * * * Bank and in correspondence with the FDIC. It is undisputed by the parties, and the ALJ found, that Respondent * * * was advised that approval of the two acquisitions was "contingent upon the accuracy of the information furnished in the notice of acquisition and that the FDIC must be notified in writing of any changes in the conditions of the transaction prior to its consummation." (R.D. at 3.) The ALJ further found that Respondent * * * rejected an opportunity to amend the * * * Bank Control Notice after being notified by the FDIC that it had been informed by the selling parties that borrowed funds would be used in the acquisition of * * * Bank. (R.D. at 3.) Respondent * * * responded to the FDIC, in writing, indicating that no changes in the financing had been made. (R.D. at 3.) The ALJ also found that the information submitted in the Control Notice for * * * Bank was incorrect at the time it was filed. (R.D. at 9.) However, the ALJ concludes that no penalty should be assessed against Respondent * * * for violation of the CBCA because "Mr. * * * was


2 F.F. Nos. 16, 18, 95, 151, 190 and 194.

3 See note 8, infra.
{{4-1-90 p.A-999}}not the person who acquired control of * * * Bank or * * * Bank; it was Mr. * * * who acquired control and therefore, any fines assessed should be assessed against Mr. * * *." For the reasons set forth below, the Board reaches the same conclusion as the ALJ.

   [.3] The evidence reflects that Respondent * * * was not "directly or indirectly or through or in concert with one or more other persons," and "acquiring person" within the meaning of the CBCA. FDIC enforcement counsel maintains that jurisdiction over Respondent * * * is obtained under section 7(j)(15) of the FDI Act (12 U.S.C. § 1817(j)(15)) which refers to "any person who willfully violates any provision of this subsection", rather than to "an acquiring person." Despite this distinction in terminology, a careful analysis of the statute reflects that only "acquiring persons" have an obligation to comply with and can therefore violate the operative provisions of subsection (j). Thus, unless Respondent * * * were determined to be an acquiring person, he cannot be deemed to have violated section 7(j) of the FDI Act. The more general language of section 7(j)(15) merely establishes the penalty for violations and does not overcome this defect. This conclusion is in no way intended to condone Respondent * * *' actions. It merely recognizes that the statute as currently written does not enable the Board to take action under the CBCA against persons who are not "acquiring persons." Because we conclude that Respondent * * * could not on the present facts be held to have violated section 7(j), the Board finds that no penalty can be assessed against him.

B. Removal Under Section 8(e)(2) is Appro-
priate
.

   1. Respondent Participated In the Conduct of the Affairs of the Banks.
   It is admitted by all parties that Respondent * * * was not at any time relevant to these proceedings an officer, director or employee of either of the Banks (Tr. p. 305, 515-18). The evidence does show, however, that he was a consultant to both of the Banks (FDIC Exh. 79 and 83). The removal action pursuant to section 8(e)(2) of the FDI Act, therefore, depends upon a determination that Respondent * * * was "a person participating in the conduct of the affairs of an insured bank" to establish applicability of the statute.4 However, the ALJ found that Respondent * * * was not a "person participating in the conduct of the affairs of an insured Bank" apparently because he believed that the Congress did not intend section 8(e)(2) to include within its scope persons involved in banks in an "unofficial" manner.5 In the ALJ's view, the pertinent language was intended only to encompass a person having an indirect ownership interest. (R.D. at 8). Necessarily then, under the ALJ's interpretation, the FDIC action under section 8(e)(2) would fail.
   The ALJ's analysis was fundamentally flawed because he failed to interpret properly this crucial statutory language and to appreciate the significance of the evidence of Respondent * * *' contact and conduct in relation to the Banks. For the reason set forth below, the Board disagrees with the ALJ and concludes that Respondent * * * was a "person participating in the conduct of the affairs of * * * Bank and * * * Bank within the meaning of section 8(e)(2) of the FDI Act.

   a. Legislative History of Section 8(e)(2).

   It is clear from the legislative history of section 8(e) of the FDI Act that in granting prohibitory powers to the bank regulatory agencies Congress was providing a mechanism—more finely tuned than the already existing power to terminate insurance—to pin-point and eradicate insider abuse. Congress was concerned with the overall health of the nation's financial system and the banking industry. The FDI Act was intended to provide protection for the public, whose financial well-being rests upon the integrity of the banking industry. The amendments to the FDI Act which became section 8(e) provided an additional remedy for the regulatory authorities to use in combatting bank abuse. The protective and remedial nature of the FDI Act compels a reading of the statute with its purpose and intent clearly in mind.
   Prior to the passage of section 8(e) the only option available to the FDIC was to terminate a bank's insurance. Section 8(e)


4 The civil money penalty action pursuant to section 18(j) of the FDI Act is also dependent on finding that Respondent was participating in the conduct of the affairs of the Banks.

5 The ALJ reached an identical conclusion with respect to section 18(j). (R.D. at 19.)
{{4-1-90 p.A-1000}}was added to provide the bank regulatory agencies the flexibility to take direct and effective action against offending individuals without the disruption and economic uncertainty incident to such an ultimate penalty as insurance termination. Admittedly, the primary focus of section 8(e) is against officers, directors and owners of banks who are the individuals most likely to be involved in insider abuse. However, the inclusion of the phrase "or person participating in the conduct of the affairs of a bank" in section 8(e)(2) indicates a recognition by Congress that persons who are neither officers, directors, owners nor employees may be in a position to abuse a bank. While the legislative history does not define this phrase, the debate on previous versions of what ultimately became section 8(e) of the FDI Act recognized the broad range of persons who might have the potential to be destructive to a bank. In 1966, J.L. Robertson, Vice Chairman, Board of Governors of the Federal Reserve System, testifying in support of a bill to grant the bank regulatory agencies the powers of section 8(e)(2), stated:
       For years, banking was considered to be so staid and conservative that it offered little attraction for those interested solely in a "quick dollar." Recently, however, it has attracted not only an increased number of legitimate and necessary operating personnel and investors, but at the same time an increased number of ill-purposed individuals whose aims are contrary to the best interests of the bank and the public. Working behind the scenes and through other persons, they gain control of banks, ransack them, and then move on to other banks or financial institutions, often times with funds obtained from the first victim. Because of the easy transferability of bank assets and liabilities, and the ever-increasing complexity of financial dealings that are an everday part of banking business, unscrupulous operators, and other ill-intentioned persons involved in the affairs of a bank, can make it extremely difficult to trace their activities. Fraudulent practices have been facilitated in recent years by the rapid development in systems of communications and transportation, making it increasingly easier to disguise illegitimate transactions as legitimate ones and to quickly imperil the solvency of a bank by inundating it with unsound assets. [Emphasis added.]
Hearings on S. 3158 Before a Subcomm. of the Comm. on Banking and Currency, 89th Cong., 2d Sess. 39–40 (1966).
   In 1977, when Congress was considering, among other things, permitting the federal regulators of financial institutions to use their cease-and-desist powers against "other persons participating in the conduct of the affairs" of financial institutions, George LeMaistre, Chairman of the Federal Deposit Insurance Corporation, also specifically addressed this issue:
       Recent experience also indicates that a bank may be harmed not only by the misconduct of its own officers and directors but also by the misconduct of others who are in a position to influence its affairs. While we have exercised our power to deal with these situations through removal proceedings or through cease-and-desist action brought against the bank itself, we support the amendments contained in Section 106(a) and (c) of the bill, which would clarify our authority in this regard by amending paragraphs (b) and (c) of Section 8 of the Federal Deposit Insurance Act to provide expressly that the appropriate regulatory agency may bring cease-and-desist proceedings against, directors, officers, employees, agents and other persons participating in the conduct of the affairs of the bank, as well as against the bank itself as permitted under present law. We believe that clarifying our ability to reach such officers, directors and other persons participating in a bank's affairs through cease and desist orders would result in an enhanced ability to correct situations which might otherwise result in serious detriment to the bank, such as overdrafts, insider loans, compensating balances and similar practices. [Emphasis added.]
Hearings Before the Subcomm. on Financial Institutions Supervision, Regulation and Insurance of the Comm. on Banking, Finance and Urban Affairs, 95th Cong., 1st Sess. 2348 (1977).
   Congress was aware of the need to ferret out abuse by persons who are in a position to manipulate the activities of a bank, and to thus place its depositors at risk. How one attains such a position is not dictated by the statute. Whether one attains such a position {{4-1-90 p.A-1001}}by virtue of ownership of the bank, controlling or otherwise, by election to the board of directors, by appointment as an officer or by any other means is not relevant to the statutory scheme. The focus of Congressional attention was not limited to an officer or director who by virtue of his or her actual authority, could manipulate and harm a bank, but encompassed "any other person" who could, in fact, by his or her activities, manipulate and harm a bank. The language and the intent are broad enough to cover persons with no "official" connection to a bank, but with the opportunity, power and ability to abuse it nonetheless. We find nothing in the legislative history or the case law which is to the contrary.

   b. Actual Authority is Not a Prerequisite
For Finding a Person Participated in the
Affairs of a Bank
.

   [.4] In finding that Respondent * * * was not a person participating in the conduct of the affairs of the Banks, the ALJ's Recommended Decision concluded that Respondent * * * had no actual "authority to make decisions or issue orders and no one at the bank was under any obligation to enforce any decisions made by him or obey any of his orders" (R.D. at 16).6 The ALJ apparently believed that "formal" or "official" authority is the prerequisite for a person to be participating in the conduct of the affairs of a bank. However, the ALJ completely ignores the possibility of a person acting with inherent authority or in excess of actual authority.7 With this oversight, the ALJ erroneously interprets Section 8(e).
   Because the ALJ rejects as irrelevant the question of whether Respondent * * * exceeded his legal or contractual authority vis-a-vis the Banks, the ALJ's conclusion ignores or disregards his own findings of fact which demonstrate the extent to which Respondent * * * in fact was able to control and manage the affairs of the Banks.8 The Recommended Decision is also replete with examples of Respondent * * * central role in these Banks:

       —"...it appears sufficiently clear that many of the transactions in which Mr. * * * was involved created significant risk of loss to the Bank..." [R.D. at 6];
       —"...[a] person who is as involved with the functions of a bank as Mr. * * * was usually has a formal position of authority..." [R.D. at 6];
       —"...Mr. * * * had definitely attended meetings of the Board Directors of both banks..." [R.D. at 6];
       "...[t]he only transaction that might be characterized as an unsafe banking practice, was his acquiring of brokered deposits..." [R.D. at 6];
       —"[i]n fact, he testified that he arranged the transactions in this way so that it would be clear to anybody who investigated that the money indeed went to the sellers of the bank rather than benefiting Mr. * * *." [R.D. at 8]; and
       —referring to the brokered deposit transactions, the ALJ considers the possibility that they would have "worked as Mr. * * * said he planned them to..." [R.D. at 9].
We find significant the fact that Respondent * * * authority was so substantial that in connection with a transaction involving brokered deposits at * * * Bank, Respondent * * * told the president of the bank, Mr. * * *, that he intended to proceed with the transaction despite being told by President * * * on two occasions that * * * Bank could not accept such deposits (Tr. p. 237-38).

   [.5] There is no great mystery as to the source of Respondent * * *' authority. He was the alter ego of the majority shareholder and chairman of the Banks, Mr. * * *. Compared with this role, his consultancy was inconsequential. Mr. * * * was Respondent * * *' power base as clearly as if


6 Respondent * * * had a contract with both * * * Bank and * * * Bank to provide accounting and other services. FDIC enforcement counsel argued that this contract alone was sufficient evidence that Respondent * * * was a participant in the conduct of the affairs of the Banks. Because we find that in exercising his inherent authority Respondent * * * actively participated in operational and policy decisions of the Banks, we need not and do not reach the issue of whether the contracts standing by themselves are sufficient for jurisdictional purposes.

7 The Board's determination that Mr. * * * is "a person participating in the conduct of the affairs" of the Banks is consistent with the principles of agency law. The law is settled that an agent is personally liable for any harm resulting from any act committed outside the scope of his or her authority. Darling Shops of Tennessee v. Brack, 95 F.2d 135 (8th Cir. 1938).

8 See e.g., F.F. Nos. 11, 12, 13, 14, 16, 23, 152, 154, 155, 162, 168, 190.
{{4-1-90 p.A-1002}}Mr. * * * were giving the orders himself or had "officially" appointed Respondent * * * president in the absence of approval by other board members. Not surprisingly, Respondent * * * was perceived by the officers and directors of the Banks as the personal representative of Mr. * * * (Tr. p. 337; R.D. at 11). The perception was reinforced by Mr. * * * who participated little, if at all, in board of director meetings, or in the management of the Banks, allowing Respondent * * * to act in his stead—even on those rare occasions when * * * was present at the Banks (Tr. p. 307, 356-58).
   This is precisely the type of situation we believe the statute was intended to cover with the inclusion of the phrase "other person participating in the conduct of the affairs" of a bank. To hold otherwise would disregard the remedial and protective purposes of the FDI Act and would create a loophole that could be used to circumvent the statute. For example, a bank owner could attempt to avoid liability under section 8(e) by declining to be either a director or officer of the bank and instead install a trusted aid to run the bank for him. Under the ALJ's interpretation of the statute, the bank regulatory agencies would have difficulty taking effective action against either the unscrupulous owner or his trusted aide, both of whom might be at liberty to jump from bank to bank without the effective intervention of the regulators.

   c. Respondent's Active Management of the
Banks Established His Participation in their
Affairs
.
   For purposes of a section 8(e) action we see no reason to distinguish between the owner and his trusted aide. Both are knowingly involved in a course of conduct which results in harm to the bank. Both are manipulating the assets of the bank to the direct advantage of the owner and the indirect advantage of his trusted aide. Both have violated the high degree of trust required of persons involved in the banking industry. The absence of direct command from the owner to his trusted aide reduces the liability of neither. Rather, it indicates that they acted as one, with a common purpose and that the trusted aide had sufficient inherent authority to be himself liable for the actions taken on behalf of the owner.

   [.6] Respondent * * * was Mr. * * *' "trusted aide." He was initially entrusted with the job of tax planning for Mr. * * *. But the relationship only begins there because the vehicle used by Respondent * * * to resolve Mr. * * *' tax problem was the manipulation of two banks owned by Mr. * * *. Respondent * * *' activities failed to take into account the fact that persons involved in banking are held to a higher duty of care than ordinary businessmen. See, Briggs v. Spaulding, 141 U.S. 132 (1891). Ignorance of banking law, regulations or practice is not a defense to activity that violates those laws, regulations or practices. Because of banking's public trust nature, violations of laws and regulations— even unwitting—by inexperienced bankers cannot be excused.
   There is substantial evidence in the record of Respondent * * *' active management of the Banks. For example, the president of * * * Bank testified that he no longer considered himself the CEO of the * * * Bank (Tr. p. 234) and the president of * * * Bank testified that Respondent "ran the show" (Tr. p. 356) at * * * Bank. Respondent expelled two senior officers of * * * Bank from a board of directors meeting (Tr. p. 232) and he proposed a motion to the * * * Bank board of directors to prohibit the * * *' Bank president from contacting regulatory authorities without the approval of the board of Mr. * * * (Tr. p. 232). For a period of time Respondent served as acting president of * * * Bank. (F.F.No. 11). He had an office in the * * * Bank building and he informed the officers of * * * Bank that he was to be contacted about all loans that were to be made. (F.F. No. 12). At a time when Respondent was not acting president of * * * Bank he arranged brokered deposits for both Banks over the protests of the presidents of the Banks (Tr. p. 237-38; 344).
   That Respondent * * * may have been motivated by zealous tax planning rather than by an intention to loot or harm the Banks cannot excuse the fact that in his determination to reduce his client's tax liability he ignored the effects of his tax plans on the Banks and thereby on the public.
   Based upon the facts presented in this case, the Board finds that persons like Respondent * * *, by virtue of their active participation and conduct, are within the jurisdiction of section 8(e)(2) of the FDI Act. The Board further finds substantial evidence in the record of Respondent * * *' involvement in the management of the Bank's affairs as set forth herein and in {{4-1-90 p.A-1003}}the Findings of Fact. Therefore, we conclude that Respondent * * * was a person participating in the conduct of the affairs of the Banks under section 8(e)(2) of the FDI Act.

   2. Substantial Financial Loss or Other
Damage Which Resulted From Respon-
dent's Conduct
.

   On May, 4, 1984, * * * Bank and * * * Bank entered into transactions involving CDs issued to Respondent * * * as president of * * * and extensions of credit to * * * secured by the CDs. * * * Bank extended credit to * * * in the amount of $900,000 secured by ten-year9 CDs in the amounts of $400,000 and $500,000 at 11.5% interest. The * * * Bank transaction involved a one million dollar loan and two five-year CDs totaling an equivalent amount. * * * Bank received a loan origination fee of $100,000 from Mr. * * * in connection with the loan.
   On or about September 16, 1984, the loan by * * * Bank was repaid and the certificates of deposit issued by * * * Bank were prematurely withdrawn. Not only did * * * Bank fail to assess the three month minimum early withdrawal penalty required by the DIDC regulations (12 C.F.R. § 1204.103(b)), but it also failed to assess the higher penalty required by the actual deposit contract. This failure resulted in substantial financial loss to the Bank in the approximate amount of $29,000, assuming the minimum three-month penalty, or $58,000, assuming the contract penalty rate. The * * * Bank records also indicate that on or about September 18, 1984, approximately $90,000 of the $100,000 loan origination fee was refunded without the approval of its board of directors. The rebate was made without any contractual obligation to do so and in contravention of normal banking practice which treats such fees as non-refundable items.
   In contrast with the ALJ's Recommended Decision, the Board find that Respondent * * * was responsible for these transactions and for the resulting financial loss incurred by * * * Bank. Significantly, although * * * Bank has made a demand for the early withdrawal penalty and for the refunded loan origination fee, neither Respondent * * * nor any other party has paid these fees to the Bank. Thus, the financial loss to * * * Bank in the amount of at least $119,000 is continuing. This is a substantial loss, especially in relation to the Bank's negative earnings.10
   On September 18, 1984, the extension of credit to * * * made by * * * Bank was repaid and the certificates of deposit were withdrawn prior to maturity without the assessment of the $25,875 minimum penalty required by the DIDC regulations. In addition, interest on the loan in the approximate amount of $1,205 was not assessed or collected by the * * * Bank for the period August 4, 1984, to September 18, 1984. (Tr. p. 206–207.) The ALJ concluded that the failure of the Banks to assess a penalty "was not something that Mr. * * * caused" (R.D. at 17) because the "authorization for the withdrawal and the failure to invoke an early withdrawal penalty had to come from someone in a position of authority in the bank", and "Mr. * * *, would not have authority or responsibility to see to it that the penalty for early withdrawal of certificates of deposit were made." (R.D. at 14). As a result of this conclusion the ALJ failed to adopt a number of the FDIC's proposed findings of fact related to these transactions.
   Because the Board has previously concluded that Respondent * * * was a person participating in the conduct of the affairs of the Banks and that he exercised substantial (if not absolute) management authority derived from Mr. * * *, we conclude here that Respondent * * * had the authority to


9 Proposed Finding of Fact number 181 incorrectly states that these CDs were issued for five years. The ALJ correctly points out this error in his discussion of the findings of fact. The Board hereby modifies Finding of Fact number 181 to accurately reflect the evidence.

10 In 1984, * * * Bank had total assets of approximately $13 million and total losses of approximately $350,000. Thus, this loss represented almost 1% of the Bank's assets as well as one-third of its losses. The Board notes that the Uniform Bank Performance Report for the relevant time period indicates that compared to peer banks this was an extremely large loss on a single credit.
{{4-1-90 p.A-1004}}prevent the Bank from assessing the early withdrawal penalty.11 We further conclude that Respondent * * * authorized the withdrawals without invoking the penalties at the time the loan and deposit transactions were reversed.
   Respondent * * * argued in his brief that Mr. * * * was the person who caused the loans and certificates of deposit to be liquidated and thus that he was not responsible for any losses resulting from these transactions. The evidence shows that in a letter to Respondent * * * dated August 27, 1984, Mr. * * * requested the "deposit and loan be removed" in order to "bring the bank's ratio into line." We find it significant that Mr. * * *, who was a director of * * * Bank, addressed such a letter to Respondent * * * (rather than the bank president, or Mr. * * *) requesting that the transaction be reversed. Obviously, Mr. * * * perceived the need to obtain Respondent * * *' approval for such action.
   In addition Respondent * * * testified at the hearing that he, Mr. * * * and * * * Bank president, * * *, discussed reversal of the loan/CD transactions at * * * Bank after Mr. * * * raised the need to do so (in connection with * * * Bank) and "then Mr. * * * took them off the books in the same way" (Tr. p. 501). Mr. * * *'s request to Mr. * * * in conjunction with this testimony of Respondent's direct participation in discussions regarding these transactions indicate to the Board that direction for the reversal of the loans and CD's came from Respondent * * *. That someone else may have performed the ministerial function of removing the transactions from the Bank's records is of no consequence here. Accordingly, we adopt FDIC Proposed Findings of Fact numbers 190 and 194 which the ALJ rejected.

   a. Payment of Loss By A Non-Obligor
Does Not Eliminate Substantial Loss
.

   The ALJ disagrees with the assertion of FDIC enforcement counsel that Respondent * * *' activities led to substantial financial losses with respect to the four large loan transactions at * * * Bank, the advances under a line of credit granted by * * * Bank to * * *, the payments of Respondent * * *' fees by * * * Bank and the failure of * * * Bank to assess and collect the early withdrawal penalty. He places great reliance on the fact that these monies were ultimately paid to the Bank by Mr. * * * (R.D. at 17). This reliance is misplaced. The ALJ's conclusion that "the fact that the loans were repaid by someone other than the stated obligor only indicates that the stated obligor and the real obligor were not the same party" ignores the risk such an arrangement presents for a bank. The ALJ confuses the moral obligation Mr. * * * may have had as the beneficiary of the loans or advances with a binding legal obligation to repay them.
   The loans were arranged and signed for by Respondent * * * on behalf of the borrowing companies in June, 1984. They were due on September 17, 1984. Mr. * * * is nowhere shown on any * * * Bank document as the borrower. The loan proceeds did not go to the "borrowing" corporations, but were used to finance a major portion of Mr. * * * purchase of controlling interest in the * * * Bank. As of September 17, 1984, the loans had not been paid and they remained unpaid until demands for payment were made by the FDIC and the * * * Department of Financial Institutions to Mr. * * * (Tr. p. 404). Thus, on September 18, 1984, the loans were in default and represented a loss in the amount of $560,123.71 on the books of * * * Bank.12
   The Bank also sustained a loss by being forced to carry a non-earning asset on its books and lost the opportunity to reinvest those funds and the potential profit from such reinvestment. While it is difficult to quantify such a loss in terms of dollars, the impact was nevertheless significant to the financially-troubled * * * Bank.

   [.7] For purposes of section 8(e)(2) of the FDI Act, substantial financial loss is not eliminated by the wholly fortuitous circumstances of repayment by a party with no legal obligation to do so although the overall effect of the loss is mitigated. The purpose of the removal statute would be substantially weakened if a respondent could


11 The record is not clear whether Respondent * * * affirmatively prevented the penalty from being assessed or whether he achieved that result by keeping the transactions hidden from appropriate management authority. We note, however, that the record indicates that the * * * Bank board of directors did not become aware of the transaction until after it was accomplished (Tr. p. 364).

12 FDIC bank examiners regularly classify as "loss" loans such as these which are delinquent, unsecured, and which lack documentation regarding their ability to be repaid. Although no actual loan classification was made in this case, the testimony of FDIC bank examiners was that these loans would have been so classified (Tr. p. 299).
{{4-1-90 p.A-1005}}make restitution at any time prior to a removal order or, as in this case, experience the good fortune of having someone else make restitution through no effort or intervention on his own behalf. The ALJ's statement that "it should not make any difference to the bank or to the FDIC where the reimbursement came from provided that the money was paid back to the bank" (R.D. at 13) is indicative of his unfamiliarity with the risks inherent in this kind of banking transaction and the need for bank officials to adhere to strict standards of risk minimization. Under these circumstances ultimate repayment does not abrogate the existence of substantial financial loss for purposes of section 8(e).

   b. Respondent's Conduct Led to Other
Substantial Losses
.

   In addition to the losses at * * * Bank discussed at pp. 23–24, supra, and the losses related to the four loans at * * * Bank discussed above, the record reflects and the Board finds that Respondent * * *' activities caused substantial financial loss in connection with several other transactions.
   The * * * Bank incurred additional loss in connection with advances on May 14, 1984, under the line of credit allegedly extended to Mr. * * *. The record contains no documentation establishing the authority of Respondent * * * to either establish or borrow against a line of credit on behalf of Mr. * * * (F.F. Nos. 116). The credit agreement under which the funds were disbursed was signed only by Respondent * * * (FDIC Exh. 7). Approval of the advances were made only by Respondent * * *. The financial statement of Mr. * * * dated June 15, 1984, filed with the FDIC does not reflect any such May 14, 1984, obligation (FDIC Exh. 6). Respondent admitted at the hearing that he had been told that Mr. * * * had subsequently notified the Bank that there were to be no more draws on any of his lines of credit because these draws had been unauthorized. (Tr. p. 531.) The only evidence to the contrary was Mr. * * *' testimony that the advances were authorized by Mr. * * * (Tr. p. 502). In light of the obviously self-serving nature of such testimony and the lack of corroboration, the Board finds it less than credible. Accordingly, the Board concludes that Respondent * * *' action in regard to the line of credit and the advances made thereunder were not authorized and caused substantial financial loss to * * * Bank.
   Finally, the Board concludes that Respondent * * *' acceptance of payment from * * * Bank in the amount of $20,014 for services rendered to * * * prior to acquisition of the * * * Bank constitutes substantial financial loss to the Bank. The ALJ dismisses this matter in finding that "there is no real reason why Mr. * * * had to concern himself much with where the money came from so long as he was paid for the services that he performed" (R.D. at 7). Under the circumstances presented by this case the Board cannot dismiss Respondent * * *' conduct so lightly. Respondent * * * was not a disinterested service provider submitting a bill to an arms-length creditor. Respondent * * * claims that his consulting contract with * * * Bank required him to submit the bill to the Bank (Tr. p. 485). This, however, does not excuse the underlying fact that the Bank paid for services by Respondent that were not for its benefit and that were performed during a period prior to his contract with the Bank. His control over the affairs of the Bank at the time of the submission of his bill and his failure to repay the amount or to take any steps to have the amount repaid to the Bank by Mr. * * * make his role inexcusable. The Board finds that as a direct result of Respondent * * *' knowing participation in this scheme, the * * * Bank suffered substantial financial loss in the amount of $20,014 when it paid the fees.13

   3. A Willful or Continuing Disregard for
the Safety of Soundness of the Banks and
Unfitness to Participate in their Affairs
.

   [.8] Under section 8(e)(2), an individual whose conduct has evidenced a willful or continuing disregard for a bank's safety or soundness, as well as "unfitness to participate in the conduct of the affairs of such insured bank" may be prohibited from further participation in the affairs of a bank.
   Based on the record before us it is beyond doubt that Respondent * * *' conduct displayed a continuing disregard for the safety and soundness of the Banks and thus demonstrated his unfitness to participate in their affairs. The ALJ also acknowledges


13 The fees paid to Respondent by * * * Bank were ultimately repaid by Mr. * * *. This is, of course, a mitigating factor, but it does not overcome the existence of the loss.
{{4-1-90 p.A-1006}}"arguable unfitness" on the part of Respondent * * *. (R.D. at 18). Nonetheless, the ALJ reaches an erroneous conclusion regarding the evidence of willful or continuing disregard for the safety or soundness of the Banks because he "...is persuaded that Mr. * * * was acting in what he believed to be the best interests of the bank and was taking what he considered to be appropriate safeguards against undue risks." (R.D. at 18). This conclusion ignores the very obvious conflict of interest situation created by Respondent * * *' dual role.
   a. Respondent Placed Himself In a Con-
flict of Interest Situation
.

   Respondent * * * himself admits that his consultancy was "two-fold" (Tr. p. 536) with obligations to the Banks and to Mr. * * *. The record reflects that Respondent * * * tenure at the Banks was marked by a singleminded dedication to the tax planning and personal financial needs of his principal and his treatment of the Banks and their funds as a vehicle for the achievement of the tax and personal financial goals of Mr. * * *. The result of these creative financial planning efforts was a consistent, total disregard for the financial condition of the Banks.
   As tax advisor to the majority shareholder and as his alter ego, Respondent * * * was in a position to obtain a benefit for Mr. * * * which could be detrimental to the Banks. Contrary to the ALJ's view, this was clearly a conflict of interest situation. Respondent * * * appears to have viewed his primary job (and thus his primary loyalty) to serve as tax planner for Mr. * * *. But by virtue of his relationship to Mr. * * * he was functioning and exercising authority as the most significant member of management of the Banks and his loyalty should have been to the Banks. During his nine months of involvement with the Banks, Respondent * * * engaged in a continuing series of transactions the purpose of which was to reduce Mr. * * *' tax liability or to produce a financial benefit to him (Tr. 448-49; 494-95). Respondent testified that he treated the purchase of * * * Bank and * * * Bank as one joint transaction because "in terms of size and dollars it took both to accomplish what Mr. * * * needed to get done in the right time period and the right taxable year." (Tr. p. 449). The CD/loan transactions at both Banks were structured to create a deduction for * * * which would be passed on to Mr. * * *. (Tr. p. 495). Apparently the tax reduction needs of Mr. * * * were of such immediate emphasis (Tr. p. 494) that in the relevant time period almost no thought was given to long term resolution of the problems at these Banks. The record establishes a number of transactions arranged to provide Mr. * * * with funds to acquire control of the Banks or to turn income of the Banks into personal tax deductions.

   b. The Record Evidences Respondent's-
Willful and Continuing Disregard
.

   The specific transactions which the Board finds actually evidence a willful disregard and a continuing disregard by Respondent * * * are summarized below.14 Respondent * * * knew at the time the Control Notice for * * * Bank was filed that Mr. * * * had borrowed money from * * * Bank to purchase shares in * * * Bank. (R.D. at 9.) The failure of Respondent * * * knowingly to file an accurate Control Notice evidences willful disregard, as does the arrangement for the four loans from * * * Bank that were part of the deceptive scheme to acquire the Bank. Respondent * * * disregarded prudent lending practices in causing those loans to be made without an established means of repayment, without obtaining basic loan documentation and admittedly in contravention of state lending limitations.15 Furthermore, Respondent * * * displayed this same indifference in arranging brokered deposit transactions in violation of established bank policies, without sufficient risk investigation or analysis and with incomplete documentation. The Respondent's willingness to accept fees from * * * Bank for services not rendered to the Bank demonstrates his willful disregard for the financial well-being of that Bank.
   The two premature CD withdrawals without assessment and collection of the early withdrawal penalties required by DIDC regulation indicate the conflict of interest Respondent * * * faced and his failure to act in the best interest of the Banks when it was inconsistent with the interests of Mr. * * *. Both Banks were experiencing negative


14 These transactions are set out with more specificity in the Findings of Fact of the ALJ, with which this Board concurs. See F.F. Nos. 82-3, 89, 94, 99, 121-4, 126-7, 136-7, 140-2, 146, 155, 168, 173-5 and their supporting citations.

15 The Board also cannot ignore the fact that the four loans were for the purpose of completing payment for * * * Bank stock purchased by Mr. * * *. In essence, * * * Bank partially paid for itself.
{{4-1-90 p.A-1007}}earnings and the early withdrawal penalties and refunded loan origination fee would have provided substantial and badly needed income to the Banks.
   Respondent * * *' attempt to excuse his behavior on the grounds that he is not a banker and is not familiar with applicable rules and regulations not only fails to provide a legally sufficient defense, but rather, provides a further indication of his reckless behavior. Respondent is an experienced professional.16 He thus cannot claim general ignorance or inability to learn the appropriate rules, regulations, standards and guidelines of his new venture. That Respondent accepted responsibilities in connection with his client's banking ventures without appropriate preparation indicates his reckless disregard for the special nature of the banking industry and the financial well being of the banks with which he was involved. Significant is the fact that Respondent * * * apparently avoided seeking advice or ignored advice actually received—either from experienced bankers at the Banks or from others with appropriate expertise— before engaging in the various transactions (F.F. Nos. 83, 89, 136, 147, 154, 168, 170, 184, 185, 201, 206). This kind of behavior simply cannot be tolerated if we are to uphold the purposes of the FDI Act.
   The Board's review of the evidence as a whole demonstrates that the actions of Respondent * * * support both a finding of unfitness to serve, a willful disregard and a continuing disregard for the safety and soundness of the Banks and requires an order prohibiting Respondent from any further participation in the conduct of the affairs of * * * Bank and * * * Bank. Furthermore, by operation of section 8(j) of the FDI Act, 12 U.S.C. § 1818(j), Respondent may not serve as an officer, director, employee or otherwise participate in the conduct of the affairs of any insured bank without prior written approval of the federal regulator of that bank. In view of Respondent's past activities ignoring banking laws and regulations, the Board has incorporated the requirements of section 8(j) into its order.

C. Assessment of the Civil Money Penalty

   [.9] Section 22(h) of the Federal Reserve Act, 12 U.S.C. § 375(b), and Reg. O of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 215, promulgated thereunder, are made applicable to insured state nonmember banks by section 18(j)(2) of the FDI Act, 12 U.S.C. § 1828(j)(2), and section 337.3 of the FDIC Rules and Regulations, 12 C.F.R. § 337.3. Significantly, section 18(j)(3)(A) of the FDI Act, 12 U.S.C. § 1828(j)(3)(A), also extends the scope of coverage of Reg. O to bank employees, agents or any other person participating in the affairs of a nonmember insured state bank. Violations of Reg. O are punishable under section 18(j)(3)(A) of the FDI Act, 12 U.S.C. § 1828(j)(3)(A), which gives the bank regulatory agencies broad civil money penalty assessment authority because of the high degree of Congressional concern with insider abuse. This section provides in pertinent part:

       (3) (A) Any nonmember insured bank which violates or any officer, director, employee, agent, or other person participating in the conduct of the affairs of such nonmember insured bank who violates any provisions of section 23A or 22(h) of the Federal Reserve Act, as amended, or any lawful regulation issued pursuant thereto, shall forfeit and pay a civil penalty of not more than $1,000 per day for each day during which such violation continues...As used in this section, the term "violates" includes without any limitation any action (alone or with another or others) for or toward causing, bringing about, participating in, counseling, or aiding or abetting a violation. (Emphasis added.)
Thus, a person who participates in the conduct of the affairs of a bank in such a way as to cause, bring about, or aid or abet a violation of any provision of Reg. O is subject to assessment of a civil money penalty in the same manner as an officer, director or principal shareholder.
   The Court of Appeals for the Sixth Circuit discussed the purpose of including such other persons within the ambit of section 22(h) of the Federal Reserve Act, 12 U.S.C. § 375b in H.D. Fitzpatrick, Jr. v. FDIC, 765 F.2d 569 (6th Cir. 1985). The Court noted that the most "prominent" purpose of the statute was in "combating improper insider transactions", and that "[t]he statute represents congressional awareness that insider

16 His academic career and professional experience are set forth in detail in the record (Tr. p. 423–430).
{{4-1-90 p.A-1008}}abuses are a predominant cause of bank failures and can only be combated with strong protective legislation." 765 F.2d at 574.

   [.10] Moreover, it is clear from the legislative history of section 22(h) of the Federal Reserve Act, 12 U.S.C. § 375(b),17 and the case law that a showing of willful intent is not necessary to establish a violation. The defense that one's conduct was merely misguided or was based upon the representations of others does not provide an exemption from the assessment of a civil money penalty because of the affirmative duty to make a reasonable inquiry. 765 F.2d at 576-78. Nor does an untainted motivation excuse a violation of the regulation. Rather, the state of mind of a violator is merely one factor to be taken into account in determining the appropriateness of the fine under section 18(j)(3)(B) of the FDI Act, 12 U.S.C. § 1828(j)(3)(B). As stated by the court in Fitzpatrick, "it is clear that good faith goes only to the amount of the penalty, not...to its presence or absence." 765 F.2d at 578.

   1. Respondent Violated Reg. O.

   The ALJ concluded that the facts support a violation of Reg. O and states that "an argument could be made that Mr. * * * was aiding or abetting the violation by Mr. * * *" (R.D. at 19). He nonetheless concludes that no civil money penalty can be assessed against Respondent * * * because he "was not himself an officer, director, employee, agent or other person participating in the conduct of the affairs of either bank." (R.D. at 19.) That conclusion, of course, is pivotal. For the reasons discussed in Section III.B.1, supra, the Board disagrees with the ALJ and concludes that Respondent * * * is a person participating in the conduct of the affairs of the Banks within the meaning of section 18(j) of the FDI Act, 12 U.S.C. § 1828(j). The Board further concludes, in accordance with the findings of fact made by the ALJ, that Respondent * * * orchestrated the making of four loans by * * * Bank to four companies —* * *, * * *, * * * and * * *—of which Respondent * * * was an officer. Each of these loans was made for the direct benefit of Mr. * * *,18 was made on an unsecured basis (F.F. Nos. 65, 68, 71 and 74) without sufficient information to judge the creditworthiness of the borrowers (see F.F. Nos. 78 and 81), was made without identification of a means for repayment (see F.F. No. 78), and was made in contravention of the * * * Bank's loan policies and procedures in effect at the time (see F.F. No. 89). Thus, these loans were made on terms more favorable than terms applicable to non-insiders and presented a more than normal risk of repayment, in violation of section 215.4(a)(2) of Reg. O, 12 C.F.R. § 215.4(a)(2).
   Under section 215.4(b) of Reg. O, 12 C.F.R. § 215.4(b), a majority of the entire board of directors of a bank is required to give prior approval for any extension of credit to any of its executive officers, directors or principal shareholders or to any related interest of that person when the extension of credit exceeds the higher of $25,000 or 5 percent of the bank's capital and unimpaired surplus. None of the four loans was approved by the * * * Bank board of directors in advance of disbursal although each loan significantly exceeded 5 percent of the Bank's capital (F.F. 98) and unimpaired surplus (Tr. p. 199). Thus, the loans violated section 215.4(b) of Reg. O. The four loans, when aggregated in accordance with the practice of the * * * Department of Financial Institutions, also exceeded the lending limit applicable to * * * as set forth in section 215.2(f) of Reg. O, 12 C.F.R. §215.2(f) in violation of section 215.4(c) of Reg. O, 12 C.F.R. § 215.4(c).19


17 "Self dealing is involved in almost all serious problem bank situations. It is generally found in the form of extensions of credit on an unsound basis to large shareowners, or their interests, who have improperly used their insider positions to take money from the bank in the form of unjustified loans (or sometimes as fees, salaries, or payments for goods or service)." H.R. Rep. No. 383, 95th Cong.; 2d Sess. 10–12, reprinted in 1978 U.S. Code Cong & Ad. News 9273, 9282-84.

18 Section 215.3(f) of Reg. O, 12 C.F.R. § 215.3(f), provides that a loan which is used for the "tangible economic benefit" of a person covered by Reg. O is considered a loan to that person. * * * as the chairman, a director and majority shareholder of * * * Bank is clearly a person covered by Reg. O under sections 215.2(c), (d), (j) and 215.4. Since the record also establishes that the proceeds of these four loans were used to pay for shares of stock in * * * Bank purchased by Mr. * * * (see F.F. Nos. 92 and 93), * * * received a direct economic benefit from the loans. Therefore the fact that * * * had no legally enforceable obligation with respect to the loans does not preclude the violations of Reg. O.

19 * * * Bank's March 31, 1984 Report of Condition ("Call Report") shows that 15% of the Bank's total capital and reserves equaled $270,000 (Tr. p. 198; F.F. 99). The four loans at issue aggregated $560,000, more than double the 15 percent maximum allowed under section 215.2(f) of Reg. O.
{{4-1-90 p.A-1009}}
   Respondent * * * admitted involvement in arranging these loans (Tr. p. 505-06), established his participation in the violations of section 215.4(a)(2), (b), and (c) of Reg. O, as a person participating in the conduct of the affairs of the bank within the meaning of section 18(j)(3)(A) of the FDI Act (see F.F. Nos. 66, 70, 73, 75, and 94).20

   2. The Proposed Civil Money Penalty is
Appropriate
.

   [.11] Section 18(j)(3)(A) provides for the imposition of a civil money penalty of up to $1,000 per day for each day a violation of Reg. O exists. In assessing a penalty the FDIC is required by section 18(j)(3)(B) to take into account a number of factors including the good faith of the person involved, the gravity of the violations, financial resources of the person involved and other matters as justice may require. Given the purpose and nature of the loans, and the violations of * * * Bank's own policies which they entailed, the Board must conclude that Respondent * * * did not act in good faith with respect to these loans. Further, insider lending violations are very serious violations and present severe financial risks.
   The record, however, as to Respondent's financial resources or his ability to pay the proposed penalty is not clear. Respondent * * * was requested in writing to provide the FDIC with any information which could bear on his ability to pay a civil money penalty (Tr. p. 406–407). Respondent failed to respond to this request in any manner and provided no financial data (Tr. p. 407–408). However, Respondent * * * did testify at the hearing in response to a question by the ALJ that he has a negative net worth (Tr. p. 519), but provided no other corroborative evidence in support of his statement despite the fact that he was uniquely in a position to do so. The record contains no testimony or evidence which contradicts this testimony. Thus, we are left with an unsupported, conclusory, and selfserving statement of Respondent's financial situation. The only other evidence related to this issue was testimony by FDIC witnesses that, in accordance with the requirements of the FDI Act, they considered various potential sources of income such as Respondent * * *' partnership in an accounting firm, his position as an officer and owner in the four companies to which * * * Bank made loans as well as * * *, and his consulting contracts in concluding that Respondent * * * has some ability to pay a civil money penalty (Tr. p. 406).
   The ALJ apparently accepts as fact Respondent's uncorroborated assertion of negative net worth and finds as a matter of law that no civil money penalty can be assessed against Respondent (R.D. at 18–19). However, financial resources of the person charged is but one of the factors to be considered in assessing a civil money penalty. Since part of the intended purpose of the civil money penalty is future deterrence, limited financial resources do not necessarily defeat assessment of the penalty. The ALJ's acceptance of Respondent's uncorroborated testimony is also troubling in that it makes it possible for a respondent to avoid the imposition of a civil money penalty by merely failing to respond to requests for evidence of his financial condition. Such a result is not consistent with the purpose and intent of section 18(j)(3) of the FDI Act.
   The Board finds that the assessment of a $10,000 civil money penalty as proposed is justified and appropriate based on the entire record in this matter: the blatant nature of these insider abuses, the significant risks they posed to the * * * Bank, the need to create a deterrent to such abuses, the FDIC's good faith attempt to seek information from Respondent * * *, the fact that $10,000 is a fraction of the maximum penalty of more than $120,000 that could have been assessed, and the FDIC's consideration of Respondent's future earning capacity.21

ORDER TO PAY CIVIL MONEY
PENALTIES AND

ORDER OF PROHIBITION FROM
FURTHER PARTICIPATION

   The Board of the Federal Deposit Insurance Corporation, having considered the


20 The Notice of Assessment charged the Respondent participated in the violations of Reg. O as an "executive officer" in addition to as a "person participating in the conduct of the affairs" of * * * Bank. Section 215.2(d) defines "executive officer" as a person who participates or has authority to participate in major policy making functions. Since the Board has concluded that Respondent "participated in the conduct of the affairs" of * * * Bank, we need not address this charge.

21 Respondent has future earnings potential as a certified public accountant.
{{4-1-90 p.A-1010}}entire record in this proceeding, including briefs filed on behalf of Respondent and the FDIC, the ALJ's Recommended Decision dated September 30, 1986, and exceptions to the Recommended Decision filed by the FDIC, makes the following findings. The Board finds on the record before it that * * * has not violated section 7(j) of the FDI Act. The Board further finds that * * * has: (1) violated section 22(h) of the Federal Reserve Act and Regulation O of the Board of Governors of the Federal Reserve System; and (2) engaged in conduct which resulted in substantial financial loss to the Banks and which evidenced his willful or continuing disregard for the safety and soundness of the Banks and his unfitness to participate in the conduct of the affairs of the Banks or any other FDIC insured bank.
   ACCORDINGLY, IT IS HEREBY ORDERED, that
   1. the proceeding pursuant to section 7(j)(15) of the FDI Act, 12 U.S.C. § 1817(j)(15), is dismissed;
   2. a civil money penalty in the amount of $10,000 be, and is, assessed against * * * pursuant to section 18(j)(3) of the FDI Act, 12 U.S.C. § 1828(j)(3);
   3. pursuant to section 8(e)(2) of the FDI Act 12 U.S.C. § 1818(e)(2), * * * is prohibited from further participation in any manner in the conduct of the affairs of * * * Bank and * * * Bank, without the prior written approval of the FDIC;
   4. pursuant to section 8(j) of the FDI Act, 12 U.S.C. § 1818(j), * * * is prohibited from serving as an officer, director or employee, or from otherwise participating in the affairs of any other bank insured by the FDIC without the prior written approval of the appropriate Federal banking agency, as defined in section 3(q) of the FDI Act, 12 U.S.C. § 1813(q).
   IT IS FURTHER ORDERED, that
   1. this Order shall be effective and the penalty ordered shall be final and payable 20 days from the date of this Order.
   2. 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 Board.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 3rd day of February, 1987.
/s/ Margaret M. Olsen
Deputy Executive Secretary

RECOMMENDED DECISION

FDIC-85-25e

FDIC-85-112k

FDIC-85-113k

   This hearing is a consolidation of three different Administrative actions. One of these, a "notice of intention to remove from office and/or prohibit from participation" (FDIC-85-25e) seeks to prohibit the respondent, * * *, from participating in the conduct of the affairs of any bank insured by the Federal Deposit Corporation. Another administrative action, "Notice of Assessment of Civil Money Penalties and Order to Pay" (FDIC-85-112k) seeks to assess a penalty of $65,000 against Mr. * * * and to order him to pay such fine. The third administrative action, another "Notice of Assessment of Civil Money Penalties and Order to Pay" (FDIC-85-113k) seeks to assess a separate penalty of $10,000 against Mr. * * * and to order him to pay such penalty. Originally, each of these actions involved other parties who have been dismissed as parties due to the fact that they had reached a settlement with the FDIC, the details of which are unknown to the undersigned Administrative Law Judge. Because of such settlements, the only party remaining is * * * who has requested a hearing.

ISSUES

   The issues are whether * * * should be prohibited from participating in the affairs of any bank insured by the FDIC without the FDIC's written permission under the provisions of Section 8(e) of the Federal Deposit Insurance Act (12 USC Section 1818(e)); whether a civil money penalty should be assessed against * * * pursuant to Section 7(j)(15) of the Federal Deposit Insurance Act (12 USC Section 1817(j)(15)); and whether a civil money penalty should be assessed against * * * pursuant to Section 18(j)(3) of the Federal Deposit Insurance Act (12 USC Section 1828(j)(3)).

APPLICABLE LAW

   Section 8(e) of the Federal Deposit Insurance Act provides, in relevant part, that whenever any person participating in the {{4-1-90 p.A-1011}}conduct of the affairs of an insured bank, by conduct or practice with respect to such bank which resulted in substantial financial loss or other damage, has evidenced either his personal dishonesty or willful and continuing disregard for the safety and soundness and, in addition, has evidenced his unfitness to participate in the conduct in the affairs of such insured bank, the agency may serve upon such person, a written notice of its intention to prohibit his further participation in any manner in the conduct of the affairs of the bank.
   Section 7(j)(15) of the Federal Deposit Insurance Act provides, in relevant part, that any person willfully violating any provision of the subsection of the act referring to acquisition of the bank, or any regulation or order issued by the appropriate federal banking agency pursuant to that subsection, shall forfeit and pay a civil penalty of not more than $10,000 per day for each day during which such violation continues. The appropriate federal banking agency shall have authority to assess such civil penalty after giving due consideration to the appropriateness of the penalty with respect to the size of the national resources and good faith of the person in charge, the gravity of the violation, and any data, views, and arguments submitted. The agency may collect such civil penalty by agreement with the person or bringing an action in the appropriate U.S. District Court, except that in such action, the person against whom the penalty has been assessed shall have a right to a trial de novo.
   Section 18(j)(3) provides, in relevant part, that any person participating in the conduct of the affairs of a nonmember insured bank and violates any provision of Section 371c or 375b of this title or any lawful regulation issued pursuant to the sections shall forfeit and pay a civil penalty of not more than $1,000 per day during which such violation continues. The penalty may be assessed and collected by the FDIC by written notice. The term "violates" includes without any limitation any action (alone or with others) for or toward causing, but bringing about, participating in, counseling, or aiding or abetting a violation.

SUMMARY OF THE EVIDENCE

   In its brief, the Federal Deposit Insurance Corporation offered several proposed findings of fact and with each finding of fact is a reference to the place in the record which contains the evidence to support each finding of fact. In his brief, Mr. * * *' attorney submitted a much shorter list of proposed findings of facts and conclusion of law. Since the FDIC's proposed findings of fact are more detailed and are, with a few exceptions found to be accurate, the undersigned hereby adopts the FDIC's proposed findings of fact as the findings of fact in this decision, except those proposed findings of fact that are inconsistent with the discussion in the remainder of this decision. As stated in a more condensed, simple form, these facts indicate that Mr. * * * assisted * * * in the filing of a Notice of Acquisition for * * * Bank with the FDIC which the FDIC received on February 3, 1984. The Notice of Acquisition stated that no borrowed funds were being used to purchase the bank and that the funds to buy the bank would be obtained by liquidation of real estate interests by Mr. * * *. The Notice of Acquisition form, itself, and subsequent letters to Mr. * * * from the FDIC advised him that approval of the acquisition was contingent upon the accuracy of the information furnished on the Notice of Acquisition and that the FDIC must be notified in writing of any changes in the conditions of the transaction prior to its consummation. After notifying Mr. * * * that it had information from the selling parties that borrowed funds would be used in the acquisition of * * * Bank * * * , Mr. * * * informed the FDIC, in writing, that no changes in the method in financing had been made. The change in the ownership of the bank occurred on May 4, 1984. Over the period from June 19, 1984 to June 22, 1984, * * * Bank * * * extended unsecured credit to four corporations. Mr. * * * signed the notes for each of these corporations as a corporate officer of the respective corporations. The total of the four loans was $560,123.71. The period the loans were made for was a 90-day period ending on June 17, 1984. There is no supporting credit information in the bank's records and no prior approval by the Board of Directors. The proceeds of the loans were dispersed to the parties who had sold controlling interests of the * * * Bank * * * to Mr. * * *. The FDIC argues that this series of transactions, in fact, presented Mr. * * * as indirectly borrowing money from * * * Bank {{4-1-90 p.A-1012}}* * * to finance a major portion of his purchase of controlling interest in the bank. The FDIC argues that this is contrary to representations Mr. * * * had made over his signature in the Notice of Acquisition, as well as the representations made by Mr. * * * in his letters to the FDIC.
   In July, 1984, a Notice of Acquisition of * * * Bank and * * * was filed with the FDIC which was signed by Mr. * * * with a cover letter from Mr. * * *. This Notice of Acquisition contained a discrepancy regarding the financing of the acquisition in that Item 5 indicated it was a simple cash for stock transaction. However, Item 6 indicated that 1,675 shares had already been purchased with $80,400 in cash and that 15,114 shares would be acquired with a cash down payment of $125,472 on the day of acquisition and $600,000 to be paid on contract to the seller. The source of the funds by which the stock was purchased was said to come from personal earnings and earnings of the institution being acquired. The Notice of Acquisition did not reflect the fact that the $80,400 used by Mr. * * * to purchase the first 1,675 shares had been borrowed from * * * Bank * * * on May 14, 1984. On that date, Mr. * * * had drawn from a $150,000 line of credit granted to him and had $80,400 transferred to * * *, one of the parties selling his interest in * * * Bank * * *.
   Although Mr. * * * was never a director or shareholder in either Bank, he participated in the discussions of the Board of Directors and, according to the testimony of some of the FDIC's witnesses, controlled much of the discussion. On the other hand, Mr. * * * testimony was to the effect that the so-called control on the meetings was limited mostly to establishing an orderly agenda. According to his testimony, he was more concerned that proper procedure be followed and not at all concerned with controlling the substance of the discussions of the Board of Directors. He was never an officer of * * * Bank * * *, and he only served as acting president of * * * Bank * * * for a brief period in October, 1984. There is some question of whether his capacity as acting president was ever official in that he had never been selected to that position by the Board of Directors and was appointed only by Mr. * * *. His only other official relationship with both banks was reflected in a contract to provide accounting and management consulting services to the * * * Bank * * * of May 8, 1984 and a similar contract with * * * Bank * * * dated September 17, 1984. Shortly after becoming acting president of * * * Bank, $1,600,000 of broker deposits were deposited to * * * Bank's corresponding account at * * * Bank in * * *, * * *. Mr. * * * had initiated contact with the deposit broker. At about the same time, $1,400,000 in brokered deposits were credited to the * * * Bank's correspondent account at * * * Bank in * * *. The brokered deposits at both banks consisted of several one year certificates of deposit to different financial institutions at a rate of 13%. At the same time, extensions of credit were to be made to several borrowers for 7 year periods at a fixed annual interest rate of 14½%. The 7 year loans were to be supported by annuity contracts to be purchased with a substantial share of the proceeds of the loans. The broker deposits and the loans to be made with the funds supplied by the broker deposits were stopped and reversed because of a cease and desist order by the FDIC.
   Other than Mr. * * * brief term as acting president of * * * Bank, his only official connection with either bank was a contract with * * * Bank dated May 8, 1984 to furnish accounting and management consulting services when requested by the * * * Bank Board of Directors and a similar contract with * * * Bank * * * dated September 17, 1984. Some irregularities occurred in connection with the transactions in which Mr. * * * took part. The four loans to corporations in which Mr. * * * was an officer matured on September 17, 1984 and were not paid at that time. They were eventually paid by Mr. * * * on October 26, 1984. On May 4, 1984, * * * Bank issued two 10-year Certificates of Deposit, one for $400,000 and the other for $500,000, to * * * of which Mr. * * * was president. At the same time, $900,000 of credit was extended to * * *. These Certificates of Deposit were paid prior to maturity on September 18, 1984 with no penalty assessed for early withdrawal. Similar transactions occurred at * * * Bank. On May 4, 1984 * * * Bank * * * issued certificates for five years in the amount of $500,000 each and at the same time, * * * extended $1,000,000 credit to * * *. These Certificates of Deposit were paid prior to maturity on September 18, 1984 with no penalty assessed for early withdrawal. The proceeds {{4-1-90 p.A-1013}}were used to pay the $1,000,000 loan of May 4, 1984.
   The FDIC issued a temporary order to cease and desist to each bank on October 16, 1984. * * * Bank terminated Mr. * * * services as consultant on October 24, 1984, and * * * Bank * * * terminated Mr. * * *'s services as consultant on November 19, 1984.

EVALUATION OF THE EVIDENCE

   From the FDIC's point of view, this series of events involved, if not actual loss to the banks, then at least a significant risk of loss. Perhaps the most significant risk came from the fact that both banks were loaning large sums of money with no information contained in either bank's records about the borrowers to show that there was reasonable expectation that the loans would be paid back. Although several loans were secured by Certificates of Deposit, the maturity of the loans were after the maturity date of the Certificates of Deposit. If the money, represented by Certificates of Deposit, was withdrawn at maturity, the bank would be in a very precarious position. Also, the fact that Mr. * * * borrowed money from * * * Bank to finance a portion of the purchase of both banks obviously put * * * Bank in a more risky position than had Mr. * * * paid for the bank with his own money, or had he at least borrowed the money from a different financial institution. Many of the transactions were for the benefit of Mr. * * *, who was an insider and, as such, received preferential treatment. Although it appears sufficiently clear that many of the transactions in which Mr. * * * was involved created significant risk of loss to the bank, it is not so clear that Mr. * * * had any special duty toward the bank to reduce the risk.
   The Federal Deposit Insurance Act established sanctions for persons who put banks at significant risk of loss due to unsafe banking practices. However, those sanctions apply only to directors, officers, or "any other person participating in the conduct of the affairs" of a bank insured by the FDIC. Unfortunately, in drafting the Federal Deposit Insurance Act, Congress did not clearly define who is "any other person participating in the conduct and affairs" of a bank. Furthermore, there seems to be very little in the way of Court cases interpreting this term. Mr. * * *'s case is somewhat unusual in that a person who is as involved with the functions of a bank as Mr. * * * was usually has a formal position of authority. To impose sanctions on Mr. * * * requires that we clarify as much as possible what actual authority, and therefore, what actual responsibility he had. Although Mr. * * * had definitely attended meetings of the Board of Directors of both banks, he was not, himself, a director, and therefore, did not have a vote. He was an officer at * * * Bank, * * * only for a very brief time and during that time, the only transaction that might be characterized as an unsafe banking practice, was his acquiring of brokered deposits to be deposited to * * * Bank correspondent account at * * * Bank in * * *. Although brokered deposits are frowned upon by the FDIC, they are not illegal and it is doubtful that the FDIC would be seeking sanctions against Mr. * * * had the brokered transactions and simultaneous extensions of credit at * * * Bank been the only indiscretion of which he was thought to be guilty. The contractual relationship with the bank required him only to give accounting services and management advice. He had no authority to make any actual decisions. He was to give advice when he was asked; whether that advice was followed would be the decision of the directors and officers of the bank. Mr. * * * is alleged to have "run the show" at the banks. If this were the case, it was only because the persons who were supposed to be "running the show", namely, the officers and directors of the banks, were not fulfilling their responsibilities. Officers and directors should be giving orders, not taking orders. Mr. * * * obviously had a practical interest in how the bank was being run because he was Mr. * * * accountant and was interested in seeing to it that Mr. * * * made money, both directly and in the form of reducing his tax liability. According to Mr. * * *' testimony, the purpose behind some of these unusual transactions was to avoid tax liability on the part of Mr. * * *. He was, in effect, trying to take taxable money away from Mr. * * * and give it back to him through his ownership interest in the bank in such a form that the money was either no longer taxable or taxable at a lower rate. No matter what duties he owed to Mr. * * *, the only duties he owed to the bank, were those outlined in the con- {{4-1-90 p.A-1014}}tracts he had with them. If he found his opinions to be acquiring the status of orders, it was because he found himself in a power vacuum in which no one else was taking responsibility for the conduct of the affairs of either bank. If the money that Mr. * * * borrowed on behalf of various corporations in which he had an interest involved substantial risk to the bank, it was the bank's responsibility as the lender to obtain the necessary information and to refuse to make any loans that involved unreasonable risks. In turn, it was the duty of the directors and officers to see to it that the bank did not commit itself to unreasonably risky situations. Mr. * * *' only obligation as the borrower or agent of borrowers was to furnish the information that was asked of him. If the bank did not require any information from him, he was under no duty to provide it. Also, it was not his function to withhold any penalty for early withdrawal of funds involved in the Certificates of Deposit. All the bank needed to do was subtract the penalty for early withdrawal from the funds paid. Also, the officers and directors of the bank did not have to approve the bank's paying Mr. * * * for services performed for Mr. * * * that did not benefit the bank. There is no real reason why Mr. * * * had to concern himself much with where the money came from so long as he was paid for the service that he performed.
   If Mr. * * * were not a person "participating in the conduct of the affairs" of either bank, then who would be within the meaning of the Federal Deposit Insurance Act? One alternative that Congress may have had in mind was a person who had an indirect ownership interest. For example, a person may have an ownership interest in a company or institution which, in turn, had an ownership interest in the bank. A person in such a position would be like a puppeteer using his ownership interest as the strings to control his puppet bank. The FDIC wants to demonstrate that Mr. * * * was "pulling the strings" to control * * * Bank and * * * Bank. What the FDIC has failed to do is to show that there were any strings to pull.
   The FDIC puts a great deal of emphasis on the fact that a great deal of money was borrowed from the * * * Bank to finance its purchase by Mr. * * * and that this financing was contrary to the representations made in the notice of acquisition. Mr. * * * on the other hand maintains that up to the time the acquisition actually took place he had no knowledge of any intent by Mr. * * * to borrow any money to finance his purchase of * * * Bank. Mr. * * * testified that at about the time the acquisition of the bank took place, it was his understanding that the FDIC was going to require Mr. * * * to put an additional $500,000.00 in capital into the bank. The testimony of Mr. * * * was that he also understood the FDIC to be requiring an additional $500,000.00 in capital to be put into the bank. Mr. * * * indicated that it was the perceived need to have $500,000.00 in cash available that lead to the transactions by which Mr. * * * directly borrowed money from the bank which was paid to the sellers of the stock. He said that this was intended to be only a short term arrangement, as evidenced by the fact that the notes in the four large loans have 90 day maturity dates. If Mr. * * * really had been trying to cover up the true purpose of these transactions, it is unlikely that he would be so incredibly careless as to have the * * * Bank send the money from the four large loans directly to the sellers of the stock. Mr. * * * testified that his accounting experience has been mainly in the area of auditing. A man with his experience, if he were trying to cover something, would certainly do a better job, and would not be funnelling all these transactions to the same small bank where they could be easily traced. In fact, he testified that he arranged the transactions in this way so that it would be clear to anybody who investigated that the money indeed went to the sellers of the bank rather than benefiting Mr. * * *. It seems that if he was trying to cover up it would have been far simpler for his corporations to have accepted the money, and then have the money sent from the corporations to the sellers of the stock. It would also appear that if Mr. * * * really wanted to cover up the nature of his transactions, he would not be having four corporations all borrowing money at exactly the same time, and for almost exactly the same amounts. There seems to be a good possibility that the very fact that the fDIC was intervening may have caused the very financial transactions on which the FDIC now frowns on. On the other hand, the information that was provided on the notice of acquisition of * * * Bank was incorrect at the time that form was filed. The form did indicate that no money had been borrowed by Mr. * * * to purchase {{4-1-90 p.A-1015}}shares of * * * Bank except that it was anticipated that part of the acquisition shares were being financed by the seller directly. In fact, before the notice of acquisition was filed, Mr. * * * had borrowed money from * * * Bank which he used to purchase some shares of stock in * * * Bank. However, in relationship to the size of the entire transaction the fact that some money was borrowed for a small portion of the shares being acquired seem relatively inconsequential. It is difficult to see how a small portion of the borrowed funds in this transaction could cause any serious threat to the financial well-being of * * * Bank.
   The major risk from the brokered deposit transactions came from the fact that the institutions which made the deposits were from outside the banks' areas and would not be expected to have any loyalty as customers to the bank and could have very easily withdrawn the money at maturity and searched for a better deal. However, these depositors were already getting a good deal in that the interest being paid to them was slightly above the market-rate of interest on certificates of deposit. The money from these deposits were used to make loans, and these loans were to be paid back by annuities from an insurance company. For each dollar borrowed, $.52 would be paid to the insurance company in return for the insurance company agreeing to pay the principle and interest when the loans mature. The other $.48 was kept by the borrowers and since the insurance company had already obligated itself to pay the principle and interest on the loans, the companies kept the difference. Although Mr. * * * had indicated that he had made his own assessment regarding the financial soundness of the company's borrowing funds, and of the insurance company, the necessary information for the officers and directors to make their own assessments was not in the records of either bank. If these transactions had worked as Mr. * * * said that he planned them to, then all parties involved stood to make a substantial profit. The banks ran some risk if interest rates rose. In that case they would have to increase the interest rates paid on certificates of deposit to keep money in the bank to cover the loans and could not raise the interest rates on the long term loans. However, the bank runs that same risk anytime it loans out money at a fixed rate of interest over a long period of time. That kind of risk is a natural part of the banking business. In fact, interest rates had declined since then, so that, if the loans were not paid off ahead of schedule, the bank could have made a substantial profit. There was nothing in the loan agreements to prevent the loans from being prepaid if the interests declined. On the other hand, assuming that borrowers had already gotten a commitment by the insurance to pay the principle upon the interest anyway, they would have little incentive to prepay the loans. In spite of the hastiness with which the deal was put together and the lack of safeguards by means of documentation, the deal might have worked very well for the banks.
   A major problem throughout this entire case is that Mr. * * * seems to be a person used to doing business by means of oral agreements. He took Mr. * * *' word that the four corporations that Mr. * * * had borrowed money from the bank to disburse on Mr. * * *' behalf would be reimbursed by Mr. * * *. A lot of the factors which made him confident in the soundness in all of these financial transactions were factors that he carried in his head without committing to paper so that they could be reviewed by the officers and directors of the bank, who had the responsibility for overseeing the financial transactions and by the FDIC. He did not seem to understand that from the FDIC's point of view, it had no reason whatsoever to take his word. At the heart of the FDIC's case against Mr. * * * is the perception that Mr. * * * was the person who was actually controlling management of the bank, and causing the bank to engage in unsafe banking practices. If Mr. * * * was managing both banks, the obvious question which presents itself is, what were the officers and directors, (whose responsibility it was to manage the bank) doing?
   If these people really believed that Mr. * * * was taking over their functions and endangering the condition of the bank, they could have and should have exerted the authority they had and that Mr. * * * lacked. If a bank were engaging in unsafe banking practices and one were looking for the person or persons responsible, one would look first to the persons legally responsible for managing the bank, namely the officers and directors. They would cer- {{4-1-90 p.A-1016}}tainly have some greater responsibility more than merely wringing their hands if they saw an outsider taking over their functions to the detriment of their bank.

FINDINGS OF FACTS

   The undersigned Federal Administrative Law Judge adopts as his Findings of Facts, most of the proposed Findings of Facts contained in the FDIC's brief. These proposed Findings of Fact are attached as an appendix to this decision. However, he notes the following exceptions and comments: With regard to proposed Finding of Fact number six, the undersigned is not convinced that the witness * * * would have knowledge of what the understanding of the entire Board of Directors was with regard to the nature of Mr. * * * services. She would have knowledge of only her own understanding. In any event, the agreement (Exhibit 79) speaks for itself with regard to what the nature of Mr. * * * services would be. The same comments are made with regard to proposed Finding of Fact number 8, regarding Mr. * * *'s testimony with regard to Mr. * * *' contract with the * * *'s Bank (Exhibit 83), except that Mr. * * *' testimony does furnish some clarification regarding what the terms contained in the document mean. With regard to proposed Finding of Fact Number 12, Mrs. * * *' testimony indicated that Mr. * * * requested that he be contacted about all loans only during his tenure as acting president "until another president was brought into the bank." (page 338 of the transcript). Proposed Finding of Fact number 16 is not really appropriate as a finding of fact and is not being accepted as a finding of fact. Concluding that Mr. * * *'s "ran the show" is similar to concluding that he "participated in the conduct of the affairs of the bank." This would be a legal conclusion than a finding of fact. From Mrs. * * *' testimony, it appears that she, and perhaps the other officers and directors, assumed that Mr. * * * derived his authority from Mr. * * *, and that contradicting Mr. * * * in anything that he wanted was equivalent to contraindicating Mr. * * *. If Mr. * * * was Mr. * * *' puppet, it seems illogical to conclude that the puppet and not the puppeteer was the one running the show. Proposed Finding of Fact number 18 is not adopted as a finding of fact. Mrs. * * * did not, in fact, testify that she was preoccupied with problems stemming from Mr. * * *' activities. What she said was that she was "mostly putting out fires" which roughly speaking is the normal function of a president anyway. All companies have their "little fires" which the chief executive officer must deal with. Mrs. * * * did not testify that Mr. * * * was the cause of all of her problems. Proposed Finding of Fact number 19 is at best misleading in that it implies that Mr. * * * was the sole or primary cause of the demise of * * * Bank. Throughout the transcript the testimony indicated that * * * Bank was already in an unhealthy condition before Mr. * * * or Mr. * * * ever heard of it. The undersigned does not quarrel with the perception that the transactions involving Mr. * * * may have made some contribution to the demise of * * * Bank, but makes no finding regarding the relative significance these contributions compared to pre-existing problems that were already tending to lead the bank in that same direction. Mr. * * * testified that the bank had substantial tax loss carry-forwards as one of the reasons Mr. * * * was interested in buying the bank.
   Mr. * * * testified that the bank had considerable problems of collection of agricultural loans. Proposed Finding of Fact number 27 is not adopted as a finding of fact. Mr. * * *'s conclusion regarding whether Mr. * * * was an employee at the bank of * * * Bank goes to the ultimate decision which is the responsibility of the Administrative Law Judge and the FDIC's Board of Governors. The contract between Mr. * * * and * * * Bank of May 8, 1984, shows that Mr. * * * was an independent contractor and had the bank as one of his clients. Proposed Finding of Fact number 42 is somewhat misleading. One would expect Mr. * * * and his accounting firm to be extensively involving in matters involving * * * Bank and * * * Bank, and that he and his firm had a contract with both banks to perform various services. Proposed Finding of Fact number 87 is assumed to be true, but the evidence in the record does not establish that Mr. * * * knew that the Department of Financial Institution aggregates loans that are made for common purposes or that he had any reasonable way of finding out about their practices. With regard to Finding of Fact number 94, again it has not been shown that Mr. * * * knew or could have known the policy of the State Department of Financial Institutions regarding aggregating loans made for common purpose. {{4-1-90 p.A-1017}}With regard to Proposed Finding of Fact number 95, Mr. * * *' comment regarding the purpose of structuring the so-called four large loans is pure speculation. Proposed Finding of Fact number 95 is not adopted. Proposed Finding of Fact number 100 is incomplete in that it states that the so called four large loans were never repaid by the actual obligors. However, it fails to state the loans were actually paid. It should not make any difference to the bank or the FDIC who paid back the loans, provided that they were paid. Proposed Finding of Facts numbers 114 and 115 do show Mr. * * *' participation in the borrowings from * * * Bank that were used to purchase shares of * * * Bank. However, they also demonstrate the negligence of the officers and the Board of Directors in that they should have not accepted Mr. * * *' signature on behalf of Mr. * * * without some documentation in the bank's record that Mr. * * * had officially given Mr. * * * such authority to act on his behalf. With regard to proposed Finding of Fact number 123, it may be true that the FDIC would have withheld approval of the notice of acquisition of control of * * * Bank if the actual nature of debt financing had been known, but the * * * Bank transaction had important differences which it made it less risky to that bank. The most important factor was that the funds borrowed to finance the purchase of * * * Bank were not borrowed from * * * Bank. Some of the funds were borrowed from the * * * Bank and some from the seller of * * * Bank. The FDIC already knew that Mr. * * * was going to borrow $600,000.00 from the sellers and that did not change their decision not to disapprove the change of control. Proposed Finding of Fact Number 127 is incomplete because it does not state that the money discussed in that finding was actually reimbursed by Mr. * * *. Again it should not make any difference to the bank or to the FDIC where the reimbursement came from provided that the money was paid back to the bank. Actually, since the services for which the payment was made were performed by Mr. * * *, it should have been Mr. * * * that reimbursed the money, rather than Mr. * * *. Mr. * * * performed the services to earn the money, but it should have been paid by Mr. * * * rather than the bank. If Mr. * * * had reimbursed the money to the bank, he would have had to turn around and seek reimbursement from Mr. * * *. With regard to Finding of Fact number 129, it should be obvious that Mr. * * * was responsible for submitting his bill to * * * Bank. However, it was the Board of Directors that was responsible for paying the bill. Had they read the contract with Mr. * * * at all, they should have been able to see that no services had been performed for the bank and should have refused to pay immediately. The fact that they paid without question indicates that they were not even going through the motions of meeting their responsibilities to the bank. With regard to proposed Finding of Fact number 151, there is some conflict between that and proposed Finding of Fact number 157. Finding of Fact number 151 indicates that the * * * Bank incurred liability for fees due the depositor broker with regard to the brokered deposit and transactions where finding number 157 shows that the bank refused to pay the broker's commission. If the bank in fact had a policy against accepting brokered deposits and had not given Mr. * * * authority to arrange for such brokered deposits, it is difficult to see how the bank could have incurred any liability for the broker's fees. Proposed Finding of Fact number 151 is not adopted as a finding of fact by the undersigned Administrative Law Judge. With regard to Finding of Fact 152, the evidence does not indicate that Mr. * * * ordered other officers of * * * Bank to sign the certificates of deposit relating to the broker transactions. Testimony of Mrs. * * * was that he asked the other officers to sign the certificates. There is no indication that Mr. * * * had authority to order anybody at the bank to do anything, or that he assumed that he had such authority. There is a large difference between a request and an order. With regard to proposed Finding of Fact number 174, the evidence does not show whether or not Mr. * * * was aware that the brokered deposits transactions were contrary to the investment policy of * * * Bank. With regard to proposed Finding of Fact number 181, the copies of the certificates of deposit in the record show that they were for ten year periods and that they matured on May 3, 1994. Proposed Finding of Fact number 190 is obviously incorrect in that Mr. * * * did not have any position at the bank that gave any authority to authorize withdrawal or to decide whether to invoke an early withdrawal penalty. There- {{4-1-90 p.A-1018}}fore, proposed Finding of Fact number 190 is not adopted as a Finding of Fact in that the authorization for the withdrawal and the failure to invoke an early withdrawal penalty had to come from someone in the position of authority within the bank. Proposed Finding of Fact 191 is irrelevant in that it indicates that Mr. * * * had knowledge of the requirement of a penalty for early withdrawal on a certificate of deposit after the withdrawal had already been made. That would have been too late for that knowledge to have had any effect. In the same vein, proposed Finding of Fact number 194, implies that Mr. * * * had authority or responsibility to assess a penalty for early withdrawal when he was not in a position which gave him such authority. With regard to proposed Finding of Fact 201, again, Mr. * * * would not have authority or responsibility to see to it that the penalty for early withdrawal of certificate of deposits were made. With regard to proposed finding of Fact number 207, Mr. * * * never explained how he determined that Mr. * * * could have been responsible for the rebate of the loan origination fee and for nonassessment of an early withdrawal penalty when he was not an officer director nor did he have any other position of authority with the bank.

RATIONALE FOR LEGAL
CONCLUSIONS

   In its action to prohibit Mr. * * * from participating in the conduct of the affairs of * * * Bank * * *, * * * Bank * * *, and any other bank insured by the FDIC (FDIC-85-25e), the FDIC cites as its authority for such action Section 8 (e) of the Federal Deposit Insurance Act, (12 USC Section 1818(e)). A careful reading of this Section reveals nothing that would give the FDIC any authority, under any set of facts, to prohibit any person from participating in the conduct of the affairs of all banks insured by the FDIC. The most that this statute would give the FDIC authority to do would be to prohibit Mr. * * * from participating in the conduct of the affairs of * * * Bank * * * and * * * Bank * * *, * * *. The * * * Bank * * * no longer exists, having been absorbed by * * * Bank. Certain parts of Section 8(e) refer only to directors and officers, of which Mr. * * * was neither; certain other parts refer to directors, officers, and "any other person participating in the conduct of the affairs" of an insured bank. The question then becomes whether Mr. * * * was a person "participating in the conduct of the affairs" of the banks within the meaning of the Statue. As the FDIC admits in it brief, the legislative history of this Section of the Act does not offer any detailed analysis of the meaning of the phrase in question. In trying to defend its version of what Congress intended to be the meaning of the phrase "participating in the conduct of the affairs" it cites testimony given before a subcommittee of the Senate in 1966 by Federal Board Vice Chairman J.L. Robinson. In his testimony, there, Mr. Robinson described an example of a bank that was acquired by a corporation, which corporation was controlled by an individual who was subsequently determined to have a criminal record. This individual was never an officer or director of a bank, but influenced the lending policy of the bank and obtained funds from the bank by charging consultant fees and expenses directly to the bank.
   If this is an example of who should be considered to be "participating in the management of the affairs of the bank", this example contains one very significant difference from Mr. * * * situation. In this example, a person had an ownership interest in the bank in that he had control of the corporation that had acquired the bank. In the present case, there is no evidence whatsoever that Mr. * * *, either directly or indirectly, had any ownership interest in the bank. Furthermore, he had no other identifiable means of exerting undue influence over those officers and directors who were responsible for conducting the affairs of the bank. The FDIC also cites the case of Manges vs. Camp. 474 F2d 97 (5th Cir. 1973) in which a controlling shareholder of a bank, but who was neither an officer or director, had been prohibited from "participating in any manner in the conduct of the affairs" of the bank. Again, the difference between such person and our Mr. * * * is that Mr. * * * had an ownership interest. The undersigned does not see the logic in the following statement in the FDIC's brief "his shareholder status alone is sufficient for a finding of participating, and it follows that an individual such as respondent * * * who actually engaged in major managerial policy decisions and Board of Director functions, as well as operational decisions, should be considered a participant as well." Again, the evidence does not show that Mr. {{4-1-90 p.A-1019}}* * * had the power or authority to make any managerial policy decisions or operational decisions, or that he had the power of authority to exert any undue influence on those that had the authority to make such decisions. The FDIC also cited the case of Federal Savings and Loan Insurance Corporation vs. Hikel, 333 F. Supp. 1308(E.D.P. 1971) in which the Federal Savings and Loan Insurance Corporation had removed Mr. Hikel from his position as president and director of the Savings and Loan Association and issued an order prohibiting him from "participating in any manner in the conduct of the affairs of the institution." Thereafter, he engaged in the selling and renting of real estate acquired by foreclosure by the association from which he had been suspended. The FDIC filed an action alleging that such activities were in violation of the order and the Court agreed. However, there is a difference in that Mr. Hikel was an officer and director of the corporation at the time the order was issued. The order referred to participating in any manner in the conduct of the affairs of the institution. Furthermore, Mr. Hikel apparently had authority to make binding decisions regarding the real estate transactions in which he engaged. Mr. * * *' actual authority was limited to offering advice. Mr. * * * had no authority to make decisions or issue orders and no one at the bank was under any obligation to enforce any decisions made by him, or obey any of his orders. The officers and directors cannot shirk their responsibilities by claiming to be "following orders" from a person who had no authority to issue such orders. They were the ones who had a fiduciary duty toward the bank. The undersigned is not able to conclude that the defendant was "participating in the conduct of the affairs" in either of the banks in question within the meaning of Section 8(e) of the Federal Deposit Insurance Act.
   Even if we assume that Mr. * * * was "participating in the conduct of the affairs" of the banks, Section 8(e) of the Federal Deposit Insurance Act requires that it be shown that the bank suffered substantial financial loss or other damage because of his conduct and practice with respect to such bank. And that it is evidenced that his personal dishonesty or a willful or continuing disregard for the safety and soundness evidences his unfitness to participate in the conduct and affairs of such insured bank. This raises the issue of whether the claimant's conduct or practices caused substantial financial loss or other damage to either bank. What substantial financial loss or other damage was suffered by the banks? The FDIC states that * * * Bank experienced substantial financial loss or other damage in that the so-called four large loans carried substantial risk that they would not be repaid, even though they were, in fact, subsequently repaid. The FDIC claims that only its intervention and increased awareness of the activities of the Board of Directors of * * * Bank led to the repayment of the loans.
   The undersigned does not believe that the evidence supports that conclusion. The FDIC goes so far as to say that eventual repayment by someone other than the stated obligor, supports the conclusions that the loans represented a loss since the four companies in question did not apparently have the financial resources to repay the loans themselves. This is transparent nonsense. There is no evidence, one way or other, regarding whether the companies had the financial resources to repay the loans. The fact that the loans were repaid by someone other than the stated obligor only indicates that the stated obligor and the real obligor were not the same party. Mr. * * * was the real obligor and Mr. * * * not only had the resources to repay the loans, but he actually did so. The FDIC also alleges that the draws under Mr. * * * line of credit subjected * * * Bank to great risk of loss. Mr. * * * would be under no legal obligation to repay the loans because the draws by Mr. * * * were presumably not authorized by Mr. * * *. It further characterizes the repayment of the loans by Mr. * * * as a "fortuitous event". It is difficult to see how these draws can be characterized as unauthorized when the proceeds were wired directly from * * * Bank to the sellers of stock in * * * Bank for the benefit of Mr. * * *. What it all boils to is that the bank loaned money to Mr. * * * and Mr. * * * repaid the money. The FDIC also alleges for the payment of fees by * * * Bank to Mr. * * * represented substantial financial loss or other damage and describes the repayment of these fees to the bank as another "fortuitous event". Again, it was Mr. * * * and not Mr. {{4-1-90 p.A-1020}}* * * who owed these fees to the bank. Mr. * * * earned a fee. The problem is that the fee was for services performed for Mr. * * *. Mr. * * * received payment for work he had done and was not unjustly enriched. The bank paid money that Mr. * * * should have paid; therefore, Mr. * * * owed the bank the money. The failure of * * * Bank to assess a penalty for early withdrawal on the Certificates of Deposit made to * * * was not something that Mr. * * * caused. He was the depositor. It was up to the bank to withhold the penalty for early withdrawal before letting the depositor have access to the funds. It is conceivable that the reason why the bank did not assess a penalty was that it was aware that Mr. * * *' withdrawal of the Certificate of Deposit was not entirely voluntary, but was the result of coercion from the FDIC. The situation occurred also with regard to Certificates of Deposit made to * * * by * * * Bank. Again, it is not the responsibility of the depositor to assess a penalty for early withdrawal. The fact that * * * Bank rebated part of the loan origination fee is beyond Mr. * * * control. The loan origination fee was paid by Mr. * * * and rebated to Mr. * * *. It does not make sense for the bank to look to Mr. * * * for its repayment. With regard to the brokered deposits made to both banks, again, the FDIC gives itself credit for preventing what it considered to be unacceptable substantial risk of financial loss to the banks. It does not seem to make much difference that repayment of the loans connected with the brokered deposits was guaranteed by an insurance company.
   The undersigned Administrative Law Judge is not as willing as the FDIC to predict that both of these banks would have suffered substantial financial loss or other damage because of Mr. * * *' actions were it not for the FDIC's intervention. Indeed, the possibility exists that it was the FDIC's intervention that caused substantial financial loss to the banks by stopping the deals which might have made the banks a substantial profit. In addition, the undersigned is not convinced by the preponderance of the evidence that Mr. * * *' has exhibited personal dishonesty or a willful or continuing disregard for the safety and soundness of the banks. All that Mr. * * * has shown was the failure to appreciate the need for detailed written documentation of each step in his plan. The undersigned is persuaded that Mr. * * * was acting in what he believed to be the best interests of the bank and was taking what he considered to be appropriate safeguards against undue risks. It might be argued that he has evidenced unfitness to participate in the conduct of the affairs of these banks because he did not understand the FDIC's concept of unsafe banking practices, but the statute requires both unfitness and either personal dishonesty or a willful or continuing disregard for safety and soundness of the bank. The undersigned concludes that the claimant should not be prohibited from participation in the conduct of the affairs of any bank.
   The FDIC's authority to assess a $65,000 penalty against Mr. * * * for willfully misinforming it of the details of the acquisitions of * * * Bank and * * * Bank comes from Section 7(j)(15) of the Federal Deposit Insurance Act. One of the requirements for assessing a civil penalty for violation of the Act is that it be willful. Mr. * * * has testified that at the time he filed the Notice of Acquisition for * * * Bank with the Federal Deposit Insurance Corporation, he expected the conditions of the transaction to be as represented on the Notice of Acquisition and that he was unaware of any significant changes until the acquisition had actually taken place. There is a question about whether he violated the requirements of keeping the FDIC informed of the details of the acquisition at all. The evidence certainly does not support a conclusion that some violation was willful. In addition, it is noted that Mr. * * * was not the person who acquired control of * * * Bank or * * * Bank; it was Mr. * * * who acquired control and therefore, any fines assessed should be assessed against Mr. * * *. Even if it were appropriate to assess a civil penalty, then the FDIC was under a statutory obligation to give due consideration to the appropriateness of the penalty with respect to the size of the financial resources and good faith of the person charged, the gravity of the violation, and any data, views, and arguments submitted. The FDIC has furnished virtually no evidence whatsoever that it knows the size of the financial resources of Mr. * * *. All it could furnish was speculation regarding what they thought his financial resources might be due to the fact that he is a CPA and an officer and director of several corporations. However, Mr. * * * testified that he has negative net worth and the FDIC could furnish no evidence to refute that testimony. The only evidence we {{4-1-90 p.A-1021}}have regarding the size of Mr. * * *' financial resources is his own testimony. Therefore, based on the evidence, the undersigned would have to conclude that Mr. * * * is unable to pay civil penalties in any amount.
   In support of its assessment of civil money penalties for violation of standards of a bank's lending money to officers and directors (FDIC 85-113k), the FDIC cites Section 18(J)(3) of the Federal Deposit Insurance Act (12 USC 1828 (J)(3)). This applies to any "officer, director, employee, agent, or other person participating in the conduct of the affairs" of a nonmember insured bank, and authorizes a civil penalty of not more than $1,000 per day for each day during which the violation continues. It goes on to state that the term "violates" includes without limitation any action (alone or with another or others) for or toward causing, bringing about, participating in, counseling or aiding or abetting the violation. Although an argument could be made that Mr. * * * was aiding or abetting the violation by Mr. * * *, Mr. * * * was not himself an officer, director, employee, agent, or other person participating in conduct of the affairs of either bank; therefore, no civil penalty can be assessed against him. This section of the Act also states that in determining the amount of the penalty, the FDIC must take into account the appropriateness of the penalty with respect to the size of the financial resources and good faith of the person charged, the gravity of the violation, the history of previous violations, and other matters as justice may require. Again, the only evidence which does not represent speculation regarding the financial resources of Mr. * * * is his own testimony that he has a negative net worth. It is not reasonable to assume that he has the financial resources to pay a civil penalty of any size. No civil penalty is appropriate.

CONCLUSIONS OF LAW

   1. * * * Bank * * *, and the * * * Bank * * *, are insured state nonmember banks, subject to the rules and regulations of the Federal Deposit Insurance Corporation.
   2. * * * was an accountant employed by Mr. * * *, and was an advisor hired by * * * Bank * * * and * * * Bank * * * to perform certain accounting and tax work. Mr. * * * was also hired to compile a limited partnership package whereby * * * Bank and * * * Bank would arrange a sale and lease back of certain real estate owned by the bank.
   3. The only time at which Mr. * * * was ever an officer or director at either bank was a short time in October, 1984 when he assumed the functions of acting president, but at no other time was he an officer, director, or person participating in the conduct of the affairs of either bank.
   4. * * * was not responsible for extending credit or causing credit to be extended to * * *, or * * *, other than as a representative or agent for these companies.
   5. * * * has not violated the provisions of Regulation O (12 CFR Sections 215.4(a), (b), or (c), 12 USC Sections 375b(1)(2) or (3)).
   6. * * * was not the person responsible for failing to collect penalties from * * * at the time said corporation withdrew its Certificates of Deposit from * * * and * * * Bank and paid off its loans from said banks.
   7. * * * conduct and advice relating to soliciting brokered deposits for * * * Bank and * * * Bank in order to set up self-liquidating loans, to be funded by annuity insurance contracts, did not constitute illegal activity or unsound banking practice.
   8. * * * has not engaged in other activity with regard to * * * Bank or * * * which would justify the FDIC's request that he be removed from all banking activity with FDIC insured banks.

DECISION

   It is the recommended decision of the undersigned Federal Administrative Law Judge that * * * not be prohibited from participating in the conduct of the affairs of * * * Bank * * *, * * * Bank * * *, or any other bank insured by the FDIC, under the authority of Section 8(e) of the Federal Deposit Insurance Act (12 USC 1818(e)(2)).
   It is the further recommended decision of the undersigned Judge that * * * not be assessed a civil penalty under Section 7(j)(15) of the Federal Deposit Insurance Act (12 USC 1817(j)(15)).
   It is the further recommended decision of the undersigned Judge that * * * not be assessed a civil penalty under Section {{4-1-90 p.A-1022}}28(j)(3) of the Federal Deposit Insurance Act (12 USC 1828(j)(3)).
   However, under the rules and regulations of the FDIC, this is only a recommended decision and the final decision will be made by the Board of Governors of the Federal Deposit Insurance Corporation.
/s/Frederick J. Graf
Administrative Law Judge
September 30, 1986

II. PROPOSED FINDINGS OF FACT

A. GENERAL FINDINGS

   1. The * * * Bank * * * ("* * * Bank") is a corporation existing and doing business under the laws of the State of * * * and has its principal place of business at * * * and is and has been at all times relevant to these proceedings, an insured State Nonmember Bank. (Admitted in Answer).
   2. * * * Bank * * * ("* * * Bank") is a corporation existing and doing business under the laws of the State of * * * and has its principal place of business at * * * and is and has been at all times relevant to these proceedings, an insured State Nonmember Bank. (Admitted in Answer).
   3. * * * was appointed Director and Chairman of the Board of * * * Bank on May 8, 1984. (FDIC Ex. 78; * * * Tr. 334)
   4. * * * was appointed Director and Chairman of the Board of * * * Bank on September 18, 1984. (FDIC Ex. 78; * * * Tr. 230)
   5. Respondent * * * and * * * Bank entered into an agreement on May 8, 1984, whereby Respondent * * * agreed to perform any and all services in accounting, tax and management service matters requested by that bank or required by its business, including the preparation of accounting statements, tax reports and returns for a term of five years (FDIC Ex. 79; * * * Tr. 334–335)
   6. The Board of Directors of * * * Bank understood that Respondent * * *' services to the Bank were not to encompass duties other than those in the May 8, 1984 agreement. (* * * Tr. 336)
   7. On September 17, 1984, Respondent * * * and * * * Bank entered into an agreement whereby Respondent * * * was to perform any and all services in accounting, tax and management service matters requested by * * * Bank or required by its business, including the preparation of accounting statements, tax reports and returns for a term of five years. (FDIC Ex. 83; * * * Tr. 230–232)
   8. The Board of Directors of * * * Bank approved the accounting agreement with Respondent * * * with the understanding that his services were to be limited to providing tax consultation under the accountant's contract and representing the bank in regulatory matters unresolved at that time. (* * * Tr. 231)
   9. * * * resigned as President of * * * Bank on October 3, 1984. (* * * Tr. 516)
   10. Respondent * * * presented Mr. * * * employment contract to the Board of Directors of * * * Bank for approval. (FDIC Ex. 29)
   11. Respondent * * * replaced Mr. * * * and became "Acting President" of * * * Bank on October 4, 1984. (* * * Tr. 86; * * * Tr. 275; * * * Tr. 516)
   12. Respondent * * * called a meeting of the officers of * * * Bank after Mr. * * * resigned for the purpose of announcing that he would have an office in the * * * building and he was to be contacted about all loans that were to go through. (* * * Tr. 338).
   13. Respondent * * * appeared on behalf of * * * Bank at meetings at the FDIC * * * Regional Office on or about June 11, 1984 and September 24, 1984. (* * * Tr. 538–539; * * * Tr. 244)
   14. Respondent * * * presided at, set the agenda for, and otherwise actively participated in meetings of the Board of Directors of * * * Bank on numerous occasions. (* * * Tr. 337)
   15. At Board of Directors' meetings of the * * * Bank, Chairman of the Board * * * was generally silent, passive and did not actively participate. (* * * Tr. 337, 358).
   16. Prior to becoming "Acting President," Respondent * * * "ran the show" for Chairman of the Board * * * for * * * Bank matters. (* * * Tr. 337, 356–358)
   17. The Board of Directors of * * * Bank terminated Respondent * * *' services as a consultant on October 24, 1984. (FDIC Ex. 81)
   18. Subsequent to the termination of Respondent * * * services at * * * Bank, President * * * was preoccupied with problems stemming from Respondent * * *' activities at the bank. (* * * Tr. 333)
{{4-1-90 p.A-1023}}
   19. Transactions involving Respondent * * * at the * * * Bank contributed to the ultimate demise of * * * Bank. (* * * Tr. 107–109)
   20. After * * * Casualty and Surety Company canceled * * * Bank's blanket bond, the bank had difficulty securing a replacement bond. (* * * Tr. 96–100).
   21. The high cost of the replacement bond, ultimately issued by Lloyd's of London, resulted in a lower lending limit at the * * * Bank, which exacerbated the Bank's financial difficulties. (* * * Tr. 98–99, 108)
   21. * * * was appointed President of * * * Bank on September 17, 1984 and served in this capacity for 9½ months. (* * * Tr. 229)
   23. Respondent * * * presided at and otherwise actively engaged in meetings of the Board of Directors of * * * Bank. (* * * Tr. 232–233)
   24. The Board of Directors of * * * Bank notified Respondent * * * of the termination of his services as a consultant in a letter dated November 27, 1984. (FDIC Ex. 87)
   25. The Board of Directors of * * * Bank retained attorney * * * to conduct a fidelity bond investigation for the purpose of determining whether a claim should be made under the Bank's fidelity insurance coverage. (* * * Tr. 82–83)
   26. Attorney * * * conducted a bond claim investigation and filed a notification of claim with * * * Bank's insurance carrier, * * * Casualty and Surety Company, concerning * * * on November 1, 1984. (FDIC Ex. 77; * * * Tr. 85)
   27. Attorney * * * determined that Respondent * * * was an employee of * * * Bank. (FDIC Ex. 77; * * * Tr. 86–87)
   28. Field Office Supervisor * * * is a highly qualified Bank Examiner with extensive experience in analyzing the financial condition of banks and their compliance with applicable laws and regulations and rendering opinions thereon. (* * * Tr. 121–124)
   29. It is part of the normal and customary duties of a Bank Examiner to render opinions regarding banks financial condition and compliance with applicable laws and regulations after review of a bank's books and records and after discussion with its management. (* * * Tr. 124–125, 137)
   (No paragraphs 30, 31, or 32 in original— Ed.)
   33. The purpose of a bank examination and a visitation is to review a bank's records and operations and check for compliance with rules and regulations in order to determine the safety and soundness of the bank and the risks it might pose to the FDIC insurance fund. (* * * Tr. 125)
   34. Field Office Supervisor * * * is a highly qualified and trained Bank Examiner with extensive experience in the analysis of the financial condition of banks and a bank's compliance with applicable laws and regulations. (* * * Tr. 30–32)
   35. Field Office Supervisor * * * was appointed Acting Assistant Regional Director of the * * * office of the FDIC for the period October 1984 to March 1985. As Acting Regional Director, * * * had responsibility for overseeing the * * * Field Office, the * * * Field Office and the * * * Field Office. (* * * Tr. 33)
   36. * * * Bank and * * * Bank were encompassed by the * * * Field Office. (* * * Tr. 33).
   37. As Acting Assistant Regional Director, Field Office Supervisor * * * had responsibility for the Regional Office recommendation to initiate actions against * * * based on review of documents. (* * * Tr. 403)
   38. Field Office Supervisor * * * is a highly qualified Bank Examiner with extensive experience in the analysis of the financial condition of banks and the banks' compliance with applicable laws and regulations. (* * * Tr. 376–378)
   39. Field Office Supervisor * * * conducted a visitation of the * * * Bank on October 12, 1984. (* * * Tr. 162)
   40. Field Office Supervisor * * * conducted a visitation of * * * Bank on October 13, 1984. (* * * Tr. 129)
   41. The purposes of the visitations were to investigate the acceptance of brokered deposits by * * * Bank and * * * Bank and to investigate any other unusual or unique transactions. (* * * Tr. 129)
   42. Respondent * * * admitted that his accounting firm was extensively involved in matters involving both * * * Bank and * * * Bank. (* * * Tr. 494)

{{4-1-90 p.A-1024}}
B. CHANGE OF CONTROL—* * *
BANK
   43. * * * signed a Notice of Acquisition of Control ("Notice") submitted to the FDIC * * * Regional Office dated January 9, 1984 with regard to * * * Bank. (Admitted in Answer)
   44. The Notice was prepared by * * * of the CPA firm, * * * (Admitted in Answer)
   45. The first page of the Notice warned of penalties for providing false information or for willful violation in the Change of Bank Control Act. (FDIC Ex. 1; * * * Tr. 40)
   46. The Notice indicated that * * * was to acquire 40,963 shares or 75.31% of the * * * outstanding stock for $1,351,779 from fourteen individuals. (FDIC Ex. 1)
   47. The offer to purchase the stock of * * * Bank was directed to * * * acting on behalf of the various sellers. (FDIC Ex. 1)
   48. Part 5 of the Notice indicated that the acquisition was to be a "very simple cash for stock transaction with no special assurances or warranties from either side." (FDIC Ex. 1)
   49. Part 6 of the Notice stated that the source of funds for the purchase of the stock of * * * Bank would be the liquidation of long term real estate contracts owned by * * *. (FDIC Ex. 1)
   50. Part 7-a and 7-b of the Notice, relating to borrowed funds, were completed as not being applicable. (FDIC Ex. 1)
   51. The * * * Regional Office of the FDIC sent a letter to Respondent * * * dated March 6, 1984 indicating that changes in the financing of the acquisition of stock of * * * Bank should be reported to the FDIC. (FDIC Ex. 2; * * * Tr. 42)
   52. The Regional Office sent a letter to Respondent * * * dated March 9, 1984 asking whether there were any changes in the terms of the acquisition. (FDIC Ex. 3; * * * Tr. 43)
   53. In a letter dated March 27, 1984, Respondent * * * indicated to the * * * Regional Office that there had been no changes in the funding arrangements of the transaction. (Admitted in Answer: FDIC Ex. 4)
   54. On the basis of the representations contained in the March 27, 1984 letter and the Notice of Acquisition of Control, the * * * Regional Office, in a letter to Respondent * * * dated April 2, 1984, raised no objection to the proposal. (Admitted in Answer) (FDIC Ex. 5; * * * Tr. 47)
   55. The * * * Regional Office's April 2, 1984 letter stated that the Regional Office was to be notified of any changes in the terms of the transactions prior to their consummation, and that in light thereof, additional information or reconsideration by the Regional Office might be necessary. (FDIC Ex. 5; * * * Tr. 47)
   56. The FDIC * * * Regional Office reviews change in control notices and has authority to allow a transaction to proceed if various factors are believed to be satisfactory. (* * * Tr. 36)
   57. One of the material factors reviewed by the * * * Regional Office is the financial condition of the acquiring party because the party's financial condition might jeopardize the bank's stability. (* * * Tr. 36)
   58. The * * * Regional Office places particular emphasis on the source of funds for the acquisition of the bank's stock because of the need to determine that the acquiring party can "afford" to buy the Bank and the potential for insider abuse. (* * * Tr. 39)
   59. The FDIC must be satisfied that the acquiring party has adequate debt servicing ability if the acquiring party is borrowing money to fund the transaction. (* * * Tr. 39)
   60. The FDIC * * * Regional Office views as a negative factor in evaluating a Notice of Change in Control, the use of borrowed funds in general, and in particular, from the bank involved. (* * * Tr. 58–61)
   61. Borrowing funds from the institution to be acquired to fund the acquisition creates a potentially abusive situation in that there is no independent third party to determine the creditworthiness of the acquiring "borrower" or to prevent the removal of collateral pledged or the adjustment of loan terms. (* * * Tr. 58–61)
   62. Borrowing funds from the institution to be acquired to fund the acquisition shifts the risk of loss from the acquiring party to the bank, and could result in a depletion of the bank's capital account. (* * * Tr. 60–61)
   63. The FDIC would have disapproved the Notice for * * * Bank if the true nature of the funding was known at the time or revealed pursuant to its instructions in fol- {{4-1-90 p.A-1025}}low up letters to Respondent * * *. (* * * Tr. 410)
   64. On May 4, 1984, * * * acquired approximately 75% of the stock of * * * Bank. (Admitted in Answer)
   65. On June 19, 1984, the * * * Bank extended credit to * * * in the amount of $137,945 on an unsecured basis and with an interest rate of 14.5%. (FDIC Exs. 32 and 33; * * * Tr. 154–158)
   66. Respondent * * * signed for the loan on behalf of that company as secretary. (FDIC Ex. 32; * * * Tr. 158)
   67. Respondent * * * was given authority to borrow on behalf of that company pursuant to a borrowing resolution in which he is indicated as being its secretary. (FDIC Ex. 35)
   68. On June 19, 1984, the * * * Bank extended credit to * * * in the amount of $137,945 on an unsecured basis and with an interest rate of 14.5%. (FDIC Exs. 36 and 37; * * * Tr. 163–164)
   69. Respondent * * * borrowed on behalf of that company pursuant to borrowing resolution. (FDIC Ex. 39)
   70. Respondent * * * signed for the loan on behalf of * * * as its president. (FDIC Ex. 36; * * * Tr. 163)
   71. On June 19, 1984, the * * * Bank extended credit to * * * in the amount of $137,945 on an unsecured basis at an interest rate of 14.5%. (FDIC Exs. 40 and 41)
   72. Respondent * * * borrowed money on behalf of that company pursuant to a borrowing resolution. (FDIC Ex. 43)
   73. Respondent * * * signed the extension of credit on behalf of that company as its vice-president. (FDIC Ex. 40; * * * Tr. 171)
   74. On June 19, 1984, the * * * Bank extended credit to * * * in the amount of $146,289 on an unsecured basis at an interest rate of 14.5%. (FDIC Exs. 44 and 45)
   75. Respondent * * * signed the extension of credit on behalf of that company as its treasurer. (FDIC Ex. 44)
   76. Respondent * * * borrowed money on behalf of that company pursuant to a borrowing resolution. (FDIC Ex. 47)
   77. All four loans were single payment 90-day loans due September 17, 1984. (FDIC Exs. 32, 36, 40 and 44)
   78. Documentation submitted with the four loans at the time of origination consisted of the following: (a) the notes themselves; (b) borrowing resolutions of the companies; and (c) the loan submission sheets. (FDIC Exs. 32, 33, 35, 36, 37, 39, 40, 41, 43, 44, 45, and 47; * * * Tr. 158–159, 166, 171)
   79. As of the date of Mr. * * * visitation at * * * Bank, the four loans were delinquent. (FDIC Ex. 34, 38, 42, 46; * * * Tr. 175)
   80. The loan submission sheets for all four loans at * * * Bank indicated only that the purposes of the credits were "business investments". (FDIC Exs. 33, 37, 41 and 45)
   81. The credit information submitted with the four loans was insufficient to judge the creditworthiness of the borrowers in that the Bank did not possess an audited financial statement of each borrower, nor was there an explanation regarding how or why * * * Bank would make these loans to out-of-territory borrowers. (* * * Tr. 159, 161, 164, 169, 171, 173, 175; * * * Tr. 353; * * * Tr. 410–411)
   82. The credit information submitted with the loans was contrary to normal and prudent banking practices. (* * * Tr. 160–161; * * * Tr. 370; * * * Tr. 411)
   83. The four loans were not approved by the * * * Bank's Board of Directors in advance of disbursal. (* * * Tr. 327; * * * Tr. 411, * * * Tr. 354)
   84. The Department of Financial Institutions is the * * * state agency responsible for regulating state chartered banks in * * * and in applying state law to state chartered banks. (* * * Tr. 188)
   85. The * * * Department of Financial Institutions reflected the four loans as a violation of the State's lending limit. (* * * Tr. 326)
   86. As of June 19, 1984, * * * Bank's lending limit under State law did not exceed $175,000 and may have been as low as $166,000. (FDIC Exs. 55 and 56; * * * Tr. 189–190, 326)
   87. For purposes of applying the * * * legal lending limit, the Department of Financial Institutions aggregates loans that are made for a common purpose. (* * * Tr. 191–193)
{{4-1-90 p.A-1026}}
   88. The FDIC applies the interpretations of the Department of Financial Institutions on a regular basis in determining whether loans made by an * * * chartered bank are in violation of state's lending limit. (* * * Tr. 188)
   89. The four loans to companies with which Respondent * * * was associated were extended in contravention of the * * * Bank's Loan Policies and Procedures adopted on June 12, 1984. (FDIC Ex. 54, * * * Tr. 411)
   90. Field Office Supervisor * * * indicated to * * * Bank on October 24, 1984 that the four loans were considered loss and would be treated as unbankable assets and deducted from the bank's capital if they were not removed from its books promptly. (* * * Tr. 162, 170, 173-176, 196)
   91. Field Office Supervisor * * * traced the proceeds of the four loans during his visitation at * * * Bank. (* * * Tr. 153-154. 176)
   92. The proceeds of the four loans did not go to the four companies or for the stated purpose "business investment" but rather were disbursed to the sellers of * * * Bank stock as follows: (a) on June 19, 1984, an * * * Bank cashier's check #31653 was issued payable to * * *, Agent, in the amount of $395,869.20; (b) on June 19, 1984, a portion of the proceeds paid off a loan at * * * Bank in the name of * * * in the amount of $151,457.37; (c) on June 19, 1984, a portion of the proceeds paid interest on a loan of * * * at the * * * Bank in the amount of $4,452.43; and (d) on June 19, 1984, a portion of the proceeds of the loan was wire transferred to * * * Bank, * * *, to account #0-000-158-8, attention * * * (FDIC Exs. 48, 49, 50, 51, and 52; * * * Tr. 176-182)
   93. * * * is an interest of the sellers of the stock of * * * Bank. (FDIC Ex. 53 a and b; * * * Tr. 184-185)
   94. Respondent * * * admitted structuring the transactions as four separate loans through the four companies indicated in order to circumvent the legal lending limit. (* * * Tr. 534-535)
   95. The manner in which the loans of the four companies were structured was designed to hide the true purpose of the loans. (* * * Tr. 410)
   96. Respondent * * * was aware that the proceeds of these loans were intended to go to the sellers of the stock of * * * Bank. (* * * Tr. 387; * * * Tr. 505-507, 535)
   97. The Board of Directors of * * * Bank independently determined that Respondent * * * was responsible for the transaction involving the four loans. (FDIC Ex. 77; * * * Tr. 356).
   98. As of March 31, 1984, 5 percent of the Bank's total capital and reserves equaled approximately $69,000 to $70,000. (* * * Tr. 199)
   99. The aggregate amount of the four loans which totaled $560,000 exceeded 15% of the Bank's capital and surplus (* * * Tr. 198)
   100. The four loans were never repaid by their actual obligors. (* * * Tr. 327; * * * Tr. 351.)

C. CHANGE OF CONTROL—* * * BANK

   101. A Notice of Acquisition of Control ("Notice") dated June 19, 1984, was submitted by Respondent * * * to the * * * Regional Regional of the FDIC on June 27, 1984, for * * * Bank. (Admitted in Answer; FDIC Ex. 6)
   102. The Notice was prepared by Respondent * * * (Admitted in Answer)
   103. Pursuant to the Notice, * * * was to acquire from * * *, 15, 114 shares or 58.13% of the * * * Bank outstanding stock for $125,472 in cash and $600,000 under a contract of sale. (FDIC Ex. 6)
   104. The first page of the Notice warns of criminal and civil liability for violations of the Change of Bank Control Act. (FDIC Ex. 6)
   105. On May 14, 1984, * * * acquired from * * *, 1,675 shares or 6.44% of * * * Bank for $80,400 in cash. (FDIC Exs. 6 at 5, 16, 72, and 75; * * * Tr. 222-223)
   106. Pursuant to Part 6 of the Notice, no indebtedness was to be incurred in connection with the acquisition of * * * Bank other than that portion to be acquired on a contract basis. (FDIC Ex. 6)
   107. In a letter from the * * * Regional Office of the FDIC to Respondent * * * dated July 16, 1984, the Regional Office requested notification in writing of any changes in the terms, conditions or financing of the proposed acquisition for the purpose of evaluating whether such changes would alter the FDIC's findings on the acquisition. (FDIC Ex. 7).
{{4-1-90 p.A-1027}}
   108. Respondent * * * did not respond to the July 16, 1984 letter or otherwise notify the Regional Office of any changes in the proposed acquisition. (* * * Tr. 51)
   109. In a letter dated September 4, 1984 addressed to Respondent * * *, the * * * Regional Office of the FDIC posed no objection to the proposal to acquire * * * Bank based upon the specific information provided in the Notice of Acquisition of Control. (Admitted in Answer; FDIC Ex. 8)
   110. The FDIC, in its letter of September 4, 1984, renewed its request for notification of any changes in the terms, conditions or financing of the proposal, and informed Respondent * * * that "an acquisition which is inconsistent with the information provided in the Notice...may be subject to civil money penalties or criminal prosecution." (FDIC Ex. 8)
   111. On September 18, 1984, * * * acquired 58.1% of the outstanding stock of * * * Bank. (FDIC Exs. 7, 62, 65, 71, 73, and 74; * * * Tr. 223-224)
   112. On May 4, 1984, * * * Bank granted a line of credit to * * * in the amount of $150,000. (FDIC Ex. 71)
   113. Advances were made pursuant to that line of credit in the amounts of $80,400 and $37,133 on May 14, 1984 and September 18, 1984, respectively. (FDIC Exs. 71, 72, 73)
   114. Respondent * * * signed the $150,000 line of credit agreement on behalf of * * * (FDIC Ex. 71)
   115. Respondent * * * made both draws under the $150,000 line of credit. (* * * Tr. 360; * * * Tr. 530)
   116. As of October 12, 1984, the day of the FDIC visitation of * * * Bank, no power of attorney or other agency agreement was in the bank's files giving Respondent * * * authority to sign on behalf of * * * (* * * Tr. 325)
   117. The purpose of advances on the * * * $150,000 line of credit was listed on * * * Bank records as personal investment. (FDIC Ex. 71)
   118. At the October 13, 1984 visitation of * * * Bank, Field Office Supervisor * * * traced the proceeds of the two advances under the $150,000 line of credit. (* * * Tr. 220-224)
   119. The proceeds of the two advances under the line of credit were wire transferred to * * * Bank "Cr; * * *" on May 14, 1984 and on September 18, 1984. (FDIC Exs. 72 and 73; * * * Tr. 220)
   120. The proceeds of the two advances under the line of credit were used to pay * * * for the cash portion of the purchase price of the stock. (FDIC Exs. 74 and 75; * * * Tr. 221-224)
   121. Respondent * * * was aware that the purpose of the transaction was to pay * * * for the cash portion of the purchase price of the * * * Bank stock. (* * * Tr. 530)
   122. The Board of Directors of * * * Bank determined that Respondent * * * was responsible for the line of credit transaction (FDIC Ex. 77).
   123. The FDIC would have withheld approval of the Notice of Acquisition of Control of * * * Bank if the actual nature of debt financing had been known. (* * * Tr. 61, 410)
   124. The acquisition of stock in * * * Bank through advances under the line of credit were contrary to representations made by Respondent * * * in the Notice of Acquisition of Control filed by him on June 27, 1984 and the FDIC's July 16, 1984 letter to * * *. (FDIC Exs. 6 at 57; * * * Tr. 221-224)

D. PAYMENT OF FEES BY * * * BANK

   125. On May 29, 1984, the * * * Bank paid $20,014 to Respondent * * * for services rendered by Respondent * * * to * * * prior to Mr. * * * acquisition of control of * * * Bank, specifically up to April 30, 1984. (FDIC Exs. 57 and 58; * * * Tr. 201-202)
   126. Respondent * * * submitted the bill to * * * Bank for the services. (FDIC Ex. 57; * * * Tr. 363)
   127. Respondent * * * did not reimburse the $20,014 to the Bank. (* * * Tr. 114)
   128. Under the terms of the employment contract between * * * Bank and Respondent * * *'s accounting firm, * * * was retained to perform accounting services for the Bank for a term beginning May 1, 1984 and ending May 1, 1989. (FDIC Ex. 79)
   129. The Board of Directors of * * * Bank determined that Respondent * * * was responsible for the submission of the {{4-1-90 p.A-1028}}
bill for services not rendered to * * * Bank. (FDIC Ex. 77)

E. BROKERED DEPOSIT
TRANSACTIONS—* * * BANK

   130. On October 10 and 11, 1984, * * * Bank accepted deposits from Deposit Broker * * *, in the total amount of $1,600,000. (Admitted in Answer) (FDIC Ex. 77; * * * Tr. 514-515)
   131. The deposits were to be issued to sixteen different financial institutions with one-year maturities and an interest rate of 13% in equal amounts of $100,000. (Admitted in Answer) (FDIC Exs. 11-26; * * * Tr. 381)
   132. The acceptance of such deposits represents the acceptance of brokered deposits. (* * * Tr. 129-130, 136)
   133. At the time of the acceptance of the brokered deposits, * * * Bank intended to extend credit to eleven out-of-territory borrowers on terms of a seven-year maturity and a fixed annual rate of interest of 14.5%. Ten of the loans were to be for $150,000 and one for 100,000. (Admitted in Answer) (* * * Tr. 138, 284; * * * Tr. 346; * * * Tr. 384)
   134. The extensions of credit were to be supported by insurance annuity contracts purchased with approximately 52 percent of the proceeds of these extensions of credit. (* * * Tr. 145; * * * Tr. 342; * * * Tr. 383; * * * Tr. 510-514)
   135. The annuity contracts were to be purchased from * * * (FDIC Exs. 27 and 28; * * * Tr. 139; * * * Tr. 383)
   136. The acceptance of the brokered deposits was contrary to a resolution of the Board of Directors passed at a directors meeting attended by Respondent * * * on May 22, 1984. (FDIC Ex. 29; * * * Tr. 140-141; * * * Tr. 347)
   137. The acceptance of deposits through a deposit broker is generally an imprudent banking practice. (* * * Tr. 130; * * * Tr. 235-236; * * * Tr. 349; * * * Tr. 380)
   138. The acceptance of the brokered deposits and the granting of the loans would have subjected the * * * Bank to an inordinate risk of increasing interest rates because the deposits had a substantially shorter maturity than the proposed loans. (* * * Tr. 131, 142-143; * * * Tr. 386)
   138. If interest rates were to rise, the risk to the * * * Bank would consist of its having to fund the fixed rate loan with increasingly higher costs of funds. (* * * Tr. 131, 142-143; * * * Tr. 386)
   139. If interest rates were to fall, the risk to the * * * Bank would be the borrowers repaying their loans and taking the funds and securing their financing elsewhere. (* * * Tr. 284)
   140. The loans did not provide for a prepayment penalty. (* * * Tr. 285)
   141. The annuity contract which was to secure the loans did not provide a guaranteed rate of return beyond one year. (FDIC Ex. 28; * * * Tr. 145)
   142. The acceptance of brokered deposits subjects a bank to a liquidity risk. (* * * Tr. 143)
   143. the liquidity risk of borrowed deposits relates to whether * * * Bank would be able to pay the depositors holding the funds after one year or earlier from the liquidation of other bank assets since the longer maturity loans would not be available for such purposes. (* * * Tr. 143-144)
   144. Respondent * * * discussed the brokered deposit transactions at * * * Bank and * * * Bank on behalf of those banks at a meeting at the * * * Department of Financial Institutions on October 15, 1984. (* * * Tr. 379-388).
   145. Field Office Supervisor * * * attended that meeting, and stated the FDIC's concern over the transaction based upon the interest rate and liquidity risks associated therewith. (* * * Tr. 386-387)
   146. At the * * * meeting, Respondent * * * admitted that he had not considered the interest rate risk to * * * Bank involved in the brokered funds transactions. (* * * Tr. 386-387)
   147. The loans to be made under the brokered funds transaction would have violated the * * * Bank's loan policy. (FDIC Ex. 54; * * * Tr. 347)
   148. The loans would have subjected * * * Bank to a collectibility risk. (* * * Tr. 144-145)
   149. Prior to accepting the brokered deposits, the * * * Bank did not obtain financial information concerning the intended borrowers or the company that was to issue the insurance annuity contract and was unaware of the terms of the policy. (* * * Tr. 145; * * * Tr. 344-347)
   150. The rate of 13 percent to be paid on the certificates of deposit was above the {{4-1-90 p.A-1029}}prevailing interest rates applicable to comparable transactions of that amount. (* * * Tr. 382-383)
   151. At the time of the acceptance of the deposits, * * * Bank incurred liability for fees due the deposit broker, * * *, in the amount of approximately $41,000. (* * * Tr. 383)
   152. Respondent * * * ordered other officers of * * * Bank to sign the certificates of deposit. (* * * Tr. 344)
   153. * * * Bank management attempted to stall for time after Respondent * * *' direction to prepare certificates of deposit in the names of companies which appeared on a list provided by Respondent * * *. (* * * Tr. 342)
   154. Respondent * * * signed the certificates of deposit as president of * * * Bank after other management officials refused to do so. (FDIC Exs. 11-26; * * * Tr. 136, 288; * * * Tr. 344)
   155. Respondent * * * arranged the brokered deposit transactions, including the intended loan transactions, without the knowledge and consent of * * * Bank's Board of Directors. (* * * Tr. 140; * * * Tr. 346)
   156. After the FDIC became aware of the brokered transactions, it issued a Temporary Cease and Desist Order on October 15, 1984 pursuant to section 8(c) of the Federal Deposit Insurance Act (12 U.S.C. § 1818 (c)), which, in part, terminated the further acceptance of brokered deposits by * * * Bank. (fDIC Ex. 30)
   157. Subsequent to the issuance of the Temporary Cease and Desist Order, the Board of Directors of * * * returned the deposits, canceled the loans, and refused to pay the deposit broker's commissions. (* * * Tr. 111; * * * Tr. 141–142; * * * Tr. 346-347)
   158. Field Office Supervisor * * * determined that Respondent * * * was responsible for the brokered deposit transactions at * * * Bank. (* * * Tr. 147, 288)
   159. The Board of Directors of * * * Bank determined that Respondent * * * was responsible for the brokered deposit transactions at * * * Bank and any resulting liability to the depositors and the deposit broker. (FDIC Ex. 77, * * * Tr. 83-84)
   160. Respondent * * * was acting on behalf of * * * Bank when he arranged the brokered deposit transaction. (FDIC Ex. 11-26, 27; * * * Tr. 288)

F. BROKERED DEPOSIT TRANSACTIONS—* * * BANK

   161. Brokered deposits were credited to an account of * * * Bank at a correspondent bank on October 10, 12, and 13, 1984 in the aggregate of $1,400,000. (Admitted in Answer) (FDIC Ex. 85; * * * Tr. 148; * * * Tr. 237; * * * Tr. 379-380)
   162. The transaction was arranged by Respondent * * * through * * * a deposit broker, (* * * Tr. 237; * * * Tr. 515)
   163. The deposits were to be represented by certificates of deposits to fourteen financial institutions, each in the amount of $100,000. (Admitted in Answer) (FDIC Ex. 85)
   164.a) The certificate of deposit were to have one-year maturities bearing interest rates of 13%. (Admitted in Answer)
   b) The rate of 13 percent to be paid on the certificates of deposit was above the prevailing rates applicable to comparable transactions of that amount. (* * * Tr. 238)
   165. * * * Bank intended to use the brokered deposits to fund extensions of credit at a fixed annual rate of interest of 14.5% with seven-year maturities. (* * * Tr. 384)
   166. The extensions of credit related to the brokered deposits were to be supported by an insurance annuity contract purchased from an annuity insurance company. (* * * Tr. 239)
   167. President * * * of * * * Bank notified the FDIC of the acceptance of the brokered deposits on October 12, 1984. (* * * Tr. 238, 242)
   168. Respondent * * * indicated to President * * * that he ( * * * ) intended to proceed with the brokered deposit transactions despite being told by President * * * on two occasions that * * * Bank could not accept the brokered deposits. (* * * Tr. 237-238)
   169. After taking a poll of * * * Bank board members, President * * * notified the FDIC and the * * * Department of Financial Institutions of the brokered deposit transactions at the Bank. (* * * Tr. 238, 242)
{{4-1-90 p.A-1030}}
   170. The Board of Directors of * * * Bank did not grant prior approval to the brokered deposit transactions. (* * * Tr. 148-149; * * * Tr. 240)
   171. Prior to entering into a commitment to accept the deposits, the * * * Bank did not obtain financial information concerning the intended borrowers or the company that was to issue the annuity contract and was unaware of the terms of the policy. (* * * Tr. 239)
   172. The brokered deposit transactions caused the * * * Bank to incur potential liability resulting from the interest on the deposits credited to the Bank and any fees or commissions due to the person arranging the deposits. (* * * Tr. 150)
   173. The brokered deposit transactions were to be structured in such a way as to expose * * * Bank to liquidity, interest rate and collectibility risks. (* * * Tr. 150)
   174. The brokered deposit transactions were contrary to the investment policy of the * * * Bank which was effective July, 1984, and which prohibited brokered deposits. (* * * Tr. 236)
   175. At the * * * meeting, Respondent * * * admitted that he had not considered the interest rate risk to * * * Bank involved in the brokered funds transactions. (* * * Tr. 386-387)
   176. Field Office Supervisor * * * determined that Respondent * * * was responsible for the brokered deposit transactions at * * * Bank. (* * * Tr. 150, 290)
   177. Respondent * * * admitted to President * * * that he had arranged for the brokered deposits to be transmitted to * * * Bank. (* * * Tr. 237)
   178. Respondent * * * was acting on behalf on * * * Bank when he arranged the brokered deposit transactions. (* * * Tr. 240; * * * Tr. 290)
   179. After the FDIC became aware of the brokered deposit transactions, it issued a Temporary Cease and Desist Order on October 15, 1984, pursuant to section 8(c) of the Federal Deposit Insurance Act, which, in part, terminated the further acceptance of brokered deposits by * * * Bank. (FDIC Ex. 31)
   180. Subsequent to the issuance of the Temporary Cease and Desist Order, the deposits were returned by the * * * Bank and the loans were not funded. (* * * Tr. 243)

G. DIDC TRANSACTION—* * * COUNTY BANK

   181. On May 4, 1984, * * * Bank issued to Respondent * * * as President of * * * two five-year certificates of deposit in the amounts of $400,000 and $500,000 at interest rates of 11.5%. (Admitted in Answer) (FDIC Exs. 59 and 60)
   182. On May 4, 1984, the * * * Bank extended $900,000 in credit to * * * using the $900,000 in certificates of deposits as collateral. (Admitted in Answer)
   183. On September 18, 1984, the extension of credit by * * * Bank in the amount of $900,000 was paid and the certificates of deposit issued by * * * Bank in the amounts of $400,000 and $500,000 were paid. (FDIC Exs. 59 and 60; * * * Tr. 204-205)
   184. The Board of Directors of * * * Bank did not learn of the termination of the transaction until after September 18, 1984. (* * * Tr. 364)
   185. The certificates of deposit were paid prior to maturity without the assessment of a penalty equal to at least three months interest on the deposits. (* * * Tr. 87; * * * Tr. 206)
   186. The approximate amount of a threemonth interest penalty would be $14,375 for the $500,000 certificate and $11,500 for the $400,000 certificate. (FDIC Ex. 77; * * * Tr. 206)
   187. The amount of income lost to * * * Bank by this failure to assess early withdrawal penalties was substantial in relations to the poor earnings position of the bank. (* * * Tr. 206)
   188. Interest due on the loan and interest payable on the certificates of deposit were assessed through August 3, 1984. (* * * Tr. 206)
   189. For the period August 4, 1984 to September 18, 1984, the * * * Bank lost interest income on the loan in the approximate amount of $1,205. (FDIC Ex. 77; * * * Tr. 206-207)
   190. Respondent * * * authorized the withdrawal without invoking the early withdrawal penalty at the time the loan and deposit transactions were reversed. (* * * Tr. 87)
   191. Respondent * * * was present at a meeting at the * * * Regional Office on September 24, 1984, at which time he was aware of the requirement of the Depository {{4-1-90 p.A-1031}}Institutions Deregulation Committee to assess an early withdrawal penalty on the certificate of deposit transactions. (* * * Tr. 244-245)
   192. * * * is an interest of Respondent * * * who served as its President and as a director at the time of the * * * transactions. (FDIC Ex. 61; * * * Tr. 205).
   193. Respondent * * * was authorized to borrow funds on behalf of * * * (FDIC Ex. 61)
   194. The Board of Directors of * * * Bank determined after the date of the transaction that Respondent * * * was responsible for the payment of the certificates without the assessment of a penalty. (FDIC Ex. 77; * * * Tr. 87)
   195. Respondent * * * did not reimburse * * * Bank for its loss resulting from not receiving an early withdrawal penalty. (FDIC Ex. 77; * * * Tr. 96)
   196. The Board of Directors of * * * Bank determined that Respondent * * * should be subject to a fidelity bond claim for his role in this transaction. (FDIC Ex. 77; * * * Tr. 103)

H. DIDC TRANSACTION—* * * BANK

   197. On May 4, 1984 * * * Bank issued to Respondent * * * as President of * * * two five-year certificates of deposit, each in the amount of $500,000 at an 11.5% rate of interest. (Admitted in Answer) (FDIC Ex. 63)
   198. On May 4, 1984, the * * * Bank extended $1,000,000 in credit to * * * using the $1,000,000 in certificates of deposit as collateral. (Admitted in Answer)
   199. The * * * Bank received a fee of $100,000 from Respondent * * * in connection with the loan. (Admitted in Answer) (* * * Tr. 208
   200. On or about September 16, 1984, the extension of credit by * * * Bank was paid and the certificates of deposit issued by * * * Bank were paid. (FDIC Exs. 63 and 66; * * * Tr. 209).
   201. The certificates of deposit were paid prior to maturity without the assessment of a penalty equal to at least three months interest on the deposit. (* * * Tr. 214; * * * Tr. 245)
   202. The certificate of deposit contracts themselves provided for a six-month interest rate penalty in the event of payment prior to maturity. (FDIC Ex. 69; * * * Tr. 215)
   203. On or about September 18, 1984, the * * * Bank rebated approximately $90,000 from the loan origination fee of $100,000. (FDIC Ex. 62; * * * Tr. 216; * * * Tr. 245)
   204. A six-month interest penalty on the certificates of deposits equals approximately $58,000. A three-month interest penalty on the deposits equals approximately $29,000. (* * * Tr. 214-216)
   205. Substantial income was lost to the * * * Bank by the rebate of the loan origination fee and failure to assess early withdrawal penalties. (* * * Tr. 218)
   206. The Bank's Board of Directors did not approve the rebate of the loan origination fee. (* * * Tr. 217)
   207. Field Office Supervisor * * *, based on his examination of * * * Bank documents and discussion with bank management, determined that Respondent * * * was responsible for the rebate of the loan origination fee and the non-assessment of an early withdrawal penalty. (* * * Tr. 219)
   208. The Board of Directors of * * * Bank notified Respondent * * * of the need to receive the payment of the refunded loan origination fee and the interest penalty in the amount of three months interest. (FDIC Ex. 86; * * * Tr. 246)
   209. The interest penalty and the loan origination fee have not been reimbursed to * * * Bank. (* * * Tr. 218; * * * Tr. 245)
   210. The rebate of the loan origination fee was traced by Field Office Supervisor * * *. (* * * Tr. 218)
   211. The proceeds from the loan origination fee were traced to * * *, the seller of the stock of * * * Bank to * * *. (FDIC Ex. 65; * * * Tr. 218–219)
   212. The rebate of the loan origination fee was improper because the loan instruments did not provide for the return of the origination fee nor did the Board of Directors approve it. (* * * Tr. 217).

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