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   [5089] FDIC Docket No. FDIC-85-303k (5-7-87)

   Civil money penalties were assessed against bank directors for violating a cease and desist order by failing to increase the bank's capital within a reasonable time, failing to file amendments to Call Reports, and failing to submit written progress reports in accordance with the order.

   [.1] Cease and Desist Orders—Penalty for Violation of
   Good faith efforts to comply with a cease and desist order are not a defense to the violation of the cease and desist order, but relate only to the appropriateness of the amount of the civil money penalty.

   [.2] Civil Money Penalties—Amount of Penalty—Good Faith Compliance
   In determining the appropriate amount of any civil money penalty, the FDIC must consider the gravity of the violations and the good faith, or lack thereof, of a bank director.


* Failure of any party to file exceptions to this Recommended Decision and Order, pursuant to Section 308.14 of FDIC Rules and Regulations, within 20 days after service, shall be a waiver of objection thereto.
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   [.3] Directors—Duties and Responsibilities—Compliance with Cease and Desist Order
   Bank directors are accountable for a bank's failure to comply with a cease and desist order, when the directors knew or should have known that the bank was violating the cease and desist order and failed to take corrective action. Bank directors cannot be insulated from liability, including liability for civil money penalties, by simply directing the bank's management to comply with the provisions of a cease and desist order.

   [.4] Capital—Additional Capital Ordered
   There are at least four available ways to raise additional capital: (1) the sale of controlling interest to an outside investor willing to inject additional capital; (2) a public sale of new shares in the bank; (3) the sale of new shares to current shareholders; and (4) the collection/recovery of charged-off loans, insurance claims, etc.

   [.5] Civil Money Penalties—Factors Determining Liability—Violation of Cease and Desist Order
   Civil money penalties are appropriate when bank directors fail to raise additional capital in a reasonably expeditious or timely way.

In the Matter of * * * , and,
individually, and as officers and/or
directors of * * * BANK (INSURED
STATE NONMEMBER BANK)

DECISION FDIC-85-303k

STATEMENT OF THE CASE1

   In this proceeding the Federal Deposit Insurance Corporation ("FDIC") seeks civil money penalties ("CMPs") under section 8(i)(2) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(i)(2), against the above-captioned officers and/or directors ("Respondents") of * * * Bank, * * * (the "Bank"). The basis for this action is Respondents' alleged violations of three paragraphs of the Cease-and-Desist Order consented to by the Bank's board of directors and issued on March 2, 1984, by the FDIC ("C&D Order"). Based upon those alleged violations, a Notice of Assessment of Civil Money Penalties, Findings of Fact and Conclusions of Law, Order to Pay and Notice of Hearing ("Notice") was issued by the FDIC on October 16, 1985.
   At the January 31, 1986, pretrial conference, the parties and the Administrative Law Judge ("ALJ") agreed that both the direct testimony and documentary evidence would be submitted in written form and the parties would then be permitted to conduct oral cross-examination. [Transcript of the January 31, 1986, Prehearing Conference at 31.] On March 17, 1986, after both parties had filed written direct testimony and documentary evidence, the FDIC moved for summary judgment. On March 28, 1986, the ALJ denied the FDIC's motion for summary judgment but canceled the remainder of the hearing, including all cross-examination. The ALJ issued his Recommended Decision and Proposed Order (the "Recommended Decision") on April 21, 1986, finding that Respondents violated paragraphs 1(a), 6(c) and 11 of the C&D Order and recommending entry of an order assessing civil money penalties against Respondents in the amounts specified in the Notice. The FDIC enforcement counsel filed no exceptions to the Recommended Decision, but did raise objections to the ALJ's exclusion of certain evidence. Respondents filed exceptions, the most significant being that cross-examination was not allowed.
   On August 12, 1986, the record was reopened and the proceeding was remanded to the ALJ pursuant to the Decision and Order to Reopen and Remand issued by the Board of Directors (the "Board") of the FDIC ("Board's Decision"). The Board's Decision required that the hearing be "reopened at the point at which it was sus-


1 Citations to the record herein shall be as follows:
—to the Recommended Decision: "R.D. at ________";
—to the Recommended Decision on Remand: "R.D.R. at ________";
—to the Board's Decision: "Brd. Dec. at ________";
—to the Stipulations: "Stip. ________";
—to the cross examination: Tr. [witness name], p.________".
{{4-1-90 p.A-1076}}pended for the limited purpose of affording the parties an opportunity for cross-examination on the issue of the amount of the penalties" (Brd. Dec. at 3). Pursuant to the Board's Decision, the FDIC made a motion, dated September 11, 1986, for cross-examination of certain witnesses. Respondents made a motion, dated September 10, 1986, for cross-examination of certain witnesses and for additional direct testimony. By Order dated September 17, 1986, the ALJ granted the motions of the FDIC and Respondents for cross-examination of certain witnesses3 but denied Respondents' motion for additional direct testimony. In accordance with this Order and with the Board's Decision, cross-examination of several witnesses was conducted by the parties on October 7, 1986. The FDIC filed a Brief on December 5, 1986, and Respondents filed a Reply Brief on December 23, 1986.
   The ALJ issued his Recommended Decision and Proposed Order on Remand (the "Recommended Decision on Remand") on January 13, 1987, recommending that an order be entered assessing civil money penalties against Respondents in the amounts set forth in the Notice, that is, $21,000 against * * *; $4,000 each against * * *, * * * , * * * , and * * *; and $2,000 each against * * * and * * *. The FDIC filed no exceptions to the Recommended Decision on Remand, but did request that the FDIC's Proposed Findings of Fact be adopted, in toto, and that one date in the Recommended Decision on Remand be corrected.4

THE DECISIONS OF THE ALJ

   In his original Recommended Decision, the ALJ stated that the Respondents' Answer to the Notice effectively admitted the alleged violations. [R.D. at 3.] Upon consideration of all of the evidence, the ALJ concluded that Respondents had violated the three relevant provisions of the C&D Order. [R.D. at 9.] The ALJ further found that "[t]he Bank's delay in raising its capital to $2,000,000 was clearly unwarranted." [R.D. at 8.] In reaching this conclusion, the ALJ discussed and found unjustified and inexcusable the time it took the Bank to execute an acceptable charter amendment to increase permissible outstanding stock. The ALJ found that this charter amendment was a vitally necessary part of the Bank's increasing its capital through the sale of new stock and that the delay was "inexcusable in light of the Bank's numerous discussions with the Regional Office and guidelines provided for its assistance." [R.D. at 7.] The ALJ also found that the Bank and its directors were put on notice by the C&D Order that if a stock offering was to be used to raise new capital, an offering circular was required to comply with federal securities laws and regulations and that the circular must contain a full description of the securities being offered, including an accurate description of the financial condition of the Bank and the circumstances giving rise to the offering, as well as any other material disclosures necessary to comply with federal securities law. [R.D. at 7.] The ALJ found that, although the C&D Order took effect on March 12, 1984, it was not until September 3, 1985, after four submissions of revised offering circulars to the FDIC, that the circular was acceptable to the FDIC. The ALJ further found that the Respondents offered "no legitimate explanation for these submissions. Virtually no mention is made in the written direct testimony submitted by the [Respondents] as to why [they] had such problems in filing an acceptable offering circular, nor do the minutes of the twenty Board meetings... contain sufficient justification." [R.D. at 7.]
   In his Recommended Decision on Remand, the ALJ considered the Respondent's evidence in mitigation —primarily in terms of their good faith efforts to increase the Bank's capital. The ALJ stated that the Respondents' evidence with respect to their efforts to raise capital included numerous examples of the delays which resulted in the Bank's inability to reach the $2,000,000 capital and reserve level by the required September 15, 1984 deadline. The ALJ concluded that the chronology of events offered by the Respondents "raises significant questions as to [their] good faith." [R.D.R. at 7.] He went on to conclude that the unwarranted delays in preparing the stock offering circular together with Respondents' failure to file the re-


3 Respondents' motion for cross-examination of certain witnesses was granted on the condition that adequate justification for cross-examination be provided in the proposed schedule of witnesses.

4 Upon review of the record, the Board has determined that FDIC enforcement counsel was correct in asserting that the date for compliance with the C&DOrder was September 15, 1984 (see Exh. G&B-1), rather than September 15, 1985, the date indicated in the ALJ's Findings of Fact number 10 (R.D.R. at 5).
{{4-1-90 p.A-1077}}quired amended Call Reports and monthly progress reports "preclude any finding that would mitigate against the full amount of the civil penalties sought on the basis of Respondents' good faith." [R.D.R. at 7.] The ALJ, therefore, recommended assessment of penalties as proposed in the Notice —i.e., * * *, $21,000; Messrs. * * *, * * * , * * * and * * * , $4,000; and Messrs. * * * and * * *, $2,000.

RESPONDENTS' EXCEPTIONS

   Respondents filed numerous exceptions, to the Recommended Decision and to the Recommended Decision on Remand, which are essentially an attempt by them to reargue their case by incorporating by reference several of their proposed findings of fact and by restating their version of the facts. Respondents' proposed findings of fact and other factual assertions, however, do not contain citations to the record. Upon review of those exceptions, the Board has concluded that many are not relevant or material to allegations in this proceeding, while those that are relevant, are not supported by the evidence in the record. In addition, several of the exceptions appear to argue the weight to be afforded certain of the evidence. Moreover, two of the exceptions relate to the appropriateness of the amounts of the civil money penalties with respect to the criteria set forth in section 8(i) of the Act and Interagency Policy Regarding the Assessment of Civil Money Penalties but each fails to state a factual or legal basis for such exception. Finally, Respondents complain of denial of procedural due process because the procedure used for the presentation of the direct cases was written testimony and because the ALJ would not later modify this procedure to permit a combination of written and oral testimony. However, the transcript of the prehearing conference of January 31, 1986, establishes that their counsel agreed to this procedure. Once Respondents, through their counsel, agreed to this procedure, they cannot later complain when they are held to that agreement.

THE VIOLATIONS OF THE CEASE
AND DESIST ORDER

1. The Failure to Raise Capital

   [.1] The fact that Respondents failed to raise the Bank's capital and reserves to at least $2,000,000 by the deadline specified in the C&D Order is an uncontested fact. Respondents have stipulated that the Bank's total capital and reserves was $1,012,000 on September 15, 1984, the deadline specified in the C&D Order —a $988,000 shortfall. [Stip. 16.] While the Respondents argued that they made good faith efforts to comply and did submit some evidence of their efforts to raise the Bank's capital to the required level, the Board concludes that under the statute such efforts are not a defense to the violation of the C&D Order but relate only to the appropriateness of the amount of the penalty. See 12 U.S.C. § 1818(i)(2). Cf. Fitzpatrick v. FDIC, 765 F.2d 569, 578 (6th Cir. 1985). In any event as discussed below, the record discloses lengthy delays on the part of Respondents (as set forth in the Chronology of Key Events, attached hereto as Appendix A, and the Board's Findings of Fact, attached hereto as Appendix B), which ultimately caused the Bank to violate the capital requirement of the C&D Order.

2. Failure to File Amendments to Call Reports

   The ALJ also found that the Bank had failed to file amendments to its Call Reports within 30 days after the effective date of the C&D Order for each quarterly period subsequent to June 11, 1983, as required by paragraph 6(c) of the C&D Order. Respondents presented no evidence whatsoever to suggest that the Bank did file the amended Call Reports as required by paragraph 6(c) of the C&D Order. Indeed, in the Stipulation of February 11, 1986, jointly submitted by the parties to this proceeding, it is conceded that the Bank did not file the amended Call Reports as required. [Stip. 18 & 19.]

3. Failure to Submit Written Progress Reports

   Finally, the ALJ determined that the Bank had failed to submit written progress reports on a monthly basis to the Regional Director detailing the actions taken to effect compliance with the C&D Order, as required by paragraph 11 of the C&D Order. While Respondents did present evidence that some progress reports were filed with the Regional Director, such reports were not filed on a monthly basis beginning on May 31, 1984, as required by paragraph 11 of the C&D Order. The evidence establishes {{4-1-90 p.A-1078}}that as of October 16, 1985 (the date the Notice was issued), only twelve out of a total of seventeen monthly reports had been filed, and of those twelve, three were found to be inadequate. Thus, of the seventeen required reports, almost half were either not filed, or if filed, were inadequate. Finally, it should be noted that Respondents have admitted in their Answer that "for a couple of months" the progress reports were not filed. [Answer, Para. 3(c).]

4. Conclusions

   The ALJ found, inter alia, that on November 18, 1983, the Bank entered into a consent agreement whereby it agreed to an Order to Cease-and-Desist [R.D. at 9]; on March 2, 1984, the FDIC issued the Order to Cease and Desist which became effective on March 12, 1984; by September 15, 1984, the date by which compliance with the capital requirement of the C&D Order was required, Respondents had violated paragraphs 1(a), 6(c) and 11 of the Order. [R.D. at 9.] For the reasons set forth above and on the basis of the Board's Findings of Fact attached hereto as Appendix B, the Board concludes that the ALJ's findings are supported by the record and finds that the Respondents have violated paragraphs 1(a), 6(c) and 11 of the C&D Order.

THE APPROPRIATENESS OF THE PENALTIES

   [.2] In determining the appropriate amount of any CMPs, the Board is required to consider, inter alia, the gravity of the violations and Respondents' good faith, or lack thereof. The ALJ's Recommended Decision on Remand considers those factors. In finding that the assessed penalties were appropriate, the ALJ considered various factors including (1) the delays which resulted in the Bank's inability to meet the $2,000,000 capital requirement of the C&D Order; (2) the failure to file the required amendments to the Call Reports and the monthly progress reports; (3) the fact that the assessed penalties are considerably below the maximum authorized by the Act for such violations;5 and (4) the gravity of the violations, including the importance of the capital requirement. In finding that the amounts of the assessed penalties are appropriate, the ALJ also considered the difference in the culpability of the Respondents and in their financial resources. The ALJ concluded that Respondent * * * was primarily responsible for insuring full compliance with the C&D Order and was therefore the most culpable. He was, therefore, assessed a $21,000 penalty. The ALJ concluded that Respondents * * * and * * * were less responsible for the violations of the C&D Order than the other directors. They had joined the Bank's board of directors after the effective date of the C&D Order and subsequent to the expiration of the dates for submission of the Call Reports and monthly progress reports. Thus their assessed penalties ($2,000 each) were less than the penalties of the other directors ($4,000 each).
   The ALJ also considered the financial resources of the Respondents. Only Respondent * * * provided any information about his financial status and no Respondent argued his inability to pay or a lack of financial resources at the hearing or in their written testimony or briefs.6
   While the record in this proceeding is less than a model of clarity, the evidence in the record indicates that Respondents failed to see that all reasonable and necessary steps were taken in a timely manner to try to increase the Bank's capital and reserves. This failure raises questions as to Respondents' "good faith" efforts to comply with the C&D Order. Preparation of the Bank's public stock offering circular was not begun or completed in a timely manner. In the Board's view, Respondents' seven months' delay after the final deadline for increasing the Bank's capital was not the exercise of "good faith". Moreover, Respondents certainly could have acted more promptly to correct the deficiencies in the offering circular and to resubmit the revised circular for review. The amount of time and the number of revised drafts necessary to achieve an adequate offering circular does seem to have been unnecessarily long. The only explanation alluded to by Respondents is that they were inexperienced in the preparation of such documents. [Cf. Tr. * * * , pp. 68–69 and 79–82] The Board does not find such an explanation to be satisfactory. Expert assistance was always available to Respon-


5 The statute, 12 U.S.C. § 1818(i), provides that a civil money penalty of up to $1,000 per day may be assessed against a bank official for each violation of a C&D Order.

6 All Respondents were invited to submit information regarding their financial resources by the "10 day" letter of February 22, 1985. Only Respondent * * * , however, provided such information.
{{4-1-90 p.A-1079}}dents through outside consultants or lawyers had they chosen to utilize such resources. Also, this explanation clearly does not excuse the Bank's failure to amend its Call Reports or to file the required monthly progress reports.
   Respondents provide no explanation or excuse for the failure to file amended Call Reports or the monthly progress reports. Respondents argue, however, that Mr. * * * was prepared to contribute the $600,000 in capital as early as June, 1984. The record indicates that in June, 1984, Respondent * * * told the FDIC that he had "sufficient funds on deposit in [his] accounts at Broadway Bank to purchase [the] stock offering." [* * * , Exh. B-4, para. 17; * * * , Exh. B-7, paras. 7–8.] Respondents also point to the fact that there was, albeit a year late, a substantial contribution to capital in March, 1985. Respondents further argue that Respondent * * * was assured by the FDIC in June, 1984, that substantial compliance, even if late, would satisfy the requirements of the Order. However, there is no evidence in the record, even in the testimony of the Respondents themselves, that the FDIC had given any such assurance. The only permissible conclusion that can be drawn is that Respondent * * * had the apparent ability to contribute the $600,000 in June, 1984 (three months before the deadline), but failed to take any steps to make that injection until March, 1985. The late contribution of a substantial amount of new capital to the Bank does not excuse the violation of the C&D Order. However, the fact that Respondent * * * ultimately made the capital contribution is an important factor in determining the appropriate penalty that he should be assessed. Accordingly, since Respondent * * * personally contributed substantial new capital to the Bank, his penalty should be in line with those of the other Respondents.

   [.3] In the Board's view, the Respondents should be held accountable for the Bank's failure to comply with the C&D Order. All of the Respondents knew or should have known that the Bank was violating the C&D Order, and failed to take corrective action. In addition, the record shows that Respondents were specifically on notice that they, as directors, were required to take "affirmative action" to meet the requirements of the C&D Order. [Exh. B-1; App. 5 to Exh. G-4.] The law is clear that bank directors cannot be insulated from liability, including liability for CMPs, by simply directing the Bank's management to comply with the provisions of the C&D Order. See Fitzpatrick, 765 F.2d at 577.
   The C&D Order itself states that its provisions are binding "upon the Bank, its directors, officers, agents, employees." [Exh. B-1, penultimate paragraph.] Moreover, as early as January, 1985, the Respondents were put on notice that they could be assessed CMPs for violations of the C&D Order. The failure by the Respondents to take reasonable steps to comply with the C&D Order, to which they had agreed, in a timely manner cannot be excused or condoned. Bank directors have a responsibility to provide adequate oversight over management to ensure that the bank complies with applicable laws, regulations and orders. Directors who fail in this duty will be subject to the applicable legal penalties.

   [.4-.5] The C&D Order does not require nor does this Board imply that the Respondents are required to use their own funds to increase the Bank's capital. However, Respondents are required to make timely efforts in good faith to raise additional capital by whatever means may be available to them. There are at least four available ways of which the Board is aware that could be utilized by most banks: 1) the sale of controlling interest to an outside investor willing to inject additional capital; 2) a public sale of new shares in the Bank; 3) the sale of new shares to current shareholders; and 4) the collection/recovery of charged-off loans, insurance claims, etc. While Respondents were exploring several of these options, they failed to do so in a reasonably expeditious or timely way. Consequently, the Board concludes that CMPs are appropriate in this case. In determining the amount of the penalty, the Board considers more than just whether a violation occurred. In view of the substantial capital contribution that did occur and the fact that the record seems to indicate the Bank's overall financial condition was improving during the course of this proceeding, the Board finds that a lesser penalty than that recommended by the ALJ is appropriate.

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CONCLUSION

   Upon review of the entire record in this proceeding and for the reasons set forth herein, the Board finds that Respondents violated paragraphs 1(a), 6(c), and 11 of the C&D Order. The Board, therefore, adopts and incorporates by reference the Findings of Fact set forth in Appendix B. The Board further finds that the proposed civil money penalties assessed against Respondents are somewhat high considering all of the circumstances of this case. The Board finds that more appropriate penalties in this case are $2,000 each for Messrs. * * *, * * *, * * * , * * * , and * * *; and $1,000 each for Messrs. * * * and * * *. The Board, therefore, adopts and issues the accompanying Order to Pay Civil Money Penalties.
   By direction of the Board of Directors.
   Dated at Washington, D.C.,, this 7th day of May, 1987.
/s/ Margaret M. Olsen
Deputy Executive Secretary

APPENDIX A

CHRONOLOGY OF KEY EVENTS

10/6/83 - Letter from state banking authority to Respondents explaining procedure for amending Bank's charter & enclosing forms
11/18/83 - Bank stipulated to C&D Order
3/2/84 - FDIC issuedC&D Order
3/12/84 - Effective date of C&D Order
3/?/84 - Bank submitted Charter Amendment forms to state banking authority
3/15/84 - State banking authority returned charter amendment forms because they did not sufficiently describe the contemplated transaction
4/15/84 - Deadline for Compliance with required filing of Amended Call Reports
6/84 - Respondent * * * indicated to FDIC Regional Office that he had $600,000 available to purchase Bank stock.
14 mos. 6 mos. 9/15/84 - Deadline for Compliance with Capital injection requirement of C&D Order
14 mos. 6 mos. 1/11/85 - Respondents were informed by letter that the * * * Regional Office was considering recommending CMPs
14 mos. 6 mos. 2/22/85 - FDIC issued "10 day" letter
14 mos. 6 mos. 3/23/85 - Respondent * * * established a $600,000 escrow account to be used to purchase stock
14 mos. 4/30/85 - FDIC received first draft of Bank's offering circular

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14 mos. 9/3/85 - FDIC received fifth and final draft of Bank's offering circular (fourth revised offering circular).
14 mos. 10/14/85 - Bank submitted a charter amendment to state banking authority which pertained to the stock offering described in the Bank's final offering circular
14 mos. 12/2/85 - FDIC received the Bank's definitive offering circular

APPENDIX B

FINDINGS OF FACT

The Cease and Desist Order

   1. On or about November 18, 1983, the board of directors of * * * Bank, * * * ("Bank"), stipulated to the issuance of a cease and desist order ("C&D Order") by the Federal Deposit Insurance Corporation ("FDIC"). [Stip. 11.]
   2. The C&D Order was issued by the FDIC on March 2, 1984 and became effective on March 12, 1984. [Stip. 7 & 8.]
   3. While the stipulation to the C&D Order was signed by * * * , * * * , * * * , * * * , and * * * (comprising the board of directors of the Bank on November 18, 1983), the C&D Order is effective as to all subsequent directors of the Bank until such time as the C&D Order is revoked, modified, or set aside by the FDIC. [Stip. 12 & 13.]
   4. * * * and * * * are and were, at all times pertinent to this proceeding, directors and/or officers of the Bank; * * * has been a director of the Bank since December 14, 1983; * * * and * * * were elected to the Bank's board of directors in July, 1984; * * * was elected to the Bank's board of directors in December, 1983, and resigned on March 20, 1985. [Stip. 3, 4, and 5.]
   5. Paragraph 1(a), page 3, of the C&D Order requires the Bank to take all steps necessary to increase the total capital and reserves to not less than $2,000,000. [Stip. 14.]
   6. The date required for compliance with paragraph 1(a) of the C&D Order was September 15, 1984. [Stip. 15.]
   7. Paragraph 6(c) of the C&D Order requires the Bank to amend and refile Reports of Condition and Income ("Call Reports") for each quarterly period subsequent to June 11, 1983, if such Call Reports do not reflect a provision for loan losses and a loan valuation reserve which, at a minimum, incorporate adjustments required by paragraph 6(a) and 6(b) of the C&D Order. [Stip. 17.]
   8. The date required for compliance with paragraph 6(c) of the C&D Order was April 15, 1984. [Stip. 18.]
   9. Paragraph 11 of the C&D Order requires the Bank to furnish written progress reports to the Regional Director of the * * * Regional Office of the FDIC detailing the form and manner and any actions taken to secure compliance with the C&D Order and the result thereof. [Stip. 23.]

Violations of the Cease and Desist Order

A. Failure to Meet the Capital
Requirement - Paragraph 1(a)

   10. As of September 15, 1984, the Bank's total capital and reserves equaled $1,012,000. [Stip. 16.]
B. Failure to File Amended Call Reports Paragraph 6(c)

   11. The Bank's Call Reports for June 30, 1983, September 30, 1983, and December 31, 1983, did not reflect a provision for a loan valuation reserve adequate for the condition of the Bank. [App. 3 to Exh. G-4, at p. 6.]
   12. As of April 15, 1984, the Bank had not amended and refiled its Call Reports for each quarterly period subsequent to June 11, 1983. [Stip. 19.]

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C. Failure to File Monthly Progress
Reports - Paragraph 11

   13. The total number of written progress reports due from the Bank to the FDIC during the period from May 31, 1984 through January, 1986, inclusive, was twenty-one. Thirteen reports were filed during the time period, nine of us which were adequate to comply with the C&D Order. Eight of the twenty-one reports due were never filed by the Bank and four reports were inadequate and did not comply with the C&D Order. [* * * , Exh. G-4, para. 35–37; App. 7 to Exh. G-4.]
   14. The total number of written progress reports due from the Bank to the FDIC during the period from May 31, 1984 through October 16, 1985 (the date the FDIC Board of Review issued the Notice), was seventeen. Only twelve of these required reports were filed. Five of the seventeen reports due were never filed by the Bank and three of the filed reports were inadequate and did not comply with the C&D Order. [See App. 7 to Exh G-4.]

Appropriateness of the Civil Money Penalties

A. Efforts to Raise Capital

a. Sale of Stock to Outside Investors

   15. A bank can be recapitalized through the sale of a controlling interest to outside investors who can contribute additional capital to the bank. [See Tr. * * * , pp. 17–19; see also, * * * , Exh. B-4, paras. 9–25.]
   16. During the period of November, 1983 through January, 1985, the principal shareholder of the Bank, Respondent * * * , had no intention of relinquishing his majority control in connection with any sale of Bank stock. [* * *, Exh. B-5, para. 3; Tr. * * * p. 97.]
   17. Attempts were made during 1983 to sell Bank stock to several outside investors. [* * *, Exh. B-4, pp. 2–3, 3–4, 5–6; * * *, Exh. B-5, pp. 1–2.]
   18. These attempts did not succeed primarily because the price of the stock was considered to be too high and none of the potential investors was willing to buy a minority interest in the Bank. [* * *, Exh. B-5, p. 2; Tr. * * * , p. 15; Tr. * * * , p. 96–100.]

b. Sale of Stock of Existing Shareholders

   19. Respondent * * * had on deposit at the Bank in July, 1984, funds sufficient to purchase 60,000 new shares of stock at $10.00 per share. [* * *, Exh. B-4, p.4; * * * , Exh. B-5, p. 2; Tr. * * * , p. 106.]
   20. Respondent * * * informed the * * * Commissioner of Banks and Trust Companies in August, 1984, that he intended to purchase the new shares of the Bank's stock for $600,000. [* * *, Exh. B-4, p. 4.]
   21. At a July 17, 1984 meeting with the FDIC, Respondent * * * verbally requested a six-month extension for the capital injection from the date originally required by the Order, i.e., six months from September 15, 1984. Respondent * * * was told that such a request would have to be submitted in writing to the FDIC in order to be considered. The Bank never filed a written request with the FDIC for an extension of time to comply, [* * *, Exh. G-4, para. 21; App. 4 to Exh. G-4.]
   22. A $600,000 escrow account to be used to purchase Bank stock was not established by Respondent * * * until March 23, 1985. This was approximately one month after the Respondents were notified of the FDIC * * * Regional Office's intention to recommend assessment of civil money penalties for violations of the C&D Order. [* * *, Exh. G-4, paras. 28 & 30; App. 1 to Exh. G-4.]

C. Public Offering of Stock

   23. A perquisite to any public offering of stock was the preparation of an offering circular by the Bank and receipt of FDIC approval for the circular. [Exh. B-1, para. 1(b).]
   24. The Bank first submitted a draft offering circular to the FDIC's Registration and Disclosure Unit for review on April 30, 1985. [* * *, Exh. G-4, para. 7; App. 2 to Exh. G-6.]
   25. It was not until September 3, 1985, that the FDIC received an acceptable offering circular. On September 5, 1985, the Bank was informed by Mr. * * * that the FDIC had no objection to the distribution of the offering circular. Mr. * * * also requested a definitive copy of the offering circular as soon as it was printed. This conversation was confirmed in a letter of September 12, 1985, from Associate Direc- {{4-1-90 p.A-1083}}tor * * *. [* * *, Exh. G-6, paras. 26 & 27; App. 5 to Exh. G-6.]
   26. On December 2, 1985, the FDIC's Registration and Disclosure Unit received the Bank's definitive offering circular. [* * *, Exh. G-6, para. 29.]
   27. Prior to approval of the offering circular by the FDIC, no public offering of the Bank's stock could be made. [Exh. B-1, para. 1(b).]
   28. No public offering of the Bank's stock was made during 1983, 1984 or 1985. [cf. Answer, para. 3(a), pp. 2–3.]

B. Good Faith of Respondents

a. Delays in Amending the Bank's Charter

   29. One of the first things that the Bank was required to do in order to sell additional shares of its common stock was to increase the number of shares authorized by its charter. [* * *, Exh. G-5, para. 2.]
   30. On October 6, 1983, * * *, Executive Assistant of the Office of the * * * Commissioner of Banks and Trust Companies, sent a letter to Respondent * * * , vice president and cashier of the Bank, explaining the procedures for amending the charter of the Bank to increase the number of authorized shares and enclosing forms to be filed with the * * * Commissioner's Office. [* * *, Exh. G-6, para. 5; App. 1 to Exh. G-6.]
   31. On December 19, 1983, at a regular meeting of the stockholders of the Bank, the Bank increased the number of authorized common stock shares from 80,000 to 140,000 shares. [* * *, Exh. G-4, para. 17; Exh. B-36, p. 6.]
   32. In March, 1984, the Bank submitted for the first time a charter amendment for review by the * * * Commissioner's Office, calling for the issuance of 60,000 shares of Bank stock at a price of $20.00 per share and a par value of $10.00. [* * *, Exh. G-5, para. 6.]
   33. On March 15, 1984, the charter amendment application filed by the Bank was returned by the * * * Commissioner's Office because it was improperly completed in that it did not sufficiently describe the transaction contemplated. [* * *, Exh. G-5, para. 6.]
   34. In August, 1984, the Bank proposed to the * * * Commissioner's Office to sell the stock at $10.00 a share with the par value of $10.00 a share and to book the proceeds entirely into the capital stock account. [* * *, Exh. G-4, para. 23; * * *, Exh. G-5, paras. 8 & 9; See also * * * , Exh. B-4, para. 18.]
   35. In September, 1984, the * * * Commissioner's Office informed the Bank that it rejected the plan for the disbursement of the stock proceeds into the capital account. [* * *, Exh. G-4, para. 24; * * *, Exh. B-4, para. 20.]
   36. The Bank's board of directors, on February 25, 1985, accepted the * * * Commissioner's required distribution for the proceeds of the new stock issue and scheduled a meeting of the Bank's shareholders for March 20, 1985. [* * *, Exh. G-5, para. 10.]
   37. On October 14, 1985, the Bank submitted to the * * * Commissioner's Office a charter amendment pertaining to the stock offering described in the Bank's final offering circular. [* * *, Exh. G-5, para. 11.]

b. Delay in Submitting Offering Circular
to the FDIC

   38. On April 30, 1985, the FDIC's Registration and Disclosure Unit received the first draft of the Bank's offering circular. [ * * * , Exh. G-4, para. 7; App. 2 to Exh. G-6.]
   39. On May 1, 1985, two samples of offering circulars for other banks were sent to Mr. * * * , then president and chief executive officer of the Bank, by the FDIC's Registration and Disclosure Unit. [* * *, Exh. G-6, para. 9; App. 3 to Exh. G-6.]
   40. On May 2 and 6, 1985, telephone calls were initiated to Mr. * * * to brief him on the most significant omissions in the initial offering circular, to review the FDIC's statement of policy regarding use of offering circulars in connection with public distribution of bank securities [App. 1 to Exh. G-6], and confirm the Bank's receipt of the sample offering circulars. [* * *, Exh. G-6, paras. 10 & 11.]
   41. On June 10, 1985, the FDIC's Registration and Disclosure Unit received the first revised offering circular (the second draft) from the Bank. [* * *, Exh. G-6, para. 13.]
   42. On June 14, 1985, Mr. * * * and his supervisor, Mr. * * * , contacted Mr. {{4-1-90 p.A-1084}}* * * by telephone to inform him of numerous inadequacies in the second draft of the offering circular. [* * *, Exh. G-6, para. 14.]
   43. On July 15, 1985, the FDIC's Registration and Disclosure Unit received the Bank's second revised offering circular (the third draft). [* * *, Exh. G-6, para 15.]
   44. On July 30, 1985, Mr. * * * telephoned Mr. * * * to provide him with comments on the third draft of the Bank's offering circular. [* * *, Exh. G-6, para. 13.]
   45. On August 2, 1985, a letter was sent to Mr. * * * from * * * , Associate Director, Enforcement and Surveillance Branch, Division of Bank Supervision of the FDIC, restating the deficiencies in the Bank's third draft offering circular and requesting the submission of a corrected fourth draft by August 12, 1985. [* * *, Exh. G-6, para. 18; App. 4 to Exh. G-6.]
   46. On August 12, 1985, Mr. * * * telephoned Mr. * * * to renew the FDIC's request for a corrected offering circular, (a fourth draft of the Bank's offering circular), which he had not yet received from the Bank. [* * *, Exh. G-6, para. 19.]
   47. On August 16, 1985, Mr. * * * contacted Mr. * * * to determine why the FDIC had not received the fourth draft of the offering circular by August 15, 1985, as promised by Mr. * * * in the August 12, 1985 conversation. [* * * Exh. G-6, paras. 20 & 21.]
   48. On August 20, 1985, the FDIC's Registration and Disclosure Unit received the Bank's third revised offering circular (the fourth draft). [* * *, Exh. G-6, para. 22.]
   49. On August 22, 1985, Mr. * * * telephoned Mr. * * * to provide him with comments on the most recent draft. In that conversation, Mr. * * * agreed to contact the Registration and Disclosure Unit by telephone with the Bank's proposed revisions by August 25, 1985. [* * *, Exh. G-6, para. 23.]
   50. On August 28, 1985, Mr. * * * attempted to contact Mr. * * * by telephone. Because Mr. * * * was out of the Bank, Mr. * * * spoke with to Respondent * * * who represented that the proposed revisions to the offering circular were to be completed by August 29, 1985, and that Mr. * * * would telephone the Registration and Disclosure Unit by that date. [* * *, Exh. G-6, para. 24.]
   51. On September 3, 1985, the FDIC's Registration and Disclosure Unit received the Bank's fourth revised offering circular (fifth draft). [* * *, Exh. G-6, para. 25.]
   52. The fifth draft of the Bank's offering circular was acceptable and the Bank was notified by the FDIC by telephone on September 5, 1985, and by letter of September 12, 1985. The Bank was also requested to submit a definitive copy of the offering circular to the FDIC after it was printed. [See Finding No. 25, supra.]
   53. On November 26, 1985, Mr. * * * contacted Mr. * * * to determine when a definitive copy of the offering circular would be forwarded to the FDIC. [* * *, Exh. G-6, para. 28.]
   54. A copy of the printed offering circular was received by the FDIC on December 2, 1985. [* * *, Exh. G-6, para. 29.]

c. Delayed Capital Contribution by
Respondent
* * *

   55. A $600,000 escrow account to be used to purchase capital stock of the Bank was established by Respondent * * * on March 23, 1985, approximately six months after the deadline specified in the C&D Order. [* * *, Exh. G-4, paras. 28 & 30; App. 1 to Exh. G-4.]

ORDER TO PAY CIVIL MONEY
PENALTIES

FDIC-85-303k

   The Board of Directors of the Federal Deposit Insurance Corporation ("Board") having considered the entire record in this proceeding, including the Administrative Law Judge's ("ALJ") Recommended Decision and Proposed Order dated April 21, 1986, as well as the ALJ's Recommended Decision on Remand dated January 13, 1987, for the reasons set forth in the Board's Decision and Findings of Fact in this proceeding, finds that Respondents were in violation of paragraphs 1(a), 6(c) and 11 of the Cease-and-Desist Order issued by the Federal Deposit Insurance Corporation against * * * Bank, * * * , on March 2, 1984. The Board having further taken into consideration the appropriateness of the penalties proposed by the FDIC enforcement staff and recommended by the ALJ with respect to the financial resources and good faith of Respondents * * * , * * * , * * * , * * * , * * * , * * * and * * * , the gravity of the viola- {{4-1-90 p.A-1085}}tions, the history of previous violations, and such other matters as justice may require, finds that those penalties should be reduced in accordance with the discussion set forth in the Board's Decision in this proceeding.
   NOW, THEREFORE, IT IS HEREBY ORDERED, that a civil money penalty in the amount of $2,000 each be, and hereby is, assessed against Respondents * * *, * * * , * * * , * * * and * * *; and that a civil money penalty in the amount of $1,000 each be, and hereby is, assessed against Respondents * * * and * * * , pursuant to section 8(i)(2) of the Act (12 U.S.C. § 1818(i)(2)).
   IT IS FURTHER ORDERED, that the penalties assessed herein shall not be paid directly or indirectly by * * * Bank, * * * , but shall be paid by the abovenamed Respondents.
   This ORDER shall be effective and the penalties assessed shall be final and payable twenty (20) days from the date of issuance of this Order. This ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provision of this ORDER shall have been modified, terminated, suspended or set aside by the Federal Deposit Insurance Corporation.
   By direction of the Board.
   Dated at Washington, D.C., this 7th day of May, 1987.
/s/ Margaret M. Olsen
Deputy Executive Secretary

RECOMMENDED DECISION AND
PROPOSED ORDER ON REMAND1

Civil money penalties assessed against
Respondents individually and as Officers
and/or Directors of the * * * Bank,
* * *, for violations of Cease-and-Desist
Order.
By DANIEL J. DAVIDSON,

Administrative Law Judge.

   This proceeding was reopened pursuant to the Decision and Order to Reopen and Remand (Decision) issued by the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) on August 12, 1986. The Decision required that the hearing be reopened at the point at which it was suspended for "the limited purpose of affording the parties an opportunity for cross-examination on the issue of the amount of the penalties." Decision at 3. Therefore, it was ordered that each party be given the opportunity for cross-examination, and that evidence in mitigation be considered in the assessment of the appropriate amount of civil money penalties. Accordingly, by Order of September 2, 1986, the prehearing requirements and hearing dates previously canceled by the Order of March 28, 1986 were rescheduled.

STATEMENT OF THE CASE

   In this proceeding the FDIC seeks civil money penalties under § 8(i)(2) of the Federal Deposit Insurance Act (Act) [(12 U.S.C. § 1818(i)(2)] against the above-captioned officers and/or directors of the * * * Bank, * * * for alleged violations of certain provisions of the Cease-and-Desist Order issued by the FDIC on March 2, 1984. (This Order is attached to this Recommended Decision as Appendix A.) Based upon these alleged violations, a Notice of Assessment of Civil Money Penalties, Findings of Fact and Conclusions of Law, Order to Pay, and Notice of Hearing (hereinafter referred to as "Notice of Assessment" and attached to this Recommended Decision as Appendix B) was issued October 16, 1985. Respondents' answer was not timely filed and failed to specifically deny any of the allegations contained in the Notice of Assessment. At the Prehearing Conference held on January 31, 1986, in * * * , Respondents' late-filed Answer was nonetheless accepted on the condition that specific evidence refuting the allegations would be submitted through direct written testimony or documentary evidence.2 This procedure was adopted despite the absence of any material issues because of Respondents' claim (raised for the first time at the prehearing conference) that it was impossible for them to comply with the Cease and Desist Order.


1 Pursuant to § 308.14 (12 C.F.R. § 308.14), within 20 days after service of the recommended decision, findings, conclusions, and proposed order of the administrative law judge, a party may file with the Executive Secretary written exceptions thereto. A supporting brief may be filed pursuant to § 308.15 (12 C.F.R. § 305.15). After expiration of the time for filing exceptions, the Executive Secretary shall notify the parties that the case has been submitted to the Board of Directors for final decision. 12 C.F.R. 308.16.

2 It was decided at the Prehearing Conference that both the direct testimony and documentary evidence would be submitted in written form, with the FDIC presenting its case first.
{{4-1-90 p.A-1086}}
   On March 17, 1986, after both parties filed written direct testimony and documentary evidence, the FDIC moved for summary judgment on the ground that Respondents did not deny violation of the Cease-and-Desist Order, nor did they demonstrate it was impossible to comply with the same. This motion was denied pursuant to 12 C.F.R. § 308.07(b)(9), which prohibits an administrative law judge from deciding on a motion to dismiss the proceedings or a motion which would result in final determination of the merits of the case. It was determined, however, that cross-examination of witnesses would be of no evidentiary value to the record, since Respondents admitted rather than denied the charges contained in the Notice of Assessment, and failed to support the claim of impossibility.
   The remainder of the hearing scheduled was canceled by Order of March 28, 1986. Respondents' testimony, documentary evidence and pleadings did include the recitation of facts designed to show their efforts to comply with the Cease-and-Desist Order. However, these appeared to fall woefully short of a showing of good faith sufficient to warrant any mitigation of the civil money penalties here sought. Accordingly, the Recommended Decision and Proposed Order assessing civil money penalties against Respondents was issued on April 21, 1986. A copy thereof is attached as Appendix C. Pursuant to the Board's Decision, limited cross-examination on remand was conducted by the parties in * * * on October 7, 1986. Briefs and reply briefs have been filed.
   Looking to the "Interagency Policy Statement Regarding the Assessment of Civil Money Penalties by the Federal Financial Institutions Regulatory Agencies" (Policy Statement) for guidance, [45 Fed. Reg. 59423-5 (1980)] the following factors among the thirteen enumerated are relevant to such a determination in the instant proceeding: 1) The frequency or recurrence of violations and the length of time the violation has been outstanding; 2) Continuation of violation after the respondent becomes aware of it, or its immediate cessation and correction; 3) Previous criticism of the institution for previous violations; 4) Tendency to create unsafe or unsound banking practices or breach of fiduciary duty; and 5) The existence of agreements, commitments or orders intended to prevent the subject violation, Id. at 59424-5. Taking into account these factors, the amount of civil money penalties previously ordered by the FDIC appear to be considerably below the maximum authorized by the Act for such violations; § 308.67 of the FDIC Rules and Regulation (12 C.F.R. § 308.67) authorizes the Board to assess upon the bank or official a civil penalty of not more than $1,000 per day for each day the violation continues (emphasis added). However, relevant considerations to this assessment, in addition to those listed in the Policy Statement, include evaluation of the good faith of Respondents, consideration of their financial resources, the gravity of the violations(s), any previous violations, and other such matters as justice may require. 12 C.F.R. § 308.68.
   Therefore, although these factors were discussed in the written submissions of the parties, and considered in the determination reached in the Recommended Decision, the cross-examination ordered by the Board has allowed the parties a greater opportunity to explore the issues of mitigation and good faith as they pertain to a determination of the appropriate amount of civil money penalties. It should be noted, however, that the findings of violations set forth in the Recommended Decision of April 21, 1986 remained undisturbed by the Board's Decision.

FINDINGS OF FACT

   A careful review of written direct and documentary evidence, and the transcript of October 7, the proposed findings of fact and conclusions of law submitted by the parties with accompanying briefs, and the reply briefs lead to the following findings of fact and conclusions with respect to the limited issue of the appropriateness of the amount of the civil money penalties:
   1. There was no specific order or mandate in the Cease and Desist Order issued on March 2, 1984, effective March 12, 1984, that the majority interest in the bank had to be sold.
   2. The testimony of * * * was that among the 375 banks he supervises the capital ratio of said banks are well in excess of five (5%) percent and if their ratios are less than six percent (6%), they are in violation of FDIC rules and regulations and that of the banks supervised by Mr. * * * , less than one-half (½) of one percent (1%) {{4-1-90 p.A-1087}}would have a capital ratio of less than six (6%) percent.
   3. That the * * * Bank acting through the Respondents acted in good faith in agreeing to a capital ratio by virtue of the Cease and Desist Order that would place its capital ratio between eight (8%) percent and nine percent (9%) and that the bank did eventually reach a capitol ratio of between (8%) percent and nine (9%) percent.
   4. The * * * Bank was never determined to be insolvent and no depositor lost any money.
   5. The U.S. Government was not called upon to ingest any money into the bank.
   6. At the time of the issuance of the FDIC Cease and Desist Order, the bank was in existence for only five (5) years and its Officers and Directors were relatively inexperienced in the banking industry.
   7. The March 2, 1984 Cease and Desist Order (Order) was stipulated to by the Bank's board on or about November 18, 1983.
   8. The effective date of the Order was March 12, 1984.
   9. While the stipulation to the Order was signed by * * * , * * * , * * * , * * * , and * * * (comprising the board of directors of the Bank on November 18, 1983), the Order is effective as to all subsequent directors of the Bank.
   10. Paragraph 1(a), page 3, of the Order required the Bank to take all steps necessary to increase the total capital and reserves to not less than $2,000,000 and the date required for compliance with paragraph 1(a) of the Order is on or about September 15, 1985.
   11. It is uncommon for the acquirer of a problem bank to agree to an acquisition involving less than majority ownership in the problem bank. The reason for this is that most acquirers of a problem bank realize that existing ownership and management have contributed greatly to the problems of the institution. Thus, it would be desirable for the acquirer to invest enough to control 51 percent of the stock so he or she can be in a position to direct the future activities of the institution. (Tr. * * * , p. 15).
   12. During the period of November, 1983 through January, 1985, the principle shareholder of the Bank, Respondent * * * , had no intention of relinquishing his majority control in connection with any sale of Bank stock. (See * * *, Ex. No. B-5, para. 3; Tr. p. 97.)
   13. At a meeting held on July 17, 1984, Respondent * * * requested a six-month extension for the capital injection from the date originally required by the Order, i.e., six months from September 15, 1984. The Bank never filed a written request with the FDIC for an extension of time to comply. ( * * * , Ex. NO. G-4, para. 21; App. 4 to Ex. No. G-4.)
   14. A $600,000 escrow account to be used to purchase capital stock of the Bank was not established by Respondent * * * until March 23, 1985. This was approximately one month after the Respondents were notified of the FDIC * * * Regional Office's intention to assess civil money penalties for violations of the Order. ( * * *, Ex. No. G-4, paras. 28 & 30; App. 1 to Ex. No. G-4.)
   15. The civil money penalties assessed against the Respondents are appropriate in light of the five factors that the FDIC is required to consider in assessing civil money penalties as set forth in section 18(i)(2)(ii), 12 U.S.C. § 1818(i)(2)(ii), namely, the size of financial resources of the person charged, the good faith of the person charged, the gravity of the violations, the history of previous violations, and such other matters as justice may require.
   16. The civil money penalties assessed against the Respondents are appropriate in light of the thirteen factors that the FDIC considers in determining whether a violation is of sufficient gravity to warrant initiating a civil money penalty assessment proceeding, in accordance with the Interagency Policy Regarding the Assessment of Civil Money Penalties by the Federal Financial Institutions Regulatory Agencies, 45 Fed. Reg. 59423 (August 28, 1980).

DISCUSSIONS AND CONCLUSIONS

   In determining the amount of civil money penalties for violation of a cease and desist order, the FDIC is required to consider the appropriateness of the penalties sought in relation to the financial resources and good faith of the persons charged, the gravity of the violation committed, the history of any previous violations, and other such matters as justice may require. See 12 U.S.C. § 1818(i)(2)(ii). One of those factors {{4-1-90 p.A-1088}}namely the gravity of the violation, has been developed further and has been committed to a written policy statement. See Interagency Policy Regarding the Assessment of Civil Money Penalties by the Federal Financial Institutions Regulatory Agencies, 45 Fed. Reg. 59423 (August 28, 1980); Appendix B. Thus, in determining the gravity or seriousness of a violation, the following thirteen factors have been identified as relevant:
   (1) Evidence that the violation or pattern of violations was intentional or committed with disregard of the law or the consequences to the institutions; (2) The frequency or recurrence of violations and the length of time the violation has been outstanding; (3) Continuation of violation after the respondent becomes aware of it, or its immediate cessation and correction; (4) Failure to cooperate with the agency in effecting early resolution of the problems; (5) Evidence of concealment of the violation, or its voluntary disclosure; (6) Any threat of or actual loss or other harm to the institution, including harm to public confidence in the institution, and the degree of any such harm; (7) Evidence that participants or their associates received financial or other gain or benefit or preferential treatment as a result of or from the violation; (8) Evidence of any restitution by the participants in the violation; (9) History of prior violations, particularly where similarities exist between those and the violation under consideration; (10) Previous criticism of the institution for similar violations; (11) Presence or absence of a compliance program and its effectiveness; (12) Tendency to create unsafe or unsound banking practices or breach of fiduciary duty; and (13) The existence of agreements, commitments or orders intended to prevent the subject violation.
   There is an overlap between the policy considerations and the five statutory factors. Additionally, not all of the thirteen policy considerations may be relevant to any given case. In light of the overlap between the statutory factors and policy considerations, and the inapplicability of certain of the policy considerations, considerations herein have dealt primarily with two of the statutory factors: the gravity of the violations and the good faith, or lack thereof, on the part of the Respondents.
   The record includes numerous examples of the delays which resulted in the Bank's inability to reach the $2,000,000 capital and reserve level by September 15, 1984, as required by the Order. Most of this evidence was presented by the Respondents themselves in an effort to mitigate the penalties assessed against them. The chronology of the events, however, raises significant questions as to Respondents' good faith. Additional unwarranted delays were exemplified by Respondents' unsuccessful attempts to prepare an appropriate offering circular for the sale of new capital stocks. This, together with their failure to fully comply with the required filing of Report of Condition and Income, and monthly progress reports preclude any finding that would mitigate against the full amount of the civil penalties sought on the basis of Respondents' good faith.
   Consideration of the entire record in this proceeding, and the findings of fact and conclusions previously enumerated supports the ultimate finding and conclusion on remand, that the amount of the civil wrong penalties sought appear to be considerably below the maximum authorized under 12 C.F.R. § 308.67 for the violation in this proceeding, and reasonably supported by the gravity of said violations. Further, the evidence concerning the circumstances and the Respondents' actions following the issuance of the Cease and Desist Order of March 2, 1984 does not establish the existence of good faith or mitigating factors sufficient to warrant any reduction in the amount of the civil penalties sought.
   Directors * * * and * * * joined the Board after the effective date of the Order, and subsequent to the expiration of the time frames for the Call Reports and monthly reports to be resubmitted. (The requirements of paragraphs 6(c) and 11 of the Order.) Accordingly, the penalty assessed against each of them, $2,000.00, is only with respect to violation of 1(a) of the Order. Directors * * *, * * *, * * * and * * * should also be assessed this penalty, along with a $1,000.00 penalty for failure to file amended Call Reports, and a $1,000.00 penalty for failure to file adequate and timely monthly reports (thus, in aggregate the total fine is $4,000.00 against each of these Directors). * * * , as a salaried Chief Executive and Chairman of the Board was primarily responsible for the activities of the Bank and his penalty is $21,000.

{{4-1-90 p.A-1089}}
PROPOSED ORDER

   Based upon the record in this proceeding and the foregoing statement of the case, including findings of fact and conclusions of law, it is RECOMMENDED that the following ORDER be entered by the Board of Directors of the FDIC: ORDERED: 1. That, by reason of violations determined against * * * , * * * , * * * , * * * , * * * , * * * and * * * , individually, the following penalties are assessed against each of them pursuant to § 8(k) of the Act, 12 U.S.C. § 1818(k):

Director Assessed Penalty
* * * $ 4,000.00
* * * 2,000.00
* * * 21,000.00
* * * 4,000.00
* * * 4,000.00
* * * 2,000.00
* * * 4,000.00

   2. That the civil money penalties assessed against each of the named individuals shall not be paid directly or indirectly by * * * Bank but shall be paid by the individual against whom the penalty is assessed.
   Dated this 13th day of January, 1987.
/s/ Daniel J. Davidson,
Administrative Law Judge
Inclosures:
Appendix A, Order to Cease and Desist
Appendix B, Notice of Assessment
Appendix C, Recommended Decision and Proposed Order

Appendix A

ORDER TO CEASE AND DESIST

FDIC-84-10b

   * * * Bank, * * * ("Bank") having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices and violations of law and regulations alleged to have been committed by the Bank and of its right to a hearing on the alleged charges under Section 8(b)(1) of the Federal Deposit Insurance Act (12 U.S.C. § 1818(b)(1)), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated November 18, 1983, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violations of law and regulations, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
   The FDIC considered the matter and determined that it had reason to believe that the Bank had engaged in unsafe or unsound banking practices and had violated law and regulations. The FDIC therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED, that the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank, cease and desist from the following unsafe or unsound banking practices and violations of law and regulation:
   1. (a) Operating with an inadequate level of capital protection for the kind and quality of its assets and with an inadequate loan valuation reserve;
   (b) Operating with excessive overhead expenses and net loan losses that have resulted in operating losses;
   (c) Operating in violation of Federal Reserve Regulation O, Sections 215.4(a)(1), 215.4(b), and 215.4(c), (12 C.F.R. §§ 215.4(a)(1), 215.4(b), and 215.4(c)), the * * * Banking Act, Sections 16(2), 16(7), and 32 ( * * * REV. STAT. Ch. 17, §§ 323(2) and (7), and 339); and the FDIC Rules and Regulations Parts 326.4 (b)(1) and 326.5(a) through (c) (12 C.F.R. §§ 326.4(b)(1), and 326.5(a)-(c));
   (d) Operating with hazardous lending and lax collection practices;
   (e) Operating with a management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits.
   (f) Operating with a board of directors that has failed to provide adequate supervision and direction over active management of the Bank in order to prevent unsafe or unsound banking practices.
   IT IS FURTHER ORDERED that * * * Bank, * * * , its directors, officers, agents, {{4-1-90 p.A-1090}}employees, successors, assigns, or other persons participating in the conduct of the affairs of the Bank, take affirmative action as follows:
   1. (a) Within 180 days of the effective date of this ORDER, the Bank shall take all steps necessary to increase total capital and reserves to not less than $2,000,000. Such increase in capital and reserves may be accomplished by:
   (i) the sale of new capital stock in the form of common stock; or
   (ii) the elimination of all or part of the "Loss" and "Doubtful" assets referred to in Paragraph 2 of this ORDER, without loss or liability to the Bank; or
   (iii) the direct contribution of cash by the directors or shareholders of the Bank; or
   (iv) the collection of assets previously charged off; or
   (v) any other means acceptable to the Regional Director of the FDIC's * * * Regional Office ("Regional Director").
   (b) If all or part of the increase in total capital and reserves required in Paragraph 1(a) above of this ORDER is to be accomplished by the sale of new capital stock in the form of common stock, the board of directors of the Bank shall forthwith take all steps necessary to adopt and implement a plan for the sale of such additional stock, including the voting of any shares owned by them in favor of said plan. Should the implementation of the plan involve public distribution of the Bank's securities the Bank shall prepare detailed offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and the circumstances giving rise to the offering, and any other material disclosures necessary to comply with Federal securities law. Prior to the sale of the capital and, in any event, not less than 20 days prior to the dissemination of such materials, the materials used in the sale of securities shall be submitted to the FDIC at Washington, D.C. for its review. Any changes requested to be made in the materials by the FDIC shall be made prior to their dissemination.
   (c) In complying with the provisions of Paragraph 1(b) of this ORDER, the Bank shall provide to any subscriber and/or purchaser of the Bank stock, written notice of any planned or existing development or other changes which is materially different from the information reflected in any offering materials used in connection with the sale of Bank stock. The written notice required by this paragraph shall be made to every purchaser and/or subscriber of Bank stock who received or was tendered the information contained in the Bank's original offering circular.
   2. Within 30 days of the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified "Loss", and 50 percent of all assets or portions of assets classified "Doubtful" as of June 11, 1983 which have not yet been eliminated. Reduction of these assets through proceeds of loans made by the Bank are not to be considered collection for the purpose of this paragraph.
   3. (a) Within 90 days from the effective date of this ORDER, the Bank shall provide and thereafter continue to retain management acceptable to the Regional Director. Such management shall include a qualified chief executive officer who shall be given stated written authority by the Bank's board of directors. Such written authority shall include the responsibility for implementing and maintaining lending policies and other bank policies in accordance with sound banking practices.
   (b) Within 90 days of the effective date of this ORDER, and as of each meeting of the shareholders of the Bank at which directors are to be elected, the Bank shall use its best efforts either to appoint or to nominate and cause to be elected at such shareholder meetings, at least three directors who shall not be active officers of the Bank or control more than 5% of the Bank's capital stock, and who shall not be active officers or directors or employees of any company that is controlled by an officer or director or more than 5% shareholder of the Bank.
   4. Within 60 days of the effective date of this Order, the Bank's board of Directors shall review the Bank's present loan policy and procedures, and develop and implement a comprehensive loan policy acceptable to the Regional Director. Copies of the revised policy shall be submitted to the Regional Director for his review. The revisions to the policy shall address, but not be limited to, procedures for supervision and collection of problem loans, as well as approval procedures for new loans and renewals of existing loans.
{{4-1-90 p.A-1091}}
   5. (a) Within 180 days of the effective date of this ORDER, the Bank shall reduce the aggregate of all loans and other assets classified "Substandard" and the remaining 50 percent of loans classified "Doubtful" as of June 11, 1983, to not more than $500,000 and within 360 days of the effective date of this ORDER, the Bank shall reduce the aforementioned loans and other asset items listed as "Substandard" and the remaining 50 percent of loans classified "Doubtful" to not more than $300,000. As used in this ORDER, the word "reduce" means (1) to collect (2) to charge-off, or (3) to substantially improve the quality of loans and other asset items adversely classified or specially mentioned to warrant removing any adverse classification. The requirements of this paragraph are not to be construed as standards for future operation, and the Bank shall further reduce all adversely classified assets.
   (b) As of the date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to or for the benefit of any borrower who has a loan or other extension of credit with the Bank, which has been charged off or has been classified, all or in part, "Loss" and is uncollected. The requirements of this paragraph do not prohibit the Bank from renewing, upon collection of interest in cash from the borrower, any credit already extended to any such borrower.
   6. (a) Within 30 days of the effective date of this ORDER, the Bank shall replenish its loan valuation reserve by charges against current operating income in an amount equal to those loans required to be charged off under paragraph 2 of this ORDER.
   (b) Within 30 days of the effective date of this ORDER, the Bank shall make an additional provision for loan losses which, after careful review and consideration by the board of directors, reflects the potential for further losses in the remaining "Substandard" and "Doubtful" loan classifications. At a minimum, the loan valuation reserve shall equal 1.25 percent of total loans.
   (c) Within 30 days of the effective date of this ORDER, Reports of Condition and Report of Income submitted to the FDIC for each quarterly period subsequent to June 11, 1983 shall be amended and refiled if they do not reflect a provision for loan losses and a loan valuation reserve which are adequate considering the condition of the Bank's loan portfolio and which, at a minimum, incorporate the adjustments required by paragraph 6(a) and 6(b) of this ORDER.
   (d) Following the effective date of this ORDER, prior to submission or publication of any Report of Condition and Report of Income requested by the FDIC, the board of directors of the Bank shall review the adequacy of the Bank's loan valuation reserve and accurately report the same. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, the amount of increase in the reserve recommended, if any, and the basis for determination of the amount of reserve provided.
   7. As of the effective date of this ORDER, the Bank shall not declare or pay any cash dividend without prior written consent of the Regional Director.
   8. As of the effective date of this ORDER, the Bank shall not purchase any additions to the Bank's fixed assets with a cost in excess of $10,000 nor obligate the Bank for any additional lease payments for bank building without the prior written consent of the Regional Director.
   9. As of the effective date of this ORDER, the Bank shall take all appropriate actions to eliminate and/or correct all the apparent violations of laws and regulations as of June 11, 1983 and establish procedures to ensure future compliance with all applicable laws and regulations.
   10. (a) Within 60 days from the effective date of this ORDER, the Bank shall draft and enact a comprehensive budget and also develop and fully implement specific written goals and strategies to improve asset yields; reduce overhead expenses (specifically, occupancy and personnel expenses); and improve its overall earnings.
   (b) The goals, strategies and budget required by paragraph 10(a), when developed, shall be presented to the Regional Director for his review.
   (c) Prior to the end of each calendar quarter, the Bank's board of Directors shall evaluate the Bank's actual performance in relation to the goals, strategies and budget required by paragraph 10(a) and report the results of the evaluations to the Regional Director. The minutes of the board meeting {{4-1-90 p.A-1092}}at which such evaluation is undertaken shall indicate the results of the evaluation and any actions taken.
   11. On the last day of the second month following the date of issuance of this ORDER, and on the last day of every month thereafter, the Bank shall furnish written progress reports to the Regional Director detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has released the Bank in writing from making further reports.
   12. The effective date of this ORDER shall be ten (10) days after its issuance by the FDIC.
   The provisions of this ORDER shall be binding upon the Bank, its directors, officers, agents, employees, successors, assigns, and other persons participating in the conduct of its affairs.
   The provisions of this ORDER shall remain effective and enforceable except to the extend that, and until such time as, any provisions of this ORDER shall have been modified, terminated, and suspended or set aside by the FDIC.
   Pursuant to delegated authority.
   DATED: March 2, 1984
* * *
Associate Director
Division of Bank Supervision

Appendix B

NOTICE OF ASSESSMENT OF CIVIL
MONEY PENALTIES, FINDINGS OF
FACT AND CONCLUSIONS OF LAW,
ORDER TO PAY, AND NOTICE OF
HEARING

FDIC-85-303k

NOTICE OF ASSESSMENT OF CIVIL
MONEY PENALTIES

   The Federal Deposit Insurance Corporation ("FDIC") is of the opinion that * * * , * * * , * * * , * * * , * * * , * * * and * * * ("Respondents"), individually and as officers and/or directors of * * * Bank, * * * ("Bank"), each has violated certain provisions of a "Cease-and-Desist Order which has become final" as that term is defined in section 8(k) of the Federal Deposit Insurance Act ("Act") (12 U.S.C. § 1818(k)). The FDIC hereby issues this NOTICE OF ASSESSMENT OF CIVIL MONEY PENALTIES, FINDINGS OF FACT AND CONCLUSIONS OF LAW, ORDER TO PAY, AND NOTICE OF HEARING ("NOTICE OF ASSESSMENT") pursuant to the provisions of section 8(i)(2) of the Act (12 U.S.C. § 1818(i)(2)) and the FDIC Rules of Practice and Procedures (12 C.F.R. Part 308). In support thereof, the FDIC finds and concludes as follows:

FINDINGS OF FACT AND
CONCLUSIONS OF LAW

   1. The Bank is a corporation existing and doing business under the laws of the State of * * * and having its principal place of business in * * *. The Bank is and was, at all times pertinent to this proceeding, an insured State nonmember bank subject to the Act (12 U.S.C. §§ 1811-1831d) and the Rules and Regulations of the FDIC (12 C.F.R. Chapter III). * * * , * * * , * * * , and * * * , each is and was, at all times pertinent to this proceeding, a director and/or an officer of the Bank. * * * and * * * each was elected to the Bank's board of directors in July, 1984, and was a director of the Bank at times pertinent to these proceedings. * * * was, at times pertinent to these proceedings, a director of the Bank until March 20, 1985. The FDIC has jurisdiction over the Bank, each Respondent, and the subject matter of the proceeding.
   2. On March 2, 1984, the FDIC issued against the Bank a "Cease-and-Desist Order which has become final" ("CEASE-AND-DESIST ORDER") as that term is defined in section 8(k) of the Act (12 U.S.C. § 1818(k)). The effective date of the Order is March 12, 1984.
   3. As of September 15, 1984, the Bank and the Respondents were in violation of the following provisions of the CEASE-AND-DESIST ORDER:
   (a) The Bank and the Respondents had not taken all steps necessary to increase the Bank's total capital and reserves to not less than $2,000,000 within 180 days from the effective date of the CEASE-AND-DESIST ORDER, as required by paragraph 1(a) of the CEASE-AND-DESIST ORDER. As of September 15, 1984, the Bank's total capital and reserves equaled $1,012,000.
   (b) Within 30 days from the effective date of the CEASE-AND-DESIST ORDER, the Bank and the Respondents had not filed {{4-1-90 p.A-1093}}amendments to Reports of Condition and Income for each quarterly period subsequent to June 11, 1983, incorporating adjustments to the loan valuation reserve and additional provision for loan losses which are required by paragraphs 6(a) and 6(b) of the CEASE-AND-DESIST ORDER, as required by paragraph 6(c) of the CEASE-AND-DESIST ORDER. As of September 15, 1984, the Bank's June 30, 1983 Reports of Income and Condition, the September 30, 1983 Report of Condition, and the December 31, 1983 Report of Income did not properly reflect the loan charge-offs and/or provision for loan losses required by paragraph 6(a) and 6(b) of the CEASE-AND-DESIST ORDER.
   (c) The Bank and the Respondents have not submitted written progress reports on a monthly basis to the Regional Director detailing the actions taken to effect compliance with the CEASE-AND-DESIST ORDER, as required by paragraph 11 of the CEASE-AND-DESIST ORDER.
   4. (a) By virtue of the facts stated above, the FDIC concludes that each Respondent violated the CEASE-AND-DESIST ORDER and that a civil money penalty should be assessed against each Respondent under section 8(i)(2) of the Act (12 U.S.C. § 1818(i)(2)).
   (b) As used herein, pursuant to sections 8(i)(2)(i) and 8(k) of the Act (12 U.S.C. §§ 1818(i)(2)(i) and (k)), the terms "violates" or "violation" include without limitation any action (alone or with another or others) for or toward causing, bringing about, participating in, counseling, or aiding or abetting a violation.

ORDER TO PAY

   After taking into account the appropriateness of each penalty with respect to the financial resources and good faith of each Respondent, the gravity of the violations of each Respondent, the history of previous violations of each Respondent, and such order matters as justice may require, it is:
   ORDERED, that by reason of the violations set forth above, a penalty of $21,000 be, and hereby is, assessed against * * *; a penalty of $4,000 be, and hereby is, assessed against * * *; a penalty of $4,000 be, and hereby is, assessed against * * *; a penalty of $4,000 be, and hereby is, assessed against * * *; a penalty of $4,000 be, and hereby is, assessed against * * *; a penalty of $2,000 be, and hereby is, assessed against * * *; and a penalty of $2,000 be, and hereby is, assessed against * * * , pursuant to section 8(i)(2) of the Act (12 U.S.C. § 1818(i)(2)).
   FURTHER ORDERED, that the effective date of the ORDER TO PAY be, and hereby is, stayed with respect to each Respondent until ten days after the date of receipt of the NOTICE OF ASSESSMENT by each Respondent, during which time the Respondents may each request a hearing pursuant to section 308.69 of the FDIC Rules of Practice and Procedures (12 C.F.R. § 308.69). Any such request for a hearing must be filed in writing with the Executive Secretary, Federal Deposit Insurance Corporation, 550 17th Street, N.W., Washington, D.C. 20429.
   If any Respondent fails to file a request for a hearing, the penalty assessed against such Respondent, pursuant to this ORDER TO PAY, shall be paid within 60 days of the date of issuance of this NOTICE OF ASSESSMENT.

NOTICE OF HEARING

   FURTHER ORDERED, that if any Respondent requests a hearing with respect to the charges in the NOTICE OF ASSESSMENT, the hearing shall commence 60 days from the date of receipt of such request at * * *. The hearing will be conducted in accordance with the provisions of the Act (12 U.S.C. §§ 1811–1813d), the Administrative Procedure Act (5 U.S.C. §§ 551–559), and the FDIC Rules of Practice and Procedures (12 C.F.R. Part 308). The hearing will be held before an Administrative Law Judge to be appointed by the U.S. Office of Personnel Management pursuant to 5 U.S.C. § 3344. The exact time and location of the hearing will be determined by the Administrative Law Judge. The FDIC is preliminarily of the view that a public hearing is necessary to protect the public interest. The hearing will be public unless the FDIC, after considering the views of the Respondent, shall determine that a private hearing is necessary to protect the public interest.
   Any Respondent who requests a hearing shall file an answer to the charges in the NOTICE OF ASSESSMENT within 20 days of receipt of the NOTICE OF HEAR- {{4-1-90 p.A-1094}}ING in accordance with section 308.06 of the FDIC Rules of Practice and Procedures (12 C.F.R. § 308.06). Respondent is further directed to file within 20 days of receipt of the NOTICE OF HEARING a written response to the determination to hold a public hearing. The response shall include any information, mitigating circumstances, documentation, or other relevant evidence as to why a public hearing would not be in the public interest.
   By direction of the Board of Review, pursuant to delegated authority.
   Dated at Washington, D.C., this 16th day of October, 1985.
/s/ Janet M. Reddish
Assistant Executive Secretary

Appendix C

RECOMMENDED DECISION AND
PROPOSED ORDER1

By DANIEL J. DAVIDSON,
Administrative Law Judge.

Statement of the Case

   The Federal Deposit Insurance Corporation (FDIC) seeks Civil Money Penalties pursuant to § 8(i)(2) of the Federal Deposit Insurance Act (Act) [12 U.S.C. § 1818(i)(2)] against * * * , * * * , * * * , * * * , * * * , * * * and * * * (Respondents) individually and as Officers and/or Directors of * * * Bank, * * * (Bank) for violating certain provisions of a "Cease-And-Desist Order which has become final" as that term is defined by section 8(k) of the Act [12 U.S.C. § 1818(k)]. (The Cease-and-Desist Order issued March 2, 1984, is attached to this Decision as Appendix A.) The Notice of Assessment of Civil Money Penalties, Findings of Fact and Conclusions of Law, Order to Pay, and Notice of Hearing (hereinafter referred to as "Notice of Assessment" and attached to this Decision as Appendix B) was issued by direction of the Board of Review, acting under direction of the FDIC, on October 16, 1985.
   Upon consideration of the alleged violations of the Cease-and-Desist Order, the financial resources and good faith of each Respondent, the gravity of violations of each Respondent, the history of previous violations of each Respondent, and such other matters as justice may require pursuant to § 308.68 of the FDIC Rules of Practice and Procedures (12 C.F.R. § 308, et. seq.), it was ordered that the civil money penalties be assessed as follows: $21,000 against * * * ; $4,000 against each of Respondents * * * , * * * , * * * and * * *; and $2,000 against each Respondent * * * and * * *, pursuant to § 8(i)(2) of the Act [12 U.S.C. § 1818(i)(2)].
   The Order to Pay stated that the effective date for payment of these penalties would be stayed until 10 days after the receipt of the Notice of Assessment by each Respondent, during which time the Respondents could request a hearing pursuant to § 308.69 of the FDIC Rules of Practice and Procedures. (12 C.F.R. § 308.69). Hearing requests were filed within the requisite time period.
   However, the Notice of Hearing contained in the Notice of Assessment provided 20 days for Respondents to file an answer to the charges therein in accordance with § 308.06 of the FDIC Rules (12 C.F.R. § 308.06). The Notice of Hearing also stated that the hearing would be public "unless the FDIC, after considering the views of the Respondent (sic), shall determine that a private hearing is necessary to protect the public interest." Notice of Assessment at 6.
   Respondents did not make a timely response to the Notice of Assessment, but were given an opportunity for leave to file a late answer if they could "show cause" why their right of participation should not be waived pursuant to § 308.06(d) [12 C.F.R. § 308.06(d)]. (Order of December 18, 1985). At the prehearing conference held in this proceeding on January 31, 1986, in * * *, Respondents' Answer was accepted, with the admonition that the Answer as presented actually admitted the allegations, and thus unless additional evidence was brought forward to contravene these charges, an order could be issued on the pleadings as they stood. Prehearing Conference Transcript at 22–24. The following alternatives were given to the Bank to avoid such a result: 1) it could amend its Answer in order to rebut the charges (Prehearing Transcript at 21); 2) it could present material in an informal manner pending settlement negotiations be-


1 Pursuant to § 308.14 (12 C.F.R. § 308.14), within 20 days after service of the Recommended Decision, findings, conclusions, and Proposed Order of the Administration Law Judge, a party may file with the Executive Secretary written exceptions thereto. A supporting brief may be filed exceptions thereto. A supporting brief may be filed pursuant to § 308.15 (12 C.F.R. § 305.15). After expiration of the time for filing exceptions, the Executive Secretary shall notify the parties that the case has been submitted to the Board of Directors for final decision. 12 C.F.R. 308.16.
{{4-1-90 p.A-1095}}tween it and the FDIC, Id. at 24; 3) it could present written evidence which would be "in mitigation rather than in actual contravention of the allegations," Id.; or 4) it could produce evidence to show that the interpretation of the Cease-and-Desist Order should be that "substantial compliance is compliance," Id. at 31, especially with regard to paragraph 1(a), which uses the language, "the Bank shall take all steps necessary to increase its capital...to $2,000,000." At the Prehearing Conference, the Bank, for the first time, raised the defense of impossibility, and was told that it would have the opportunity to amend its Answer and/or submit evidence to prove the same. Id. at 30. Therefore, the hearing dates as scheduled contemplated that the Bank would put forth evidence to prove impossibility or would use the ensuing months to negotiate a settlement. Neither of these alternatives came to fruition, nor did the Bank in any way amend its Answer. The written direct testimony, documentary evidence, and pleadings merely recounted their efforts to comply with the Order and in effect admitted that the failure to do so was caused by the Bank's own inefficiency.
   After receipt of the written direct testimony and documentary evidence in this proceedings, the FDIC moved for summary judgment on March 17, 1986. This motion was denied by the Order of March 28, 1986, because the FDIC Rules prohibit an administrative law judge from deciding any motion to dismiss the proceedings or other motion resulting in final determination of the merits of the proceeding. 12 C.F.R. § 308.07(b)(9). It was determined nevertheless that the hearing for purposes of cross-examination would serve no useful purpose in evaluation of the charges in this proceeding, because Respondents' pleadings and evidence admitted rather than denied the charges contained in the Notice. Accordingly, the remainder of the hearing was canceled.2

Statement of Facts

   * * * Bank (Bank) is a corporation existing and doing business under the laws of the State of * * * and has its principal place of business in * * *. At all times pertinent to this proceeding, the Bank is and was an insured state nonmember bank subject to the Act [12 U.S.C. §§ 1811-1831(d)] and Rules and Regulations of the FDIC (12 C.F.R. Chapter III). * * * and * * * each is and was, at all times pertinent to this proceeding, a Director and/or Officer of the Bank. * * * has been a Director since December 14, 1983. * * * and * * * each was elected to the Bank's Board of Directors in July, 1984. * * * was elected a Director on December 14, 1983 but resigned this position on March 20, 1985.
   This action stems from the Cease-and-Desist Order (Order) of March 2, 1984, issued pursuant to the Stipulation and Consent to the Issuance of an Order to Cease-and-Desist (Consent Agreement) entered into between the FDIC and the Bank on November 18, 1983. The Consent Agreement, in essence, stipulated that the Bank understood its right to receive a Notice of Charges and of Hearing detailing unsafe and unsound banking practices and violations of law and/or regulations alleged to have been committed by it, of its right to a hearing on the alleged charges under § 8(b)(1) of the Act [12 U.S.C. § 1818(b)(1)], and had waived these rights. Thereby, the Bank, solely for the purpose of that proceeding and without admitting or denying any of the charges and violations of law and/or regulations, agreed to the issuance of an order to cease and desist by FDIC, that this order would become final, and that it therefore waived all rights to a hearing thereto, including the issuance of proposed findings of fact and conclusions of law, a recommended decision by an administrative law judge, and the filing of exceptions and briefs with respect to such a decision. This stipulation was signed by * * * , * * *, * * *, * * *. * * *, and * * *, then comprising the Bank's Board of Directors.
   A Certified Copy of Resolution of the Board was issued by its Secretary, * * * , on December 15, 1983, stating that the Board accepted the Consent Agreement and


2 Pursuant to the stipulations jointly submitted by the parties on February 11, 1986, official business records identified and certified by counsel as having been compiled and maintained in the regular course of business may be introduced and admitted into evidence through witnesses who did not participate in their preparations and/or who are not official custodians of such records. Stipulations at 4, paragraph 27. Since the findings herein are based solely on such records and the pleadings and evidence submitted by Respondents, there was no need for the cross-examination of witnesses as contemplated in the remaining hearing schedule.
{{4-1-90 p.A-1096}}agreed to the issuance of a Cease-and-Desist Order by the FDIC under the provisions of § 8(b) of the Act. The Order, issued by the FDIC on March 2, 1984, became effective March 12, 1984.
   However, upon an examination of the Bank conducted as of close of business on September 15, 1984 by the FDIC, it was reported to the Regional Office in * * * that the Bank had not substantially complied with the Order. A letter from. * * *, Regional Director, was sent to the Board of Directors of the Bank on January 11, 1985, which along with the report of examination, detailed the violations alleged and explained why poor management decisions by the Bank led to noncompliance with the Order. The letter asked the Board to advise the FDIC of actions taken in regard to these violations within 45 days of its receipts, and also warned that the Regional Office was "seriously considering recommending the assessment of Civil Money Penalties against the Board Members for violations of the Order pursuant to § 8(i)(2) of the...Act." Ex. No. G-5, Appendix 5 at 3. On February 22, 1985, the Regional Office issued a "10day letter"3 notifying the Board Members that it was prepared to recommend to FDIC that civil money penalties be assessed against them in their representative capacities as Directors and/or Officers of the Bank for seven specified violations of the Order, including those at issue in this proceeding:
   1. The Bank failed to take all steps necessary to increase the Bank's total capital and reserves to not less than $2,000,000 within 180 days from the Order as required by paragraph 1(a) of the Order.
   2. The Bank failed to file amendments to Reports of Condition and Income within 30 days of the effective date of the Order for each quarterly period subsequent to June 11, 1983, incorporating adjustments to the loan valuation reserve and additional provision for loan losses as required by paragraphs 6(a) and 6(b) of the Order, as required by paragraph 6(c) of the Order. (The date required for compliance of this provision was on or about April 15, 1984.).
   3. The Bank failed to submit written progress reports on a monthly basis to the Regional Director detailing the actions taken to effect compliance with the Order, as required by paragraph 11 of the Order.
   Ex. No. G-4, Appendix 2 at 1.
   The letter invited the Board members to respond within 10 days to provide their opinion of the appropriateness of these penalties based on the alleged violations. The Board members were also asked to provide information which would influence the amount of penalty contemplated against them, including their financial resources, good faith efforts to correct the violations, the gravity of the violations, any history of previous violations, and any other matters as justice requires. Ex. No. G-4.
   On March 4, 1985, the Regional Office received a letter from * * * which explained his financial situation, but provided little information surrounding the violations of the Order. Ex. No. G-4, Appendix 2. Such a letter was received from the full Board, however, on March 10, 1985; in this response the Board provided a detailed chronology of the efforts taken to comply with the Order, and offered mitigating factors as to why certain of the provisions were yet unaccomplished. Ex. No. G-4, Appendix 3, Ex. No. G-63. In response to the Board's explanation of its activities, the Regional Office dropped several of the provisions to which civil money penalties were to be assessed, pursuing only the three violations discussed above.
   The Notice of Assessment charging these alleged violations of the Order, ordering payment of civil money penalties thereto, and providing the Notice of Hearing was issued October 16, 1985.

Substantiation of the Violations

   The written direct testimony and documentary evidence received from the Bank focuses on its efforts to gain approval of a charter amendment for the issuance of additional shares of bank stock. It was this step which was to facilitate the accumulation of $2,000,000 in total capital and reserves as required by paragraph 1(a) of the Order. However, the Bank's execution of this effort was replete with error. The Bank initially submitted a charter amendment in March of 1984 to * * * , Executive Assistant to the * * * Commissioner of Banks and Trust Companies, calling for an issuance of 60,000 shares of bank stock at a price of $20.00 per share and a par value of $10.00 per share. Ex. No. G-5 at 2, Ex. No.


3 A "10-day letter" is one which provides a warning to a financial institution that civil money penalties against it are being contemplated, allowing a 10-day response time to the recipients to rebut the grounds for the assessed penalties.
{{4-1-90 p.A-1097}}B-7 at 2 * * *. However, at a meeting with members of the Bank's Board on March 15, 1984, Mr. * * * explained that the charter amendment application was returned because it was improperly completed; i.e., it was not sufficiently descriptive of the transaction. Id. See Bank's Answer at 2. When it became apparent that the price per share was too high in light of the Bank's condition, the Board amended the purchase price to $10.00 a share at a July, 1984 shareholders' meeting. Bank Answer at 2, Ex. No. B-13. Despite this reduction, the Bank's proposal was unacceptable as a remedy for its condition as the proceeds of the stock offering would be injected entirely into the stock account of the Bank and not to either the surplus or undivided capital accounts, the latter of which was a negative figure. Ex. No. G-5 at 3, Ex. No. B-7 at 2 * * *. Therefore, the proposal was inadequate as it did not provide for a selling price in excess of the stated par value to restore the capital accounts to an acceptable level. It was not until October 18, 1985 that an acceptable charter amendment was presented (and thus approved) to the Commissioner's office, in which the Bank authorized an offering of stock at $7.00 par value to be sold at $10.00 per share. Ex. No. B-4 * * * , Ex. No. B-27. The Bank's delay in executing a feasible charter amendment to increase its capital and reserves, a vital provision mandated by the Order, is inexcusable in light of the Bank's numerous discussions with the Regional Office and guidelines provided for its assistance. The claim of impossibility cannot be viewed as a serious defense to the violation of paragraph 1(a) of the Order, as the delay in obtaining the necessary capital was apparently caused by the Bank's own malfeasance.
   Lack of diligence was also apparently to blame for the delay by the Bank in gaining approval for a public stock offering circular. Not only was this circular to comply with state and federal securities laws and regulations, but under paragraph 1(b) of the Order, it was required to "include detailed offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and the circumstances giving rise to the offering, and any other material disclosures necessary to comply with Federal securities law." Ex. No. G&B-1, paragraph 1(b). However, it was not until September 3, 1985 when the Bank submitted a fourth revised offering to FDIC's Registration and Disclosure Unit that the offering circular was found acceptable; a definitive copy of the Bank's offering circular was not received by the FDIC until December 2, 1985, more than two months after this document was requested. See Ex. No. B-27.
   In its defense, the Bank offers not legitimate explanation for these submissions. Virtually no mention is made in the written direct testimony submitted by the Bank as to why it had such problems in filing an acceptable offering circular, nor do the minutes of the twenty Board meetings submitted as documentary evidence contain sufficient justification. It appears that the Bank's violation of paragraph 1(a) of the Order was caused by its failure to follow basic securities regulations. The Bank was fully aware that issuance of additional stock was one of the only options available in order to raise its capital and reserves to $2,000,000. This became evident long before September 15, 1984, the date of compliance.
   The need for the Bank to submit an offering circular to the Securities Section of the FDIC was fully explained in the Order issued over 18 months before the Bank finally submitted an acceptable circular. The Bank was given six months to raise its capital to $2,000,000 but took more than 18 months to do so. An adequate capital level is critical to the safe and sound operation of a bank. The Bank's delay in raising its capital to $2,000,000 was clearly unwarranted.
   The Respondents' pleadings and evidence presented in this proceeding also demonstrate noncompliance with the remaining two charges in the Notice of Assessment: failure to file amendments to Reports of Condition and Income (Call Reports) for each quarterly period subsequent to June 11, 1983, incorporating adjustments to the loan valuation reserve and additional provision for loan losses as required by paragraphs 6(a) and 6(b) of the Order, a violation of paragraph of 6(c) of the Order, and failure to file written progress reports on a monthly basis to the Regional Director detailing the actions taken to comply with the Order, a violation of paragraph 11 of the Order. This is especially extraordinary in that the Order was one {{4-1-90 p.A-1098}}to which the Bank had stipulated. Indeed, in the Stipulations of February 11, 1986, jointly submitted by the parties to this proceeding, the Bank concedes that it did not refile amended Call Reports. Stipulations at paragraph 11. Call Reports are necessary to reflect accurately the reserve requirements mandated by paragraphs 6(a) and 6(b) of the Order. Though the Answer and documentary evidence filed by the Bank discuss efforts made on the collection of loan matters and the maintenance of a proper loan valuation reserve, no mention is made of filing amended Call Reports. Instead, it is stated again and again that "the Board has always attempted to comply with the requirements of the Order...." Bank's Answer at 3. This is conclusory and selfserving at best. It is not alleged that the Bank violated paragraphs 6(a) and 6(b) of the Order which required it to replenish its loan valuation reserve to a minimum of 1.25 percent of total loans, and make additional provision for loan losses in the "Substandard" and "Doubtful" loan classifications, [Ex. No. G&B-1, paragraphs 6(a) and 6(b)] but that the Bank had not filed amendments to its Reports of Condition and Income describing the loan charge-offs and/or provision for loan losses required by paragraphs 6(a) and 6(b) of the Order, as required by paragraph 6(c) of the Order. Thus, the public did not have access to documents describing the true condition of the Bank. The bulk of the evidence submitted by the Bank discusses its effort to increase its loan reserve and otherwise collect on several of its accounts. This, however, is not relevant to the alleged violation of paragraph 6(c), as it refers only to compliance with paragraphs 6(a) and 6(b), to which no violation has been charged. Indeed, both parties have stipulated that the loan valuation reserve for the months in question have exceeded the 1.25 percent minimum of total loans. Stipulations at 3, paragraphs 18–22. The Bank simply has not complied with the filing requirements of the Order.
   In regard to violation of paragraph 11 of the Order requiring the Bank to file monthly written progress reports, the Bank has admitted in its Answer that "for certain months," reports were not filed. Bank's Answer at 4, paragraph 3(c). Its defense that several monthly reports were indeed filed which reported improvements in the Bank's condition is not a defense at all. The alleged violation was not that no monthly reports were received; the violation alleged was that these reports were not received monthly. Considering the gravity of the Bank's condition and the need for the FDIC to be informed of the Bank's compliance with the Order, this violation is inexcusable.

Findings of Fact and Conclusions of Law

   The Bank entered into a Consent Agreement whereby it agreed to an Order to Cease-and-Desist on November 18, 1983. The Bank accepted the terms of the Consent Agreement and agreed to the Order on December 15, 1983. The Order was issued by the FDIC on March 2, 1984, became effective March 12, 1984, and was a final Order as that term is defined by § 8(k) of the Act [12 U.S.C. § 1818(k)]. The Order is effective as to all of the Directors at the time of its issue and as to all subsequent Directors of the Bank until such time as the Order is revoked, modified or set aside by the FDIC. As of September 15, 1984, 180 days from the effective date of the Order and the date by which compliance was required, Respondents had violated paragraphs 1(a), 6(c)4, and 11 of the Order. By virtue of these violations, it is appropriate that a civil money penalty be assessed against each Respondent under § 8(i)(2) of the Act. [12 U.S.C. § 1818(i)(2)]. According to § 308.68 of the FDIC Rules and Regulations (12 C.F.R. § 308.68), the amount of each penalty should be assessed by taking into account the financial resources and good faith of each Respondent, the gravity of the violations of each Respondent, the history of previous violations of each Respondent, and other such matters as justice requires. Violation of the capital provision of the Order is considered most critical, and thus the amount assessed for noncompliance should be greater than for noncompliance with the other two provisions. Distinction with respect to culpability among the Board members is also necessary; because Mr. * * * was a salaried Chief Executive Officer and Chairman of the Board during the period of compliance with the Order, he was ultimately responsible for insuring full conformance with all of its provisions. His penalty should therefore reflect this responsibility. The financial resources of each Director must also be considered; however, only Mr. * * * provided any information in this regard, though all were invited to do


4 Compliance required by April 15, 1984.
{{4-1-90 p.A-1099}}so by the "10-day" letter of February 22, 1985. Directors * * * and * * * joined the Board after the effective date of the Order, and subsequent to the expiration of the time frames for the Call Reports and monthly reports to be resubmitted. (The requirements of paragraphs 6(c) and 11 of the Order.) Accordingly, the penalty assessed against each of them, $2,000.00, is only with respect to violation of 1(a) of the Order. Directors * * * , * * * , * * * and * * * should also be assessed this penalty, along with a $1,000.00 penalty for failure to file amended Call Reports, and a $1,000.00 penalty for failure to file adequate and timely monthly reports (thus, in aggregate the total fine is $4,000.00 against each of these Directors).

PROPOSED ORDER

   Based upon the record in this proceeding and the foregoing statement of the case, including findings of fact and conclusions of law, it is RECOMMENDED that the following ORDER be entered by the Board of Directors of the FDIC:
   ORDERED: 1. That, by reason of violations determined against * * * , * * * , * * *, * * *, * * *, * * * and * * *, individually, the following penalties are assessed against each of them pursuant to § 8(k) of the Act, 12 U.S.C. § 1818(k):

Director Assessed Penalty
* * * $ 4,000.00
* * * 2,000.00
* * * 21,000.00
* * * 4,000.00
* * * 4,000.00
* * * 2,000.00
* * * 4,000.00

   2. That the civil money penalties assessed against each of the named individuals shall not be paid directly or indirectly by * * * Bank but shall be paid by the individual against whom the penalty is assessed.
   Dated this 21st day of April, 1986.
/s/ Daniel J. Davidson,
Administrative Law Judge

DECISION AND ORDER TO
REOPEN AND TO REMAND

FDIC-85-303k

STATEMENT

   In this proceeding the Federal Deposit Insurance Corporation ("FDIC") seeks civil money penalties under § 8(i)(2) of the Federal Deposit Insurance Act ("Act") (12 U.S.C. § 1818(i)(2)) against the above-captioned officers and/or directors ("Respondents") of * * * Bank, * * *. The basis for this action is Respondents' alleged violation of certain provisions of the Cease-and-Desist Order issued by the FDIC on March 2, 1984 ("1984 Order"). Based on alleged violations of the 1984 Order, the FDIC issued to Respondents a Notice of Assessment of Civil Money Penalties, Findings of Fact and Conclusions of Law, Order to Pay and Notice of Hearing ("Notice"). Respondents did not file a timely Answer, but at the January 31, 1986, prehearing conference their Answer was accepted by Administrative Law Judge Daniel J. Davidson (the "ALJ") on the condition that Respondents would offer at the hearing specific evidence which denied the allegations. Respondents' initial Answer did not deny the principal operative facts alleged in the Notice, but rather sought to excuse or mitigate the seriousness of Respondents' and * * * Bank's violations of the 1984 Order.
   At the January 31, 1986 pretrial conference, the ALJ proposed that the hearing in this matter be conducted using a largely written format, but with oral cross-examination of all witnesses. Transcript of the January 31, 1986 prehearing conference at 31 (hereinafter cited as "Tr."). Both parties agreed to that format.
   After both parties had filed written direct testimony and documentary evidence, the FDIC moved for summary judgment. In a March 28, 1986 order the ALJ denied that motion. The ALJ subsequently canceled the balance of the hearing, including all cross-examination of witnesses. See April 21, 1986 Recommended Decision and Proposed Order at 3 (hereinafter cited as "Recommended Decision"). The ALJ's Recommended Decision recommends that civil money penalties be assessed individually against Respondents in the amounts specified in the Notice, that is, $21,000 against * * *; $4,000 each against * * *, * * *, {{4-1-90 p.A-1100}}* * *, and * * *; and $2,000 each against * * * and * * *.
   Exceptions to the ALJ's Recommended Decision were filed with the Board Pursuant to 12 C.F.R. § 308.14. Respondents' principal exception is that cross-examination was not allowed. Exceptions to certain evidentiary rulings were taken by the FDIC.

DISCUSSION

Summary

   For the reasons set forth below, the Board finds that the hearing must be reopened at the point at which it was suspended for the limited purpose of affording the parties an opportunity for cross-examination on the issue of the amount of the penalties. By remanding, the Board is in no way prejudging whether the amounts of the penalties set forth in the Notice are appropriate.
1. The Act Requires the Board and the ALJ to Make Findings as to the Proper Amounts of the Penalties
   Civil money penalties of up to $1,000 per person per day may be assessed against any bank director or officer "who violates the terms of any order which has become final and was issued pursuant to subsection (b) or (c) of this section..." Section 8(i)(2)(i) of the Act, 12 U.S.C. § 1818(i)(2)(i). The Act further provides that:

       In determining the amount of the penalty the [FDIC] shall take into account the appropriateness of the penalty with respect to the size of financial resources and good faith of the...person charged, the gravity of the violation, the history of previous violations, and such other matters as justice may require.
12 U.S.C. § 1818(i)(2)(ii). Thus, under the Act, finding a violation of the 1984 Order can establish liability for civil money penalties, but such a finding, standing alone, does not establish the proper amount of the penalty.
   To establish the proper amount of the penalty, the Board —and thus the ALJ —as part of the fact-finding process must consider, inter alia, the "size of financial resources and good faith of the...person charges," and the "gravity of the violation." 12 U.S.C. § 1818(i)(2)(ii). In determining whether to assess civil money penalties, the ALJ may be guided by the "Interagency Policy Statement Regarding the Assessment of Civil Money Penalties by the Federal Financial Institutions Regulatory Agencies" ("Policy Statement") issued September 30, 1980. 45 Fed. Reg. 59,423 (1980). The Policy Statement lists thirteen factors the federal banking agencies have deemed relevant in determining whether the violations are of sufficient gravity to warrant assessment of a civil money penalty. As the Board has noted in other civil money penalty proceedings, the thirteen factors provide a useful guide for evaluating the responsibility for and good faith of each individual respondent with respect to the violations that give rise to the proceeding.1 Personal culpability, the gravity of the violations and financial resources are principal factors to be evaluated in determining an appropriate amount for the penalty. After considering these factors, the ALJ is to recommend the amounts of civil money penalties, if any, to be assessed against Respondents. The Board, based on the ALJ's recommendation and on the record presented to the ALJ, then makes the final decision on the amounts of the penalties.2
2. The ALJ Erred in Terminating the Proceeding Without Providing an Opportunity for Cross-examination on the Issue of the Amounts of the Penalties.
   In his Recommended Decision the ALJ recites the appropriate statutory requirements (Recommended Decision at 9), but the decision to terminate the hearing prior to the cross-examination stage appears based on a conclusion that unless Respondents deny the underlying factual events, i.e., violation of the 1984 Order, there is no issue remaining for trial. Given this record, we are uncertain whether the ALJ recognized his authority to hear evidence relevant to the proper amount of any penalty.
   As noted, Respondents contested the amounts of the penalties, and introduced evidence on the issue of the seriousness of the violations of; and the impossibility of compliance with, the Cease-and-Desist Order. For example, Respondents' Answer and written direct testimony raise issues concerning, at a minimum, Respondents' good faith in attempting to increase * * * Bank's capital. Respondents' written submissions also appear to raise questions concerning the seriousness or "gravity" of at
1 Not all the factors may apply in any given case.

2 We note that the civil money penalties proposed in the Notice in this case are far below the maximum amount that could be assessed under the Act.
{{4-1-90 p.A-1101}}least some of the violations. The parties' evidence conflicts concerning the seriousness of the alleged violations. Similarly, there is conflicting evidence regarding Respondents' good faith. In the Board's view, these conflicts in the evidence on issues of material fact going to the amounts of the penalties, require the ALJ to provide Respondents with an opportunity for cross-examination on this issue.
   The Board finds (1) the ALJ must consider evidence relevant to the proper amount of the penalty; (2) the hearing must be reopened and both parties afforded an opportunity to cross-examine the opposing party's witnesses concerning Respondents' good faith and the gravity of the violations. Upon remand we anticipate that the hearing will resume at the same stage it had reached before it was suspended.3By remanding, the Board is in no way prejudging whether the amounts of the civil money penalties set forth in the Notice are appropriate.4

CONCLUSION

   For the foregoing reasons, the Board reopens and remands this case to Administrative Law Judge Daniel J. Davidson for further proceedings consistent with this Decision. The ALJ shall reconvene the hearing as promptly as possible, and no later than 45 days after the date of this Decision and Order.5The ALJ shall afford each party an opportunity for cross-examination, and the ALJ shall consider evidence of mitigation in determining the appropriate amount of civil money penalty to be assessed against each Respondent.

ORDER

   The Board of Directors of the Federal Deposit Insurance Corporation having considered the record in this proceeding, it is hereby
   ORDERED that the May 16, 1986, notice that this matter has been submitted to the Board for final decision be, and hereby is, set aside and that the record in this case is reopened.
   IT IS FURTHER ORDERED that this proceeding be remanded to Administrative Law Judge Daniel J. Davidson as follows:
   1. The ALJ shall schedule a hearing in this matter, to be held no later than 45 days after the date of this Order unless and extension is granted by the Executive Secretary.
   2. The ALJ shall afford each party the opportunity for cross-examination.
   3. The ALJ shall consider evidence of mitigation in his assessment of the appropriate civil money penalty.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 12th day of August, 1986.


3 While phrased in terms of "mitigation," rather than good faith or gravity, Respondents' Exceptions assert that Respondents were precluded from submitting some relevant (and largely unspecified) evidence in their case in chief. It is not clear given Respondents' broad-ranging written direct testimony that any argument by Respondents was in fact foreclosed. However, by remanding this matter we do not limit the ALJ's discretion to reopen the direct testimony, only as it pertains to mitigation evidence, if either party shows good grounds for doing so.

4 Substantial amounts of evidence were stricken by the ALJ. Given that this matter must be remanded, we urge the ALJ to review the decisions to strike insofar as he struck evidence which is relevant to the gravity of the violations, the good faith of Respondents, and the appropriate amount of the penalty. We further note that the expertise of bank examiners may be relevant to whether certain opinion evidence is admissible. See, e.g., Sunshine State Bank v. FDIC, 783 F.2d 1580 (11th Cir. 1986). Additionally, to the extent that testimony may have been struck because it appeared argumentative or its basis was not stated, the opposing party's right to cross-examine may be relevant in determining whether the better course is to strike the subject evidence or to admit it and consider its weight after the evidence is tested under cross-examination.

5 An extension may be granted by the Executive Secretary for a "good cause" shown.
{{4-1-90 p.A-1102}}
/s/ Hoyle L. Robinson
Executive Secretary

RECOMMENDED DECISION AND
PROPOSED ORDER1

Civil money penalties assessed against
Respondents individually and as Officers
and/or Directors of the * * * Bank,
* * * , for violations of Cease-and-Desist
Order.

By DANIEL J. DAVIDSON,
Administrative Law Judge.

Statement of the Case

   The Federal Deposit Insurance Corporation (FDIC) seeks Civil Money Penalties pursuant to § 8(i)(2) of the Federal Deposit Insurance Act (Act) [12 U.S.C. § 1818(i)(2)] against * * * , * * * , * * * , * * * , * * * , * * * and * * * (Respondents) individually and as Officers and/or Directors of * * * Bank, * * * (Bank) for violating certain provisions of a "Cease-And-Desist Order which has become final" as that term is defined by section 8(k) of the Act [12 U.S.C. § 1818(k)]. (The Cease-and-Desist Order issued March 2, 1984, is attached to this Decision as Appendix A.) The Notice of Assessment of Civil Money Penalties, Findings of Fact and Conclusions of Law, Order to Pay, and Notice of Hearing (hereinafter referred to as "Notice of Assessment" and attached to this Decision as Appendix B) was issued by direction of the Board of Review, acting under direction of the FDIC, on October 16, 1985.
   Upon consideration of the alleged violations of the Cease-and-Desist Order, the financial resources and good faith of each Respondent, the gravity of violations of each Respondent, the history of previous violations of each Respondent, and such other matters as justice may require pursuant to § 308.68 of the FDIC Rules of Practice and Procedures (12 C.F.R. § 308, et. seq.), it was ordered that the civil money penalties be assessed as follows: $21,000 against * * * ; $4,000 against each of Respondents * * * , * * * , * * * and * * *; and $2,000 against each Respondent * * * and * * * , pursuant to § 8(i)(2) of the Act [12 U.S.C. § 1818(i)(2)].
   The Order to pay stated that the effective date for payment of these penalties would be stayed until 10 days after the receipt of the Notice of Assessment by each Respondent, during which time the Respondents could request a hearing pursuant to § 308.69 of the FDIC Rules of Practice and Procedures. (12 C.F.R. § 308.69). Hearing requests were filed within the requisite time period.
   However, the Notice of Hearing contained in the Notice of Assessment provided 20 days of Respondents to file an answer to the charges therein in accordance with § 308.06 of the FDIC Rules (12 C.F.R. § 308.06). The Notice of Hearing also stated that the hearing would be public "unless the FDIC, after considering the views of the Respondent (sic), shall determine that a private hearing is necessary to protect the public interest." Notice of Assessment at 6.
   Respondents did not make a timely response to the Notice of Assessment, but were given an opportunity for leave to file a late answer if they could "show cause" why their right of participation should not be waived pursuant to § 308.06(d) [12 C.F.R. § 308.06(d)]. (Order of December 18, 1985). At the prehearing conference held in this proceeding on January 31, 1986, in * * * , Respondents' Answer was accepted, with the admonition that the Answer as presented actually admitted the allegations, and thus unless additional evidence was brought forward to contravene these charges, an order could be issued on the pleadings as they stood. Prehearing Conference Transcript at 22–24. The following alternatives were given to the Bank to avoid such a result: 1) it could amend its Answer in order to rebut the charges (Prehearing Transcript at 21); 2) it could present material in an informal manner pending settlement negotiations between it and the FDIC, Id. at 24; 3) it could present written evidence which would be "in mitigation rather than in actual contravention of the allegations," Id.; or 4) it could produce evidence to show that the interpretation of the Cease-and-Desist Order should be that "substantial compliance is compliance," Id. at 31, especially with regard to paragraph 1(a), which uses the language, "the Bank shall take all steps nec-


1 Pursuant to § 308.14 (12 C.F.R. § 308.14), within 20 days after service of the Recommended Decision, findings, conclusions, and Proposed Order of the Administrative Law Judge, a party may file with the Executive Secretary written exceptions thereto. A supporting brief may be filed pursuant to § 308.15 (12 C.F.R. § 305.15). After expiration of the time for filing exceptions, the Executive Secretary shall notify the parties that the case has been submitted to the Board of Directors for final decision. 12 C.F.R. 308.16.
{{4-1-90 p.A-1103}}essary to increase its capital . . . to $2,000,000." At the Prehearing Conference, the Bank, for the first time, raised the defense of impossibility, and was told that it would have the opportunity to amend its Answer and/or submit evidence to prove the same. Id. at 30. Therefore, the hearing dates as scheduled contemplated that the Bank would put forth evidence to prove impossibility or would use the ensuing months to negotiate a settlement. Neither of these alternatives came to fruition, nor did the Bank in any way amend its Answer. The written direct testimony, documentary evidence, and pleadings merely recounted their efforts to comply with the Order and in effect admitted that the failure to do so was caused by the Bank's own inefficiency.
   After receipt of the written direct testimony and documentary evidence in this proceeding, the FDIC moved for summary judgment on March 17, 1986. This motion was denied by the Order of March 28, 1986, because the FDIC Rules prohibit an administrative law judge from deciding any motion to dismiss the proceedings or other motion resulting in final determination of the merits of the proceeding. 12 C.F.R. § 308.07(b)(9). It was determined nevertheless that the hearing for purposes of cross-examination would serve no useful purpose in evaluation of the charges in this proceeding, because Respondents' pleadings and evidence admitted rather than denied the charges contained in the Notice. Accordingly, the remainder of the hearing was canceled.2

Statement of Facts

   * * * Bank (Bank) is a corporation existing and doing business under the laws of the State of * * * and has its principal place of business in * * *. At all times pertinent to this proceeding, the Bank is and was an insured state nonmember bank subject to the Act [12 U.S.C. §§ 1811-1831(d)] and Rules and Regulations of the FDIC (12 C.F.R. Chapter III). * * * and * * * each is and was, at all times pertinent to this proceedings, a Director and/or Officer of the Bank. * * * has been a Director since December 14, 1983. * * * and * * * each was elected to the Bank's Board of Directors in July, 1984. * * * was elected a Director on December 14, 1983 but resigned this position on March 20, 1985.
   This action stems from the Cease-and-Desist Order (Order) of March 2, 1984, issued pursuant to the Stipulation and Consent to the Issuance of an Order to Cease-and-Desist (Consent Agreement) entered into between the FDIC and the Bank on November 18, 1983. The Consent Agreement, in essence, stipulated that the Bank understood its right to receive a Notice of Charges and of Hearing detailing unsafe and unsound banking practices and violations of law and/or regulations alleged to have been committed by it, of its right to a hearing on the alleged charges under § 8(b)(1) of the Act [12 U.S.C. § 1818(b)(1)], and had waived these rights. Thereby, the Bank, solely for the purpose of that proceeding and without admitting or denying any of the charges and violations of law and/or regulations, agreed to the issuance of an order to cease and desist by FDIC, that this order would become final, and that it therefore waived all rights to a hearing thereto, including the issuance of proposed findings of fact and conclusions of law, a recommended decision by an administrative law judge, and the filing of exceptions and briefs with respect to such a decision. This stipulation was signed by * * * , * * * , * * * , * * * , and * * * , then comprising the Bank's Board of Directors.
   A Certified Copy of Resolution of the Board was issued by its Secretary, * * * , on December 15, 1983, stating that the Board accepted the Consent Agreement and agreed to the issuance of a Cease-and-Desist Order by the FDIC under the provisions of § 8(b) of the Act. The Order, issued by the FDIC on March 2, 1984, became effective March 12, 1984.
   However, upon an examination of the Bank conducted as of close of business on September 15, 1984 by the FDIC, it was reported to the Regional Office in * * * that the Bank had not substantially complied with the Order. A letter from * * * ,


2 Pursuant to the stipulations jointly submitted by the parties on February 11 1986, official business records identified and certified by counsel as having been compiled and maintained in the regular course of business may be introduced and admitted into evidence through witnesses who did not participate in their preparations and/or who are not official custodians of such records. Stipulations at 4, paragraph 27. Since the findings herein are based solely on such records and the pleadings and evidence submitted by Respondents, there was no need for the cross-examination of witnesses as contemplated in the remaining hearing schedule.
{{4-1-90 p.A-1104}}Regional Director, was sent to the Board of Directors of the Bank on January 11, 1985, which along with the report of examination, detailed the violations alleged and explained why poor management decisions by the Bank led to noncompliance with the Order. The letter asked the Board to advise the FDIC of actions taken in regard to these violations within 45 days of its receipt, and also warned that the Regional Office was "seriously considering recommending the assessment of Civil Money Penalties against the Board Members for violations of the Order pursuant to § 8(i)(2) of the . . . Act." Ex. No. G-5, Appendix 5 at 3. On February 22, 1985, the Regional Office issued a "10day letter"3notifying the Board Members that it was prepared to recommend to FDIC that civil money penalties be assessed against them in their representative capacities as Directors and/or Officers of the Bank for seven specified violations of the Order, including those at issue in this proceeding:
   1. The Bank failed to take all steps necessary to increase the Bank's total capital and reserves to not less than $2,000,000 within 180 days from the Order as required by paragraph 1(a) of the Order.
   2. The Bank failed to file amendments to Reports of Condition and Income within 30 days of the effective date of the Order for each quarterly period subsequent to June 11, 1983, incorporating adjustments to the loan valuation reserve and additional provision for loan losses as required by paragraphs 6(a) and 6(b) of the Order, as required by paragraph 6(c) of the Order. (The date required for compliance of this provision was on or about April 15, 1984.).
   3. The Bank failed to submit written progress reports on a monthly basis to the Regional Director detailing the actions taken to effect compliance with the Order, as required by paragraph 11 of the Order.
   Ex. No. G-4, Appendix 2 at 1.
   The letter invited the Board members to respond within 10 days to provide their opinion of the appropriateness of these penalties based on the alleged violations. The Board members were also asked to provide information which would influence the amount of penalty contemplated against them, including their financial resources, good faith efforts to correct the violations, the gravity of the violations, any history of previous violations, and any other matters as justice requires. Ex. No. G-4.
   On March 4, 1985, the Regional Office received a letter from * * * which explained his financial situation, but provided little information surrounding the violations of the Order. Ex. No. G-4, Appendix 2. Such a letter was received from the full Board, however, on March 10, 1985; in this response the Board provided a detailed chronology of the efforts taken to comply with the Order, and offered mitigating factors as to why certain of the provisions were yet unaccomplished. Ex. No. G-4, Appendix 3, Ex. No. G-63. In response to the Board's explanation of its activities, the Regional Office dropped several of the provisions to which civil money penalties were to be assessed, pursuing only the three violations discussed above.
   The Notice of Assessment charging these alleged violations of the Order, ordering payment of civil money penalties thereto, and providing the Notice of Hearing was issued October 16, 1985.

Substantiation of the Violations

   The written direct testimony and documentary evidence received from the Bank focuses on its efforts to gain approval of a charter amendment for the issuance of additional shares of bank stock. It was this step which was to facilitate the accumulation of $2,000,000 in total capital and reserves as required by paragraph 1(a) of the Order. However, the Bank's execution of this effort was replete with error. The Bank initially submitted a charter amendment in March of 1984 to * * * Executive Assistant to the * * * Commissioner of Banks and Trust Companies, calling for an issuance of 60,000 shares of bank stock at a price of $20.00 per share and a par value of $10.00 per share. Ex. No. G-5 at 2, Ex. No. B-7 at 2 * * *. However, at a meeting with members of the Bank's Board on March 15, 1984, Mr. * * * explained that the charter amendment application was returned because it was improperly completed; i.e., it was not sufficiently descriptive of the transaction. Id. See Bank's Answer at 2. When it became apparent that the price per share was too high in light of the Bank's condition, the Board amended the purchase price to $10.00 a share at a July, 1984 shareholders' meeting. Bank Answer at 2, Ex. No. B-


3 A "10-day letter" is one which provides a warning to a financial institution that civil money penalties against it are being contemplated, allowing a 10-day response time to the recipients to rebut the grounds for the assessed penalties.
{{4-1-90 p.A-1105}}13. Despite this reduction, the Bank's proposal was unacceptable as a remedy for its condition as the proceeds of the stock offering would be injected entirely into the stock account of the Bank and not to either the surplus or undivided capital accounts, the latter of which was a negative figure. Ex. No. G-5 at 3, Ex. No. B-7 at 2 * * *. Therefore, the proposal was inadequate as it did not provide for a selling price in excess of the stated par value to restore the capital accounts to an acceptable level. It was not until October 18, 1985 that an acceptable charter amendment was presented (and thus approved) to the Commissioner's office, in which the Bank authorized an offering of stock at $7.00 par value to be sold at $10.00 per share. Ex. No. B-4 * * * , Ex. No. B-27. The Bank's delay in executing a feasible charter amendment to increase its capital and reserves, a vital provision mandated by the Order, is inexcusable in light of the Bank's numerous discussions with the Regional Office and guidelines provided for its assistance. The claim of impossibility cannot be viewed as a serious defense to the violation of paragraph 1(a) of the Order, as the delay in obtaining the necessary capital was apparently caused by the Bank's own malfeasance.
   Lack of diligence was also apparently to blame for the delay by the Bank in gaining approval for a public stock offering circular. Not only was this circular to comply with state and federal securities laws and regulations but under paragraph 1(b) of the Order, it was required to "include detailed offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and the circumstances giving rise to the offering, and any other material disclosures necessary to comply with Federal securities law." Ex. No. G&B-1, paragraph 1(b). However, it was not until September 3, 1985 when the Bank submitted a fourth revised offering to FDIC's Registration and Disclosure Unit that the offering circular was found acceptable; a definitive copy of the Bank's offering circular was not received by the FDIC until December 2, 1985, more than two months after this document was requested. See Ex. No. B-27.
   In its defense, the Bank offers no legitimate explanation for these submissions. Virtually no mention is made in the written direct testimony submitted by the Bank as to why it had such problems in filing an acceptable offering circular, nor do the minutes of the twenty board meetings submitted as documentary evidence contain sufficient justification. It appears that the Bank's violation of paragraph 1(a) of the Order was caused by its failure to follow basic securities regulations. The Bank was fully aware that issuance of additional stock was one of the only options available in order to raise its capital and reserves to $2,000,000. This became evident long before September 15, 1984, the date of compliance.
   The need for the Bank to submit an offering circular to the Securities Section of the FDIC was fully explained in the Order issued over 18 months before the Bank finally submitted an acceptable circular. The Bank was given six months to raise its capital to $2,000,000 but took more than 18 months to do so. An adequate capital level is critical to the safe and sound operation of a bank. The Bank's delay in raising its capital to $2,000,000 was clearly unwarranted.
   The Respondents' pleadings and evidence presented in this proceeding also demonstrate noncompliance with the remaining two charges in the Notice of Assessment: failure to file amendments to Reports of Condition and Income (Call Reports) for each quarterly period subsequent to June 11, 1983, incorporating adjustments to the loan valuation reserve and additional provision for loan losses as required by paragraphs 6(a) and 6(b) of the Order, a violation of paragraph of 6(c) of the Order, and failure to file written progress reports on a monthly basis to the Regional Director detailing the actions taken to comply with the Order, a violation of paragraph 11 of the Order. This is especially extraordinary in that the Order was one to which the Bank had stipulated. Indeed, in the Stipulations of February 11, 1986, jointly submitted by the parties to this proceeding; the Bank concedes that it did not refile amended Call Reports. Stipulations at paragraph 11. Call Reports are necessary to reflect accurately the reserve requirements mandated by paragraphs 6(a) and 6(b) of the Order. Though the Answer and documentary evidence filed by the Bank discuss efforts made on the collection of loan matters and the maintenance of a proper loan {{4-1-90 p.A-1106}}valuation reserve, no mention is made of filing amended Call Reports. Instead, it is stated again and again that "the Board has always attempted to comply with the requirements of the Order . . . ." Bank's Answer at 3. This is conclusory and selfserving at best. It is not alleged that the Bank violated paragraphs 6(a) and 6(b) of the Order which required it to replenish its loan valuation reserve to a minimum of 1.25 percent of total loans, and made additional provision for loan losses in the "Substandard" and "Doubtful" loan classifications, [Ex. No. G&B-1, paragraphs 6(a) and 6(b)] but that the Bank had not filed amendments to its Reports of Condition and Income describing the loan charge-offs and/or provision for loan losses required by paragraphs 6(a) and 6(b) of the Order, as required by paragraph 6(c) of the Order. Thus, the public did not have access to documents describing the true condition of the Bank. The bulk of the evidence submitted by the Bank discusses its effort to increase its loan reserve and otherwise collect on several of its accounts. This, however, is not relevant to the alleged violation of paragraph 6(c), as it refers only to compliance with paragraphs 6(a) and 6(b), to which no violation has been charged. Indeed, both parties have stipulated that the loan valuation reserve for the months in question have exceeded the 1.25 percent minimum of total loans. Stipulations at 3, paragraph 18–22. The Bank simply has not complied with the filing requirements of the Order.
   In regard to violation of paragraph 11 of the Order requiring the Bank to file monthly written progress reports, the Bank has admitted in its Answer that "for certain months," reports were not filed. Bank's Answer at 4, paragraph 3(c). Its defense that several monthly reports were indeed filed which reported improvements in the Bank's condition is not a defense at all. The alleged violation was not that no monthly reports were received; the violation alleged was that these reports were not received monthly. Considering the gravity of the Bank's condition and the need for the FDIC to be informed of the Bank's compliance with the Order, this violation is inexcusable.

Findings of Fact and Conclusions of Law

   The Bank entered into a Consent Agreement whereby it agreed to an Order to Cease-and-Desist on November 18, 1983. The Bank accepted the terms of the Consent Agreement and agreed to the Order on December 15, 1983. The Order was issued by the FDIC on March 2, 1984, became effective March 12, 1984, and was a final Order as that term is defined by § 8(k) of the Act [12 U.S.C. § 1818(k)]. The Order is effective as to all of the Directors at the time of its issue and as to all subsequent Directors of the Bank until such time as the Order is revoked, modified or set aside by the FDIC. As of September 15, 1984, 180 days from the effective date of the Order and the date by which compliance was required, Respondents had violated paragraphs 1(a), 6(c)4, and 11 of the Order. By virtue of these violations, it is appropriate that a civil money penalty be assessed against each Respondent under § 8(i)(2) of the Act. [12 U.S.C. § 1818(i)(2)]. According to § 308.68 of the FDIC Rules and Regulations (12 C.F.R. § 308.68), the amount of each penalty should be assessed by taking into account the financial resources and good faith of each Respondent, the gravity of the violations of each Respondent, the history of previous violations of each Respondent, and other such matters as justice requires. Violation of the capital provision of the Order is considered most critical, and thus the amount assessed for noncompliance should be greater than for noncompliance with the other two provisions. Distinction with respect to culpability among the Board members is also necessary; because Mr. * * * was a salaried Chief Executive Officer and Chairman of the Board during the period of compliance with the Order, he was ultimately responsible for insuring full conformance with all of its provision. His penalty should therefore reflect this responsibility. The financial resources of each Director must also be considered; however, only Mr. * * * provided any information in this regard, though all were invited to do so by the "10-day" letter of February 22, 1985. Directors * * * and * * * joined the Board after the effective date of the Order, and subsequent to the expiration of the time frames for the Call Reports and monthly reports to be resubmitted. (The requirements of paragraphs 6(c) and 11 of the Order.) Accordingly, the penalty assessed against each of them, $2,000.00, is only with respect to violation of 1(a) of the Order. Directors * * * , * * * , * * * and * * * should also be assessed this penalty,


4 Compliance required by April 15, 1984.
{{4-1-90 p.A-1107}}along with a $1,000.00 penalty for failure to file amended Call Reports, and a $1,000.00 penalty for failure to file adequate and timely monthly reports (thus, in aggregate the total fine is $4,000.00 against each of these Directors).

PROPOSED ORDER

   Based upon the record in this proceeding and the foregoing statement of the case, including findings of fact and conclusions of law, it is RECOMMENDED that the following ORDER be entered by the Board of Directors of the FDIC:
   ORDERED: 1. That, by reason of violations determined against * * * , * * * , * * * , * * * , * * * , * * * and * * * , individually, the following penalties are assessed against each of them pursuant to § 8(k) of the Act, 12 U.S.C. § 1818(k):

Director Assessed Penalty
* * * $4,000.00
* * * 2,000.00
* * * 21,000.00
* * * 4,000.00
* * * 4,000.00
* * * 2,000.00
* * * 4,000.00

   2. That the civil money penalties assessed against each of the named individuals shall not be paid directly or indirectly by * * * Bank but shall be paid by the individual against whom the penalty is assessed.
   Dated this 21st day of April, 1986.

/s/ Daniel J. Davidson,
Administrative Law Judge

Appendix A

ORDER TO CEASE AND DESIST

FDIC-84-10b

   * * * Bank, * * * ("Bank") having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices and violations of law and regulations alleged to have been committed by the Bank and of its right to a hearing on the alleged charges under Section 8(b)(1) of the Federal Deposit Insurance Act (12 U.S.C. § 1818(b)(1)), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated November 18, 1983, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violations of law and regulations, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
   The FDIC considered the matter and determined that it had reason to believe that the Bank had engaged in unsafe or unsound banking practices and had violated law and regulations. The FDIC therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED, that the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank, cease and desist from the following unsafe or unsound banking practices and violations of law and regulation:
   1. (a) Operating with an inadequate level of capital protection for the kind and quality of its assets and with an inadequate loan valuation reserve;
   (b) Operating with excessive overhead expenses and net loan losses that have resulted in operating losses;
   (c) Operating in violation of Federal Reserve Regulation O, Sections 215.4(a)(1), 215.4(b), and 215.4(c), (12 C.R.F. §§ 215.4(a)(1), 215.4(b), and 215.4(c)); the * * * Banking Act, Sections 16(2), 16(7), and 32 (* * * REV. STAT. Ch. 17, §§ 323(2) and (7), and 339); and the FDIC Rules and Regulations Parts 326.4(b)(1) and 326.5(a) through (c) (12 C.F.R. §§326.4(b)(1), and 326.5(a)-(e));
   (d) Operating with hazardous lending and lax collection practices;
   (e) Operating with a management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits.
   (f) Operating with a board of directors that has failed to provide adequate supervision and direction over active management of the Bank in order to prevent unsafe or unsound banking practices.
{{4-1-90 p.A-1108}}
   IT IS FURTHER ORDERED that * * * Bank, * * * , its directors, officers, agents, employees, successors, assigns, or other persons participating in the conduct of the affairs of the Bank, take affirmative action as follows:
   1. (a) Within 180 days of the effective date of this ORDER, the Bank shall take all steps necessary to increase total capital and reserves to not less than $2,000,000. Such increase in capital and reserves may be accomplished by:
   (i) the sale of new capital stock in the form of common stock; or
   (ii) the elimination of all or part of the "Loss" and "Doubtful" assets referred to in Paragraph 2 of this ORDER, without loss or liability to the Bank; or
   (iii) the direct contribution of cash by the directors or shareholders of the Bank; or
   (iv) the collection of assets previously charged off; or
   (v) any other means acceptable to the Regional Director of the FDIC's * * * Regional Office ("Regional Director").
   (b) If all or part of the increase in total capital and reserves required in Paragraph 1(a) above of this ORDER is to be accomplished by the sale of new capital stock in the form of common stock, the board of directors of the Bank shall forthwith take all steps necessary to adopt and implement a plan for the sale of such additional stock, including the voting of any shares owned by them in favor of said plan. Should the implementation of the plan involve public distribution of the Bank's securities the Bank shall prepare detailed offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and the circumstances giving rise to the offering, and any other material disclosures necessary to comply with Federal securities law. Prior to the sale of the capital and, in any event, not less than 20 days prior to the dissemination of such materials, the materials used in the sale of securities shall be submitted to the FDIC at Washington, D.C. for its review. Any changes requested to be made in the materials by the FDIC shall be made prior to their dissemination.
   (c) In complying with the provisions of Paragraph 1(b) of this ORDER, the Bank shall provide to any subscriber and/or purchaser of the Bank stock, written notice of any planned or existing development or other changes which is materially different from the information reflected in any offering materials used in connection with the sale of Bank stock. The written notice required by this paragraph shall be made to every purchaser and/or subscriber of Bank stock who received or was tendered the information contained in the Bank's original offering circular.
   2. Within 30 days of the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified "Loss", and 50 percent of all assets or portions of assets classified "Doubtful" as of June 11, 1983 which have not yet been eliminated. Reduction of these assets through proceeds of loans made by the Bank are not to be considered collection for the purpose of this paragraph.
   3. (a) Within 90 days from the effective date of this ORDER, the Bank shall provide and thereafter continue to retain management acceptable to the Regional Director. Such management shall include a qualified chief executive officer who shall be given stated written authority by the Bank's board of directors. Such written authority shall include the responsibility for implementing and maintaining lending policies and other bank policies in accordance with sound banking practices.
   (b) Within 90 days of the effective date of this Order, and as of each meeting of the shareholders of the Bank at which directors are to be elected, the Bank shall use its best efforts either to appoint or to nominate and cause to be elected at such shareholder meetings, at least three directors who shall not be active officers of the Bank or control more than 5% of the Bank's capital stock, and who shall not be active officers or directors or employees of any company that is controlled by an officer or director or more than 5% shareholder of the Bank.
   4. Within 60 days of the effective date of this Order, the Bank's board of Directors shall review the Bank's present loan policy and procedures, and develop and implement a comprehensive loan policy acceptable to the Regional Director. Copies of the revised policy shall be submitted to the Regional Director for his review. The revisions to the policy shall address, but not be limited to, procedures for supervision and collection of problem loans, as well as ap- {{4-1-90 p.A-1109}}proval procedures for new loans and renewals of existing loans.
   5. (a) Within 180 days of the effective date of this ORDER, the Bank shall reduce the aggregate of all loans and other assets classified "Substandard" and the remaining 50 percent of loans classified "Doubtful" as of June 11, 1983, to not more than $500,000 and within 360 days of the effective date of this ORDER, the Bank shall reduce the aforementioned loans and other asset items listed as "Substandard" and the remaining 50 percent of loans classified "Doubtful" to not more than $300,000. As used in this ORDER, the word "reduce" means (1) to collect (2) to charge-off, or (3) to substantially improve the quality of loans and other asset items adversely classified or specially mentioned to warrant removing any adverse classifications. The requirements of this paragraph are not to be construed as standards for future operation, and the Bank shall further reduce all adversely classified assets.
   (b) As of the date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to or for the benefit of any borrower who has a loan or other extension of credit with the Bank, which has been charged off or has been classified, all or in part, "Loss" and is uncollected. The requirements of this paragraph do not prohibit the Bank from renewing, upon collection of interest in cash from the borrower, any credit already extended to any such borrower.
   6. (a) Within 30 days of the effective date of this ORDER, the Bank shall replenish its loan valuation reserve by charges against current operating income in an amount equal to those loans required to be charged off under paragraph 2 of this ORDER.
   (b) Within 30 days of the effective date of this ORDER, the Bank shall make an additional provision for loan losses which, after careful review and consideration by the board of directors, reflects the potential for further losses in the remaining "Substandard" and "Doubtful" loan classifications. At a minimum, the loan valuation reserve shall equal 1.25 percent of total loans.
   (c) Within 30 days of the effective date of this ORDER, Reports of Condition and Report of Income submitted to the FDIC for each quarterly period subsequent to June 11, 1983 shall be amended and refiled if they do not reflect a provision for loan losses and a loan valuation reserve which are adequate considering the condition of the Bank's loan portfolio and which, at a minimum, incorporate the adjustments required by paragraphs 6(a) and 6(b) of this ORDER.
   (d) Following the effective date of this ORDER, prior to submission or publication of any Report of Condition and Report of Income requested by the FDIC, the board of directors of the Bank shall review the adequacy of the Bank's loan valuation reserve and accurately report the same. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, the amount of increase in the reserve recommended, if any, and the basis for determination of the amount of reserve provided.
   7. As of the effective date of this ORDER, the Bank shall not declare or pay any cash dividend without prior written consent of the Regional Director.
   8. As of the effective date of this ORDER, the Bank shall not purchase any additions to the Bank's fixed assets with a cost in excess of $10,000 nor obligate the Bank for any additional lease payments for bank building without the prior written consent of the Regional Director.
   9. As of the effective date of this ORDER, the Bank shall take all appropriate actions to eliminate and/or correct all the apparent violations of laws and regulations as of June 11, 1983 and establish procedures to ensure future compliance with all applicable laws and regulations.
   10. (a) Within 60 days from the effective date of this ORDER, the Bank shall draft and enact a comprehensive budget and also develop and fully implement specific written goals and strategies to improve asset yields; reduce overhead expenses (specifically, occupancy and personnel expenses); and improve its overall earnings.
   (b) The goals, strategies and budget required by paragraph 10(a), when developed, shall be presented to the Regional Director for his review.
   (c) Prior to the end of each calendar quarter, the Bank's board of Directors shall evaluate the Bank's actual performance in relation to the goals, strategies and budget required by paragraph 10(a) and report the {{4-1-90 p.A-1110}}results of the evaluations to the Regional Director. The minutes of the board meeting at which such evaluation is undertaken shall indicate the results of the evaluation and any actions taken.
   11. On the last day of the second month following the date of issuance of this ORDER, and on the last day of every month thereafter, the Bank shall furnish written progress reports to the Regional Director detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has released the Bank in writing from making further reports.
   12. The effective date of this ORDER shall be ten (10) days after its issuance by the FDIC.
   The provisions of this ORDER shall be binding upon the Bank, its directors, officers, agents, employees, successors, assigns, and other persons participating in the conduct of its affairs.
   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, and suspended or set aside by the FDIC.
   Pursuant to delegated authority.
   DATED: March 2, 1984
* * *
Associate Director
Division of Bank Supervision

Appendix B

NOTICE OF ASSESSMENT OF CIVIL
MONEY PENALTIES, FINDINGS OF
FACT AND CONCLUSIONS OF LAW,
ORDER TO PAY, AND NOTICE OF
HEARING

FDIC-85-303k

NOTICE OF ASSESSMENT OF CIVIL
MONEY PENALTIES

   The Federal Deposit Insurance Corporation ("FDIC") is of the opinion that * * * , * * * , * * * , * * * , * * * , * * * and * * * ("Respondents"), individually and as officers and/or directors of * * * Bank, * * * ("Bank"), each has violated certain provisions of a "Cease-and-Desist Order which has become final" as that term is defined in section 8(k) of the Federal Deposit Insurance Act ("Act") (12 U.S.C. § 1818(k)). The FDIC hereby issues this NOTICE OF ASSESSMENT OF CIVIL MONEY PENALTIES, FINDINGS OF FACT AND CONCLUSIONS OF LAW, ORDER TO PAY, AND NOTICE OF HEARING ("NOTICE OF ASSESSMENT") pursuant to the provisions of section 8(i)(2) of the Act (12 U.S.C. § 1818(i)(2)) and the FDIC Rules of Practice and Procedures (12 C.F.R. Part 308). In support thereof, the FDIC finds and concludes as follows:

FINDINGS OF FACT AND
CONCLUSIONS OF LAW

   1. The Bank is a corporation existing and doing business under the laws of the State of * * * and having its principal place of business in * * *. The Bank is and was, at all times pertinent to this proceeding, an insured State nonmember bank subject to the Act (12 U.S.C. §§1811-1831d) and the Rules and Regulations of the FDIC (12 C.F.R. Chapter III). * * * , * * * , * * * , and * * * , each is and was, at all times pertinent to this proceeding, a director and/o an officer of the Bank. * * * and * * * each was elected to the Bank's board of directors in July, 1984, and was a director of the Bank at times pertinent to these proceedings. * * * was, at times pertinent to these proceedings, a director of the Bank until March 20, 1985. The FDIC has jurisdiction over the Bank, each Respondent, and the subject matter of the proceeding.
   2. On March 2, 1984, the FDIC issued against the Bank a "Cease-and-Desist Order which has become final" ("CEASE-AND-DESIST ORDER") as that term is defined in section 8(k) of the Act (12 U.S.C. § 1818(k)). The effective date of the Order is March 12, 1984.
   3. As of September 15, 1984, the Bank and the Respondents were in violation of the following provisions of the CEASE-AND-DESIST ORDER:
   (a) The Bank and the Respondents had not taken all steps necessary to increase the Bank's total capital and reserves to not less than $2,000,000 within 180 days from the effective date of the CEASE-AND-DESIST ORDER, as required by paragraph 1(a) of the CEASE-AND-DESIST ORDER. As of September 15, 1984, the Bank's total capital and reserves equaled $1,012,000.
{{4-1-90 p.A-1111}}
   (b) Within 30 days from the effective date of the CEASE-AND-DESIST ORDER, the Bank and the Respondents had not filed amendments to Reports of Condition and Income for each quarterly period subsequent to June 11, 1983, incorporating adjustments to the loan valuation reserve and additional provision for loan losses which are required by paragraphs 6(a) and 6(b) of the CEASE-AND-DESIST ORDER, as required by paragraph 6(c) of the CEASE-AND-DESIST ORDER. As of September 15, 1984, the Bank's June 30, 1983 Reports of Income and Condition, the September 30, 1983 Report of Condition, and the December 31, 1983 Report of Income did not properly reflect the loan charge-offs and/or provision for loan losses required by paragraph 6(a) and 6(b) of the CEASE-AND-DESIST ORDER.
   (c) The Bank and the Respondents have not submitted written progress reports on a monthly basis to the Regional Director detailing the actions taken to effect compliance with the CEASE-AND-DESIST ORDER, as required by paragraph 11 of the CEASE-AND-DESIST ORDER.
   4. (a) By virtue of the facts stated above, the FDIC concludes that each Respondent violated the CEASE-AND-DESIST ORDER and that a civil money penalty should be assessed against each Respondent under section 8(i)(2) of the Act (12 U.S.C. § 1818(i)(2)).
   (b) As used herein, pursuant to sections 8(i)(2)(i) and 8(k) of the Act (12 U.S.C. §§818(i)(2)(i) and (k)), the terms "violates" or "violation" includes without limitation any action (alone or with another or others) for or toward causing, bringing about, participating in, counseling, or aiding or abetting a violation.

ORDER TO PAY

   After taking into account the appropriateness of each penalty with respect to the financial resources and good faith of each Respondent, the gravity of the violations of each Respondent, the history of previous violations of each Respondent, and such other matters as justice may require, it is:
   ORDERED, that by reason of the violations set forth above, a penalty of $21,000 be, and hereby is, assessed against * * *; a penalty of $4,000 be, and hereby is, assessed against * * *; a penalty of $4,000 be, and hereby is, assessed against * * *; a penalty of $4,000 be, and hereby is, assessed against * * *; a penalty of $4,000 be, and hereby is, assessed against * * *; a penalty of $2,000 be, and hereby is, assessed against * * *; and a penalty of $2,000 be, and hereby is, assessed against * * * , pursuant to section 8(i)(2) of the Act (12 U.S.C. § 1818(i)(2)).
   FURTHER ORDERED, that the effective date of the ORDER TO PAY be, and hereby is, stayed with respect to each Respondent until ten days after the date of receipt of the NOTICE OF ASSESSMENT by each Respondent, during which time the Respondents may each request a hearing pursuant to section 308.69 of the FDIC Rules of Practice and Procedures (12 C.F.R. § 308.69). Any such request for a hearing must be filed in writing with the Executive Secretary, Federal Deposit Insurance Corporation, 550 17th Street, N.W., Washington, D.C. 20429.
   If any Respondent fails to file a request for a hearing, the penalty assessed against such Respondent, pursuant to this ORDER TO PAY, shall be paid within 60 days of the date of issuance of this NOTICE OF ASSESSMENT.

NOTICE OF HEARING

   FURTHER ORDERED, that if any Respondent requests a hearing with respect to the charges in the NOTICE OF ASSESSMENT, the hearing shall commence 60 days from the date of receipt of such request at * * *. The hearing will be conducted in accordance with the provisions of the Act (12 U.S.C. §§1811-1831d), the Administrative Procedure Act (5 U.S.C. §§551–559), and the FDIC Rules of Practice and Procedures (12 C.F.R. Part 308). The hearing will be held before an Administrative Law Judge to be appointed by the U.S. Office of Personnel Management pursuant to 5 U.S.C. § 3344. The exact time and location of the hearing will be determined by the Administrative Law Judge. The FDIC is preliminarily of the view that a public hearing is necessary to protect the public interest. The hearing will be public unless the FDIC, after considering the views of the Respondent, shall determine that a private hearing is necessary to protect the public interest.
{{4-1-90 p.A-1112}}
   Any Respondent who requests a hearing shall file an answer to the charges in the NOTICE OF ASSESSMENT within 20 days of receipt of the NOTICE OF HEARING in accordance with section 308.06 of the FDIC Rules of Practice and Procedures (12 C.F.R. § 308.06). Respondent is further directed to file within 20 days of receipt of the NOTICE OF HEARING a written response to the determination to hold a public hearing. The response shall include any information, mitigating circumstances, documentation, or other relevant evidence as to why a public hearing would not be in the public interest.
   By direction of the Board of Review, pursuant to delegated authority.
   Dated at Washington, D.C., this 16th day of October, 1985.

/s/ Janet M. Reddish
Assistant Executive Secretary

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