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   [5098] FDIC Docket No. FDIC-85-322k (12-17-87)

   A former bank director was assessed a civil money penalty of $15,000 for extending credit in violation of the legal lending limit and for violating a cease and desist order.

   [.1] Cease and Desist Order—Civil Money Penalties for Violation
   Civil money penalties may be assessed against a former bank director when the director extends credit in violation of the legal lending limit, violates a cease and desist order by extending such credit, and fails to maintain adequate capital in the bank as required by the cease and desist order.

In the Matter of * * * individually and as
a person participating in the affairs of and
a principal shareholder of * * * BANK &
TRUST COMPANY * * * (Insured State
Nonmember Bank)


DECISION AND ORDER TO PAY
CIVIL MONEY PENALTIES

FDIC-85-322k

BACKGROUND

   This civil money penalty proceeding was initiated by the Board of Review of the Federal Deposit Insurance Corporation ("FDIC") on November 13, 1985. The Notice of Assessment of Civil Money Penalties, Findings of Fact and Conclusions of Law, Order to Pay and Notice of Hearing ("Notice of Assessment") assessed a civil money penalty of $15,000 against * * * ("Respondent") pursuant to the provisions of sections 8(i)(2) and 18(j)(3) of the Federal Deposit Insurance Act (12 U.S.C. §§ 1818(i)(2), 1828(j)(3)).
   The Respondent initially appeared in this proceeding by counsel. However, prior to the administrative hearing, counsel withdrew from the case. Thereafter, notice of the precise time and place of the hearing was sent directly to Respondent * * * at his last known address. The hearing in this matter was held before Administrative Law Judge Patrick R. Maloney ("ALJ") on August 25, 1987. Respondent failed to appear at the hearing. FDIC enforcement counsel nonetheless presented their case, which included calling three witnesses.
   ALJ Maloney issued a Recommended Decision on September 15, 1987. The Recommended Decision concluded that Respondent * * * had violated both Regulation O and certain provisions of a November 9, 1983 Cease and Desist Order (the "1983 Order") which had been entered against * * * Bank & Trust Company, * * * ("Bank"), by the FDIC. ALJ Maloney recommended that the full $15,000 civil money penalty be assessed against Respondent * * *. Respondent did not file exceptions to that Recommended Decision.1

DECISION

   Based on the entire record of the proceeding, the Board of Directors ("Board") of the Federal Deposit Insurance Corporation finds that ALJ Maloney's Recommended Decision correctly summarizes the relevant facts and is in accordance with applicable law. Consequently, the Board adopts ALJ Maloney's Recommended Decision in its entirety, including his Findings of Fact and Conclusions of Law, and incorporates that Recommended Decision herein by this reference.
   In light of our adoption of ALJ Maloney's Recommended Decision, and Respondent's failure to file exceptions, this Decision is limited to a brief overview of the violations and the bases for the penalty imposed.

The Violations

   The 1983 Order was issued against the Bank, on consent, as a result of a November 12, 1982 Report of Examination which concluded, among other things, that the Bank had made extensions of credit to Respondent in violation of Regulation O. At the time of the 1982 examination, Respondent * * * was vice-chairman of the board of directors of the Bank. Respondent * * * resigned that position in February 1983, but the Bank is controlled by the * * * family, and during the relevant period Respondent remained a principal shareholder in the Bank. Additionally, Respondent * * * was active in the Bank's management both during and after his tenure as vice-chairman. Thus, during the relevant period, the Respondent remained covered by the provision of Regulation O.
   Between February 1, 1984, and October 22, 1984, the Bank (or its wholly owned


1 Under 12 C.F.R. 308.14(b), if no exceptions are filed all objections to the Recommended Decision are waived.
{{4-1-90 p.A-1177}}subsidiary) paid six bills on behalf of Respondent or his related interests. The bills totalled $14,779. Those six payments were comparable to some of the transactions that underlaid the 1983 Order, and each of those six transactions violated Regulation O.2 In addition to violating Regulation O, each of those transactions violated the 1983 Order. The Bank also failed to maintain adequate capital as required by the 1983 Order.

The Penalty

   [.1] The Board finds three independent bases for imposing the $15,000 civil money penalty. First, there were six Regulation O violations. Respondent's direct pecuniary gain from those violations was almost $15,000, and his theoretical exposure to civil money penalties based on those violations is in excess of $1.5 million. Second, the six violations of Regulation O were also violations of the 1983 Order. Respondent's participation in, and profit from, those violations of the 1983 Order provides a separate legal basis for imposing civil money penalties. Third, there was a failure to maintain adequate capital in the Bank as required by the 1983 Order. The record includes a prima facie case for imposing civil money penalties on Respondent based upon this violation of the 1983 Order. While imposing the penalty on all three of these bases, the Board notes that even if Respondent had not been chargeable with any violations of the 1983 Order the Board would still have imposed the full $15,000 civil money penalty based solely on Respondent's violations of Regulation O.

ORDER

   Accordingly, IT IS HEREBY ORDERED that a civil money penalty of $15,000 is assessed against * * *
   IT IS FURTHER ORDERED that this penalty shall be paid within 60 days of the date of this Order.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 17th day of December, 1987.

/s/ Hoyle L. Robinson
Executive Secretary

RECOMMENDED DECISION

FDIC-85-322k

   This matter came before the undersigned Administrative Law Judge on a request for hearing made by the Respondent in an ANSWER dated December 30, 1985. A hearing was held in * * * August 25, 1987.
   Respondent * * * failed to appear at the hearing.

STATEMENT OF THE CASE

   This case involves the question of whether the FDIC is entitled to assess civil money penalities against * * * ("Respondent") pursuant to sections 8(i)(2) and 18(j)(3) of the Act [12 U.S.C. §§ 1818(i)(2), 1828(j)(3)].

FINDINGS OF FACT

   1. At all times pertinent to this proceeding, the Bank was a corporation existing and doing business under the laws of the State of * * * having its principal place of business in * * *.
   2. At all times pertinent to this proceeding, the Bank was an insured state nonmember bank subject to the Act [12 U.S.C. §§ 1811-1831(d)] and the Rules and Regulations of the FDIC (12 C.F.R. Chapter III).
   3. At all times pertinent to this proceeding, Respondent was a "principal shareholder" of the Bank as that term is defined in section 215.2(j) of Regulation O [12 C.F.R. § 215.2(j)], in that Respondent, directly or indirectly, or acting through or in concert with one or more persons, owned, controlled, or had the power to vote more than 10 percent of any class of voting securities of the Bank.
   4. At all times pertinent to this proceeding, * * * Corporation was a wholly owned subsidiary of the Bank.
   5. The payments described herein were "extensions of credit" as that term is defined in section 215.3(a) of Regulation O [12 C.F.R. § 215.3(a)] in that the Bank extended credit on Respondent's behalf, or engaged in a transaction as a result of which Respondent became obligated, directly or indirectly, to pay money to the Bank.
   6. The proceeds of the extensions of credit described herein were used for the tangible economic benefit of Respondent.


2 After commencement of this proceeding * * * Mr. * * * 's sister, who was originally a respondent in this proceeding, settled with the FDIC. At that time she repaid to the Bank the $14,779 plus interest. That payment effectively ended the Regulation O violations, but only after the violations had each continued for several months.
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   7. The extensions of credit described herein were not made on substantially the same terms as those prevailing at the time for comparable transactions by the Bank with persons who are not employed by Regulation O and who are not employed by the Bank.
   8. The extensions of credit described herein involved more than the normal risk of repayment or presented other unfavorable features.
   9. Respondent caused, brought about, participated in, counseled, or aided or abetted the extensions of credit made by the Bank and described herein.
   10. On February 2, 1984, the Bank paid $7,500 to the * * * Department of Saving and Loan on behalf of Respondent.
   11. On February 1, 1984, the Bank paid $5,000 to * * * on behalf of Respondent.
   12. On June 19, 1984, * * * Corporation paid $615.91 to * * * on behalf of Respondent.
   13. On June 19, 1984, * * * Corporation paid $738.46 to * * * on behalf of Respondent.
   14. On October 10, 1984, * * * Corporation paid $700 to * * * on behalf of Respondent.
   15. On October 22, 1984, * * * Corporation paid $225 to * * * on behalf of Respondent.
   16. The Bank consented to the issuance of the Order to Cease and Desist and the board of directors of the Bank entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist dated September 30, 1983.
   17. On November 9, 1983, the FDIC issued the Order pursuant to section 8(b) of the Act [12 U.S.C. § 1818(b)].
   18. The Order was made effective November 19, 1983, and was in effect at all times pertinent to this proceeding. The Order was an order "which has become final" as that term is defined in section 8(k) of the Act [12 U.S.C. § 1818(k)].
   19. At all times pertinent to this proceeding, Respondent was a person participating in the conduct of the affairs of the Bank, and therefore was subject to the Order issued with the Bank's consent by the FDIC pursuant to section 8(b) of the Act [12 U.S.C. § 1818(b)].
   20. The Order required the Bank to take all necessary steps to ensure future compliance with all applicable laws, rules and regulations.
   21. The Bank failed to ensure compliance with all applicable laws, rules, and regulations, and extended credit on Respondent's behalf in violation of section 22(h) of the Federal Reserve Act (12 U.S.C. § 375b) and Regulation O (12 C.F.R. Part 215).
   22. Respondent caused, brought about, participated in, counseled, or aided or abetted the Bank's failure to ensure compliance with all applicable laws, rules, and regulations.
   23. The Order required the Bank to provide equity capital and reserves equal to or exceeding 7.0% of average total assets by December 1983.
   24. The Order required the Bank to provide equity capital and reserves equal to or exceeding 7.5% of average total assets for the month of March 1984, and thereafter maintain equity capital and reserves at a level equal to or exceeding 7.5% of average total assets for the months of June, September, December, and March during the life of the Order.
   25. The Bank failed to provide equity capital and reserves at a level equal to or exceeding 7.0% of average total assets, for the month of December 1983.
   26. The Bank failed to provide or maintain equity capital and reserves at a level equal to or exceeding 7.5% of average total assets, at any time between March 31, 1984 and September 30, 1985.
   27. Respondent caused, brought about, participated in, counseled, or aided or abetted the Bank's failure to provide or maintain equity capital and reserves at a level equal to or exceeding 7.5% of average total assets, at any time between December 31, 1983 and September 30, 1985.
   28. * * * reimbursed the Bank for the extensions of credit made by the Bank on behalf of Respondent on February 24, 1985.
   29. From February 1, 1984 to February 25, 1985, 390 days have elapsed.
   30. The FDIC has imposed civil money penalties of not more than $1,000 per day for each day during which a violation continued, in accordance with sections 8(i)(2)(i) and 18(j)(3)(A) of the Act [12 U.S.C. §§ 1818(i)(2)(i), 1828(j)(3)(A)].
   31. The FDIC took into account the statutory considerations set forth in section {{4-1-90 p.A-1179}}8(u)(2)(ii) and 18(j)(3)(B) of the Act [12 U.S.C. §§ 1818(i)(2)(ii), 1828(j)(3)(B)] and the factors set forth in the Interagency Policy Regarding the Assessment of Civil Money Penalties by the Federal Financial Institutions Regulatory Agencies, in determining whether or not to assess civil money penalties and in determining the amount of the civil money penalties to be assessed against Respondent.

CONCLUSIONS OF LAW

   1. The FDIC has jurisdiction over the Bank, the Respondent, and the subject matter of this proceeding.
   2. The extensions of credit made by the Bank on behalf of Respondent were made in violation of section 22(h) of the Federal Reserve Act (12 U.S.C. § 375b), and in violation of section 215.4(a) of Regulation O [12 C.F.R. § 215.4(a)].
   3. The extensions of credit made by the Bank on behalf of Respondent were made in violation of paragraph 6 of the Order which had become final and which was issued pursuant to section 8(b) of the Act [12 U.S.C. § 1818(b)].
   4. Respondent caused, brought about, participated in, counseled, or aided or abetted the extensions of credit made by the Bank on his behalf.
   5. Respondent violated section 22(h) of the Federal Reserve Act (12 U.S.C. § 375b), and violated section 215.4(a) of Regulation O [12 C.F.R. § 215.4(a)].
   6. Respondent violated paragraph 6 of the Order.
   7. The Bank failed to provide equity capital and reserves at a level equal to or exceeding 7.0% of average total assets by December 31, 1983, as required by paragraph 2 of the Order.
   8. The Bank failed to provide or maintain equity capital and reserves at a level equal to or exceeding 7.5% of average total assets at any time between March 31, 1984 and September 30, 1985, as required by paragraph 2 of the Order.
   9. Respondent caused, brought about, participated in, counseled, or aided or abetted the Bank's failure to maintain equity capital and reserves at a level equal to or exceeding the ratios required by paragraph 2 of the Order.
   10. Respondent violated paragraph 2 of the Order.
   11. The civil money penalty was properly assessed by the FDIC against Respondent for violations of section 22(h) of the Federal Reserve Act and Regulation O, and for violations of the Order, in accordance with the statutory considerations set forth in sections 8(i)(2)(ii) and 18(j)(3)(B) of the Act [12 U.S.C. §§ 1818(i)(2)(ii), 1828(j)(3)(B)].

RECOMMENDED DECISION

   Therefore, it is the recommended decision of the Administrative Law Judge that by reason of the violations set forth above, a penalty of $15,000 be assessed against * * * pursuant to sections 18(j)(3) and 8(i)(2) of the Act [12 U.S.C. §§ 1828(j)(3) and 1818(i)(2)].
Dated:
September 15, 1987

/s/ Patrick R. Maloney
Administrative Law Judge

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