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FDIC Enforcement Decisions and Orders

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   [5100] FDIC Docket No. FDIC 87-79c&b (11-24-87)

   Failure to timely answer notices "to cease and desist" and "to prohibit from participation" results in a default judgment. (Further proceedings in this docket appear at [¶ 5122]).

   [.1] Practice and Procedure—Special Permission to Appeal Moot After Recommended Decision
   Special permission to appeal an ALJ's procedural ruling becomes moot after the ALJ's recommended default judgment has been forwarded to the FDIC Board.

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   [.2] Cease and Desist Order—Failure to Answer Notice of Charges
   An officer who fails to answer a notice to cease and desist but timely answers a subsequent notice to prohibit further participation may be allowed to file an answer to the previous notice.

   [.3] Prohibition, Removal, or Suspension—Failure to Answer Notice of Intention—Subsequent Answer Permitted
   An officer who fails to timely answer a notice of charges defaults and waives the right to contest the facts.

   [.4] Cease and Desist Order—Defenses—Recission of Transaction
   The rescission of the transaction in question may not be a ground to dismiss a proceeding when the proposed cease and desist order requires the return of the bank to a safe and sound condition.

In the Matter of * * *, individually and as
a person participating in the conduct of
the affairs of * * * Bank,

and

* * *, individually and as an officer and
director of * * * Bank,
and

* * *, * * *, * * *, * * *, and * * *,
individually and as directors of * * * Bank
and

* * *, * * *, * * * and * * *,
individually and as former directors and
persons participating, in the conduct of the
affairs of * * * Bank,
and

* * * BANK
(INSURED STATE NONMEMBER
BANK)


DECISION and ORDER
FDIC 87-79c&b

Statement of the Case

   On April 16, 1987, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Charges and of Hearing ("Notice") to * * *, * * *, * * *, * * *, * * *, * * *, * * * * * *, * * *, * * * and * * * ("Respondents"), and * * * Bank, * * * ("Bank"). The Notice was issued pursuant to the FDIC's cease and desist authority in section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b). In the Notice, all respondents were directed to file an answer to the charges contained therein within 20 days after service as provided in section 308.06 of the FDIC Rules of Practice and Procedures, 12 C.F.R. § 308.06.
   Respondents * * *, * * *, * * * and * * * failed to file timely answers and William A. Gershuny, the administrative law judge ("ALJ") assigned to hear the case, issued a recommended default judgment as to them on August 21, 1987.
   On July 21, 1987, the FDIC's Board of Directors ("Board") issued a Notice of Intention to Prohibit From Further Participation ("Notice of Intention") pursuant to section 8(e) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e), to * * * and a similar Notice of Intention to * * * and * * *. * * * and * * * filed answers which have been accepted as timely. * * * has not filed a timely answer. The same ALJ who was assigned to hear the section 8(b) matter, William A. Gershuny, has been assigned to hear the section 8(e) proceedings.
   On July 31, 1987, Respondent * * * sought the Board's special permission to appeal the ALJ's refusal to permit him to file an out-of-time answer to the section 8(b) Notice. He also requested oral argument before the Board on that request.
   On August 24, 1987, the ALJ received a motion to dismiss the cease and desist proceeding filed by Respondent * * * on the ground that the transactions which gave rise to the Notice had been rescinded. Because the ALJ had already transmitted his recommended default judgment to the Board, he forwarded the motion to dismiss to the Board for decision.
   * * *'s Motion for Special Permission to Appeal the ALJ's Refusal To Permit Out-of-Time Filing of Answer

   [.1] Since the ALJ has already forwarded his recommended "default judgment" as to Respondent * * *, * * * motion for special permission to appeal the ALJ's procedural rulings and * * * 's request for oral {{4-1-90 p.A-1182}}argument are now moot. Accordingly, the Board dismisses them.
   ALJ's Recommended Default Judgment as to * * * and * * *

   [.2] The Board agrees with the ALJ's conclusion that neither * * * nor * * * had any adequate excuse for their failure to timely file answers to the Notice. Ordinarily the Board would not permit a respondent to contest the charges against him or her after an unexcused waiver of that right occurs through failure to file a timely answer to a Notice of Charges. However, in this case, the Board issued Notices of Intention to Prohibit From Further Participation to * * * and * * * pursuant to section 8(e) of the Act subsequent to issuance of the section 8(b) Notice now at issue. Respondents * * * and * * * filed answers to the section 8(e) Notices exercising their right to contest the allegations against them which underlie the section 8(e) matter. Their answers have been accepted as timely. The section 8(e) proceedings have many facts in common with the allegations underlying the cease and desist proceeding. Accordingly, to assure that results reached are consistent, the Board declines to adopt the ALJ's recommended default judgment and cease and desist order as to Respondents * * * and * * *. We remand these proceedings to the ALJ with instructions that he permit Respondents * * * and * * * to file answers to the section 8(b) Notices. The section 8(b) proceedings and the section 8(e) proceedings should be consolidated for hearing.
ALJ's Recommended Default Judgment as to * * * and * * *

   [.3] Respondent * * * is also a subject of a section 8(e) proceeding which the Board instituted on July 21, 1987. However, he filed no answer in that case. Therefore he has waived his right to contest the facts which underly both proceedings.
   Respondent * * * failed to file any answer to the section 8(b) case and has therefore waived his right to contest the charges against him. No other FDIC enforcement proceedings are pending against him at this time. The ALJ's recommended default judgment and cease and desist order are adopted as to Respondents * * * and * * *

* * *'s Motion to Dismiss the Notice of Charges

   [.4] Since the proposed cease and desist order includes provisions which are required to return the Bank to a safe and sound condition and which are not affected by the alleged rescission of the transactions mentioned in * * * 's motion, the motion to dismiss the section 8(b) proceeding is denied.

IT IS ORDERED:

   1. Respondent * * * 's Motion for Special Permission to Appeal the Ruling of the Administrative Law Judge and his request for oral argument are DISMISSED as moot.
   2. The Administrative Law Judge's Recommended Decision and Cease and Desist Order as to Respondents * * * and * * * are NOT ADOPTED and that matter is REMANDED to ALJ Gershuny for further proceedings consistent with this Decision and Order.
   3. The Administrative Law Judge's Recommended Decision and Cease and Desist Order are ADOPTED as to Respondents * * * and * * * as follows:
   IT IS HEREBY ORDERED, that Respondents * * *, and * * *, their employees, agents, successors, and assigns, cease and desist from the following unsafe or unsound banking practices and violations of law and rules and regulations:
   A. Participating in the exercise of any control over the management or policies of the * * * Bank, * * * * * * ("Bank"), in violation of section 7(j) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1817(j), and in violation of section 15(9) of the * * * Banking Act, * * *. Ann. Stat. Ch. 17, paragraph 322.9.
   B. Serving as directors of the Bank in violation of section 16(2) of the * * * Banking Act, * * * Ann. Stat. Ch. 17, paragraph 323.2 and section 16(4) of the * * * Banking Act, * * * Ann. Stat. Ch. 17, paragraph 323.4.
   C. Acquiring any shares of voting stock of the Bank on behalf of themselves or any other entity without first notifying the Regional Director of the * * * Region of the Federal Deposit Insurance Corporation ("Regional Director") and the Commissioner of Banks and Trust Companies of the State of * * * ("Commissioner").
   D. Selling to the Bank or participating in the sale to the Bank or participating in the purchase by the Bank of any asset or assets, except as required by this Order or without the prior written approval of the Regional Director and the Commissioner.
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   IT IS FURTHER ORDERED, that the Respondents * * * and * * *, their employees, agents, successors and assigns, take affirmative action as follows:

       1. Within fifteen (15) days from the effective date of this Order, Respondents * * * and * * *, shall tender the shares of voting stock of the Bank they hold to * * * ("* * *") in return for all monies actually paid to * * * for those shares.
       2. The Respondents * * * and * * * shall notify in writing the Regional Director and the Commissioner of the date of compliance with this Order within five (5) days of such compliance.
       3. All agreements and contracts entered into for the purpose of effectuating the requirements of this Order shall be submitted to the Regional Director and the Commissioner for comment.
       4. This Order shall become effective ten (10) days from the date of its issuance. The provisions of this Order shall be binding upon Respondents * * * and * * *, their employees, agents, successors and assigns.
       5. The provisions of this Order shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this Order shall have been modified, terminated, suspended, or set aside by the FDIC.
   4. Respondent * * * 's Motion to Dismiss is DENIED. By direction of the Board of Directors. Dated at Washington, D.C., this 24th day of November, 1987.

/s/ Hoyle L. Robinson
Executive Secretary

RECOMMENDED DEFAULT
JUDGMENT
FDIC 87-79c&b

   On the Federal Deposit Insurance Corporation's ("FDIC") Motion for Recommended Default Judgment pursuant to section 308.06(d) of the FDIC Rules and Regulations, 12 C.F.R. § 308.06(d), the Administrative Law Judge, being fully advised in this matter and having considered the failure to * * *, * * * , * * * and * * * ("Respondents") to file a timely answer to the Notice of Charges and of Hearing ("Notice") as required by section 308.06(a) of said Rules, hereby orders as follows:
   1. The Respondents are deemed to have waived their right to appear and contest the allegations of the Notice, attached as Exhibit A.
   2. The allegations of the Notice are hereby found as facts and as appropriate conclusions of law and therefore, it is recommended that the FDIC issue the Order to Cease and Desist attached as Exhibit B.
   By order of the Administrative Law Judge dated this 21st day of August, 1987.

William A. Gershuny
Administrative Law Judge

NOTICE OF CHARGES AND
OF HEARING
FDIC 87-79c&b

EXHIBIT A

   The Federal Deposit Insurance Corporation ("FDIC"), being of the opinion that * * * Bank, * * * ("Bank"), and * * *, * * *, * * *, * * *, * * *, * * *, * * * , * * *, * * *, * * *, and * * * ("Respondents") have engaged in unsafe or unsound banking practices and violations of laws and regulations and/or, unless restrained, will engage in unsafe or unsound practices and violations of laws and regulations in conducting the business of the Bank, hereby institutes this proceeding for the purpose of determining whether an appropriate order shall be issued against the Bank under the provisions of section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1). The FDIC hereby issues this NOTICE OF CHARGES AND OF HEARING ("NOTICE") under the provisions of the Act, 12 U.S.C. §§ 1811-1831d, and the FDIC Rules of Practice and Procedures, 12 C.F.R. Part 308, and alleges as follows:
   1. The Bank, a corporation existing and doing business under the laws of the State of * * * and having its principal place of business at * * *, is and has been, at all times pertinent to this proceeding, an insured State nonmember bank. The Bank is subject to the Act, 12 U.S.C. § 1811-1831d, the FDIC Rules and Regulations, 12 C.F.R. Chapter III, and the laws of the State of * * *.
   2. * * * ("Respondent * * *"), throughout all times pertinent to this proceeding, acted as president of * * * ("* * *"), and * * * ("* * *"). He is also the apparent {{4-1-90 p.A-1184}}owner and president of * * * ("* * *"), which has entered into a consulting agreement with the Bank. Because of his involvement in these various entities and the involvement of the entities with the Bank as described below, Respondent * * * is deemed to be a person participating in the conduct of the affairs of the Bank.
   3. * * * ("Respondent * * *") is and has been, throughout all times pertinent to this proceeding, an officer and director of the Bank.
   4. * * *, * * *, * * *, * * *, and * * * ("Respondents * * *, * * *, * * *, * * * and * * *") are currently directors of the Bank.
   5. * * *, * * *, * * *, and * * * ("Respondents * * *, * * *, * * *, and * * * ") were, at times pertinent to these proceedings, directors of the Bank and owners of stock in the Bank and, as such, are persons participating in the conduct of the affairs of the Bank.
   6. The FDIC has jurisdiction over the Bank, the Respondents, and the subject matter of this proceeding.
   7. On or about March 31, 1987, the Bank engaged in unsafe or unsound banking practices in that it paid $2,259,867 to * * * for the purchase of twenty-eight (28) real estate mortgages without establishing the validity and creditworthiness of the mortgages, which are outside the Bank's trade area, and without sufficient knowledge of the legal and financial status of * * *.
   8. On or about March 31, 1987, the $2,259,867 paid to * * * described in paragraph 7 above was credited to the account of * * * maintained at the Bank. On or about that same date, upon direction of * * *, the Bank transferred $1,000,000 of that amount to the Bank's capital surplus account; $290,000 was transferred from * * *'s account to Respondent * * *, a shareholder of the Bank's; and $130,000 from * * * 's account was transferred to * * *. The Bank was directed to take an additional $800,000 from * * * 's account and issue $800,000 worth of certificates of deposit made payable to * * * . Also, the Bank expensed a $50,000 "brokerage fee" to * * * for the $1,000,000 transfer to the Bank's capital surplus account described in this paragraph and a $22,578 "brokerage fee" to * * * for the purchase of the 28 real estate mortgages described in paragraph 7 above.
   9. The monies transferred to Respondent * * * as described in paragraph 8 above were paid in consideration for 533 shares of Bank stock, out of 970 shares outstanding, under an "Option Agreement" between * * * and him. The $130,000 transferred to * * * as described in paragraph 8 above was utilized by * * * to purchase 232 shares of Bank stock owned by Respondents * * *, * * *, * * *, * * *, * * *, and * * *. As a result of these purchases, * * * has acquired "control" of the Bank as that term is defined in section 7(j)(8)(B) of the Act, 12 U.S.C. § 1817(j)(8)(B).
   10. Neither * * * nor any other person has filed an application with any Federal banking agency prior to the acquisition of control of the Bank as required by section 7(j) of the Act, 12 U.S.C. § 1817(j), nor has any application been filed with the Commissioner of Banks and Trust Companies for the State of * * * as required by section 15(9) of the * * * Banking Act, * * * Ann. Stat. Ch. 17, §322.9.
   11. On March 30, 1987, Respondents * * *, * * *, and * * * were elected to the board of directors of the Bank by vote of the then members of the board of directors, Respondents * * *, * * *, * * *, * * *, * * *, and * * *, in violation of section 16(2) of the * * * Banking Act, * * *. Ann. Stat. Ch. 17, § 323.2, in that more than one-third of the board members were appointed without the vote of shareholders. Respondents' * * * , * * * , and * * * then participated in the board approval of the Bank's purchase of the mortgages from * * * described in paragraph 7 above, prior to owning any shares of Bank stock, in violation of section 16(4) of the * * * Banking Act, * * * . Ann. Stat. Ch. 17, §323.4.
   12. The FDIC has reasonable cause to believe that the Bank and the individual Respondents have engaged in unsafe or unsound banking practices and violations of laws and regulations in conducting the business of the Bank and that, unless restrained, the Bank and the individual Respondents will continue to engage in such practices and violations. The Board is further of the opinion that, unless the Bank and the individual Respondents are restrained by issuance of a temporary order to cease and desist, such practices and violations, or their continuation, are likely to cause the Bank's insolvency or substantial dissipation of the Bank's assets or earnings, and/or are {{4-1-90 p.A-1185}}likely seriously to weaken the condition of the Bank and/or otherwise seriously prejudice the interests of the Bank's depositors prior to the completion of the administrative proceedings instituted pursuant to the foregoing NOTICE.
   13. Notice is hereby given that a hearing will be held in * * * , 60 days from the date of service of this NOTICE on the Bank and the individual Respondents, or at such other time as may be determined by the administrative law judge appointed to hear this matter, for the purpose of taking evidence on the above-specified charges in order to determine:

       Whether an appropriate Order should be issued under the Act requiring the Bank and the individual Respondents: (a) to cease and desist from the unsafe or unsound practices and violations herein specified; and/or (b) to take affirmative action to correct the conditions resulting from such practices and violations.
   14. The hearing is to 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 hearing will be private, unless the FDIC shall determine a public hearing is necessary to protect the public interest, and in all respects will be conducted in compliance with the provisions of the Act and the Rules of Practice and Procedures of the FDIC.
   15. The Bank and the individual Respondents are hereby directed to file an answer to this NOTICE within 20 days after service of this NOTICE, as provided in section 308.06 of the FDIC Rules of Practice and Procedures, 12 C.F.R. § 308.06.
   16. Originals of all papers filed in this proceeding shall be served upon the FDIC's Office of the Executive Secretary, Washington, D.C. 20429. Copies of all papers filed in this proceeding shall be served upon the FDIC's Legal Division, Compliance and Enforcement Section, Washington, D.C. 20429, and upon the FDIC's Regional Counsel, Bank Supervision, * * *.

   By direction of the Board of Directors.
   Dated at Washington, D.C., this 16th day of April, 1987.

/s/ Hoyle L. Robinson
Executive Secretary

ORDER TO CEASE AND DESIST
FDIC 87-79c&b

   IT IS HEREBY ORDERED, that Respondents * * * , * * * , * * * , and * * * , their employees, agents, successors, and assigns, cease and desist from the following unsafe or unsound banking practices and violations of law and rules and regulations:
   A. Participating in the exercise of any control over the management or policies of the * * * Bank, * * * ("Bank"), in violation of section 7(j) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1817(j), and in violation of section 15(9) of the * * * Banking Act, * * *. Ann. Stat. Ch. 17, ¶322.9.
   B. Serving as directors of the Bank in violation of section 16(2) of the * * * Banking Act, * * * . Rev. Stat. Ch. 17 § 323.2 and section 16(4) of the * * * Banking Act, * * * . Rev. Stat. Ch. 17 ¶323.4.
   C. Acquiring any shares of voting stock of the Bank on behalf of themselves or any other entity without first notifying the Regional Director of the * * * Region of the Federal Deposit Insurance Corporation ("Regional Director") and the Commissioner of Banks and Trust Companies of the State of * * * ("Commissioner").
   D. Selling to the Bank or participating in the sale to the Bank or participating in the purchase by the Bank of any asset or assets, except as required by this Order or without the prior written approval of the Regional Director and the Commissioner.
   IT IS FURTHER ORDERED, that the Respondents, their employees, agents, successors and assigns, take affirmative action as follows:
   1. Within fifteen (15) days from the effective date of this Order, Respondents * * *, * * * , and * * * shall tender the shares of voting stock of the Bank they hold to * * * in return for all monies actually paid to * * * for those shares.
   2. Within fifteen (15) days from the effective date of this Order, Respondent * * *, individually and as president of * * * shall cause * * * to repurchase from the Bank for $2,259,867 the 28 mortgages sold to the Bank on or about March 31, 1987. No fees shall be charged the Bank for the repurchase; and the repurchase shall be condi- {{4-1-90 p.A-1186}}tioned upon the return to * * * of the $1,000,000 placed in the Bank's surplus capital account, which funds may be utilized by * * * for the repurchase.
   3. Within fifteen (15) days from the effective date of this Order, Respondent * * *, individually and as president of * * *, shall cause * * * to return the $50,000 brokerage fee paid to * * * by the Bank on April 1, 1987 and shall return to the Bank the $22,575 dollar brokerage fee paid by the Bank to * * * for the purchase of the 28 real estate mortgage loans on April 1, 1987.
   4. Within fifteen (15) days from the effective date of this Order, Respondent * * *, individually and as president of * * *, shall return to * * * the 533 shares of Bank stock it holds as collateral for the promissory note of * * * . The obligation of this paragraph is conditioned upon the agreement of * * * to pay * * * $290,485 for the promissory note extended by * * *.
   5. Within fifteen (15) days from the effective date of this Order, Respondent * * *, individually and as president of * * *, shall authorize the return to the Bank for cancellation the $800,000 of Certificates of Deposit of the Bank held by * * *., as part of the transaction required under paragraph 2 of this Order.
   6. Within fifteen (15) days from the effective date of this Order, Respondent * * * , individually and as president of * * * , shall cause * * * to tender shares of voting stock of the Bank purchased from * * * , * * * , * * * , * * * , * * * , * * * , * * * and * * * on March 31, 1987 in return for monies actually paid to those individuals for the shares.
   7. Within fifteen (15) days from the effective date of this Order, Respondent * * * individually and as president of * * *., shall cause * * * to rescind its "Option Agreement" and promissory note with * * * with the purchase of the 533 shares of Bank stock. In addition, Respondent * * * shall cause * * * to rescind and cancel the agreement with the Bank for the purchase of $1,000,000 of Bank stock.
   8. Within fifteen (15) days from the effective date of this Order, Respondent * * *, individually and as president of * * * ., shall cause * * * to purchase from Respondents * * * , * * * and * * * and from * * * the shares of voting stock of the Bank for all monies actually paid by the individuals for those shares.
   9. The Respondents shall notify in writing the Regional Director and the Commissioner of the date of compliance with each of the transactions required by paragraphs 1 through 8 of this Order within five (5) days of such compliance.
   10. All agreements and contracts entered into for the purpose of effectuating the requirements of paragraphs 1 through 8 of this Order shall be submitted to the Regional Director and the Commissioner for comment.
   11. This Order shall become effective ten (10) days from the date of its issuance. The provisions of this Order shall be binding upon the Respondents, their employees, agents, successors and assigns.
   12. The provisions of this Order shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this Order shall have been modified, terminated, suspended, or set aside by the FDIC.
   DATED:

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