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FDIC Enforcement Decisions and Orders

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{{4-1-90 p.A-1298}}
   [5116] Docket No. FDIC-87-179e (7-6-88).

   Director and officer prohibited from participation in the affairs, of, and the exercising of any voting rights in, any insured bank.

   [.1] Prohibition, Removal, or Suspension—Notice of Intention to Prohibit— Failure to Answer
   FDIC accepts facts as alleged in Notice of Intention to Prohibit from Further Participation when Respondent fails to answer in required period.

   [.2] Prohibition, Removal, or Suspension—Participation in Affairs of Any Insured Bank
   [.3] Prohibition, Removal, or Suspension—Exercise of Voting Rights

In the Matter of ***, individually, and as
president, director, and person
participating in the conduct of the affairs
of *** BANK & TRUST CO. ***
(Insured State Nonmember Bank-in Liquidation)


DECISION AND ORDER TO
PROHIBIT FROM FURTHER
PARTICIPATION

I. Procedural History

   The Federal Deposit Insurance Corporation ("FDIC") initiated this proceeding pursuant to Section 8(e) of the Federal Deposit Insurance Act ("the Act"), 12 U.S.C. §1818(e), and the FDIC Rules of Practice and Procedures (12 C.F.R. Part 308), ("FDIC Rules") to prohibit *** ("Respondent"), individually and in his capacity as president, director, and a participant in the affairs of *** Bank & Trust Co., *** ("Bank"), from further participation in the conduct of the affairs of the Bank or any other bank insured by the FDIC without its prior written consent.
   On January 19, 1988, the FDIC issued a Notice of Intention to Prohibit from Further Participation ("Notice"), which {{4-1-90 p.A-1299}}charged Respondent with engaging or participating in unsafe or unsound banking practices, committing or participating in violations of law, or committing or engaging in certain acts, omissions, or practices which constituted breaches of his fiduciary duties as president and director of the Bank. The FDIC also charged that Respondent's entire course of conduct exhibited personal dishonesty and demonstrated a willful or continuing disregard for the safety and soundness of the Bank and resulted in substantial financial loss or other damage to the Bank and its depositors and in financial gain to Respondent.*
   The Notice, served on Respondent by certified mail return receipt requested on February 4, 1988, stated that a hearing would be held at ***, commencing 60 days from the date of service and directed Respondent to file an answer to the Notice within 20 days from the date of service on Respondent, as provided by section 308.06 of the FDIC Rules (12 C.F.R. §308.06). Respondent failed to file a timely answer to the charges in the Notice and on March 18, 1988, enforcement counsel for the FDIC filed a Motion for Recommended Order of Default ("Motion") based upon Respondent's failure to answer. Respondent did not respond to the Motion. On April 8, 1988, Administrative Law Judge Steven M. Charno (the "ALJ") issued a Recommended Order of Default recommending the adoption of an Order of Prohibition From Further Participation. At no time has Respondent sought leave to file a late answer or made an attempt to explain his failure to answer.

II. Discussion

   [.1] Section 308.06(a) of the FDIC Rules provides:

    Every party to a proceeding shall file an answer with the Executive Secretary within 20 days after service of the notice of hearing . . . 12 C.F.R. §308.06(a) (emphasis added).
The directive to this rule could not be more clear. Respondent was required to file an answer with the Executive Secretary not later than 20 days after service of the Notice and he did not do so. Further, the Notice specifically stated:
    Respondent is hereby directed to file an answer to this Notice of Intention to Prohibit from Further Participation within 20 days from the date of service on Respondent, as provided by section 308.06 of the FDIC Rules . . . (emphasis added).

III. Conclusion

   In light of Respondent's failure to file an answer, the Board of Directors of the Federal Deposit Insurance Corporation adopts and incorporates by reference herein the Recommended Order of Default issued by the ALJ, finding the facts to be as alleged in the Notice of Intention to Prohibit From Further Participation and adopting the conclusions contained therein.

ORDER OF PROHIBITION FROM
FURTHER PARTICIPATION

   The Board, having reviewed the record in this proceeding, including the ALJ's Recommended Order of Default, finds the facts to be as alleged in the Notice of Intention to Prohibit From Further Participation. NOW, THEREFORE, IT IS HEREBY ORDERED, that:

   [.2] 1. *** is prohibited from participation in any manner in the conduct of the business and affairs of any bank insured by the FDIC without the prior written approval of the appropriate federal banking agency, as that term is defined in Section 3(q) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1813(q);

   [.3] 2. *** shall not, directly or indirectly, solicit or procure or transfer or attempt to transfer, or vote or attempt to vote, proxies, consents, or authorizations in respect to any voting rights in any bank insured by the FDIC without the prior written approval of the appropriate federal banking agency, as that term is defined in Section 3(q) of the Act, 12 U.S.C. §1813(q);
   3. The provisions of this Order shall remain effective and enforceable from its effective date except to the extent that, and until such time as, any provision of this


* On or about September 17, 1987, the Commissioner of Financial Institutions for the State of *** took possession of the Bank pursuant to 2 ** Rev. Stat.Ann. ch. 6, §382.A. (West 1986 & Supp. 1988) and appointed the FDIC as receiver of the Bank pursuant to 2 ** Rev.Stat.Ann. ch. 6, §391 (West 1986). Prior to that time, and at all times relevant to the activities at issue here, the Bank was an insured state nonmember bank, and was subject to the Federal Deposit Insurance Act, 12 U.S.C. §§1811-1831d, the FDIC's Rules, 12 C.F.R. Chapter III, and the laws of the State of ***.
{{4-1-90 p.A-1300}}Order shall have been modified, terminated, suspended, or set aside by the FDIC; and
   4. This Order shall become effective ten (10) days after the date of its issuance.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 6th day of July, 1988. Hoyle L. Robinson Executive Secretary

In the Matter of ***, individually and as
president, director, and a person
participating in the conduct of the affairs
of *** BANK & TRUST CO. ***
(Insured State Nonmember Bank—In Liquidation)
RECOMMENDED ORDER OF
DEFAULT

   The Federal Deposit Insurance Corporation ("FDIC"), having filed its Motion for Recommended Order of Default pursuant to section 308.06(d) of the FDIC Rules and Regulations, 12 C.F.R. §308.06(d), and the Administrative Law Judge being fully advised in this matter and having considered the failure of *** ("Respondent") to file a timely Answer to the Notice of Intention to Prohibit From Further Participation ("Notice") as required by section 308.06(a) of said Rules, hereby ORDERS as follows:
   1. The Respondent is deemed to have waived his right to appear and contest the allegations of the Notice, a copy of which is attached as Exhibit "B".
   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 of Removal from Office and Prohibition From Further Participation, in substantially the same form as attached hereto as Exhibit "C".
   By order of the Administrative Law Judge: Dated this 8th day of April, 1988.
In the Matter of ***, Individually and as
president, director, and a participant in the
conduct of the affairs of *** BANK &
TRUST CO. ***
(Insured State Nonmember Bank—In Liquidation)
NOTICE OF INTENTION TO
PROHIBIT FROM FURTHER
PARTICIPATION

   The Federal Deposit Insurance Corporation ("FDIC"), being of the opinion that *** ("Respondent"), individually and in his capacity as president, director, and a participant in the affairs of *** Bank & Trust Co., *** ("Bank"), engaged or participated in unsafe or unsound banking practices, or committed or participated in violations of law, or committed or engaged in acts, omissions, or practices which constituted breaches of his fiduciary duties as president and director of the Bank, and having reason to believe that the Bank suffered substantial financial loss or other damage, or that the interests of the Bank's depositors have been seriously prejudiced by reason of such violations, practices and/or breaches of fiduciary duties, or that Respondent received financial gain by reason of such violations, practices and/or breaches of fiduciary duties, and being of the opinion that such violations, practices and/or breaches of fiduciary duties involved personal dishonesty or demonstrated a willful or continuing disregard for the safety and soundness of the Bank by Respondent, institutes this proceeding for the purpose of determining whether an appropriate order should be issued against Respondent under the provisions of section 8(e) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1818(e), prohibiting Respondent from further participation in the conduct of the affairs of the Bank or any other bank insured by the FDIC.
   The FDIC hereby issues this NOTICE OF INTENTION TO PROHIBIT FROM FURTHER PARTICIPATION ("NOTICE") pursuant to section 8(e) of the Act, 12 U.S.C. §1818(e), and Part 308 of the FDIC Rules of Practice and Procedures, 12 C.F.R. Part 308, and alleges as follows:
   1. Prior to September 17, 1987, the Bank was a corporation existing and doing business under the laws of the State of ***, and had its principal place of business at *** *** At all times pertinent hereto, the Bank was an insured State nonmember bank, and was subject to the Act, 12 U.S.C. §§1811-1831d, the Rules and Regulations of the FDIC, 12 C.F.R. Chapter III, and the laws of the State of ***
   2. On or about September 17, 1987, the Commissioner of Financial Institutions for the State of *** took possession of the Bank pursuant to ** Rev. Stat. Ann. tit. 6 §382(a) and thereafter appointed the FDIC as receiver of the Bank pursuant to ** Rev. Stat. Ann. tit. 6 §391.
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   3. At all times pertinent to the charges in this NOTICE, Respondent served as president and a director of the Bank and was a participant in the conduct of the affairs of the Bank. The FDIC has jurisdiction over the Bank, the Respondent and the subject matter of this proceeding.
   4. Respondent engaged or participated in unsafe or unsound banking practices and breached his fiduciary duty as an executive officer and a director of the Bank by causing or allowing the Bank to extend credit to himself; his wife, *** and ***, an interest of Respondent and his wife's. These extensions of credit were not supported by the current sound worth and paying capacity of the borrower(s), and were inadequately collateralized. Several of these extensions of credit were made without the knowledge of the Bank's board of directors. As of September 8, 1986, the extensions of credit to Respondent, his wife, his interests, and her interests totalled $382,000, with $212,000 classified "Substandard" and $115,000 classified "Loss".
   5. Respondent engaged or participated in unsafe or unsound banking practices and breached his fiduciary duty as an executive officer and a director of the Bank by causing or allowing the Bank, between the dates of May 30, 1986, and August 22, 1986, to continuously pay overdrafts of *** and ***, interests of Respondent, and ***, an interest of Respondent and his wife's, without a written, preauthorized, interest-bearing extension of credit plan that specified a method of repayment or a written, preauthorized transfer of funds from another account, and without the collection of an overdraft fee in violation of section 215.4(d) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §215.4(d), made applicable to State nonmember banks by section 18(j)(2) of the Act, 12 U.S.C. §1828(j)(2).
   6. Respondent engaged or participated in unsafe or unsound banking practices by causing or allowing the Bank to extend credit which was, when made, inadequately protected by the then current sound worth and paying capacity of borrowers, and which was inadequately collateralized. As of September 8, 1986, Respondent has caused or allowed the Bank to make extensions of credit that were adversely classified "Loss" in the amount of $4,337,000, "Doubtful" in the amount of $1,066,000, and "Substandard" in the amount of $2,197,000. These adversely classified loans accounted for 60.3 percent of total adversely classified loans, 69.8 percent of loans classified "Loss", 83.5 percent of loans classified "Doubtful" and 43.0 percent of loans classified "Substandard", and represented 193.1 percent of the Bank's total equity capital and reserves.
   7. Respondent engaged or participated in unsafe or unsound banking practices and breached his fiduciary duty as an executive officer and a director of the Bank by causing or allowing the Bank to make extensions of credit which, when made, exceeded his lending authority as established by the Bank's board of directors, were inadequately protected by the then current sound worth and paying capacity of the borrowers, and were inadequately collateralized. These extensions of credit were never submitted by the Respondent to the Bank's board of directors for its approval, and as of September 8, 1986, were adversely classified "Loss" in the amount of $2,815,000, "Doubtful" in the amount of $861,000, and "Substandard" in the amount of $1,079,000. These credits are included in the totals provided in paragraph 6 above and are comprised of the following:

       (i) An extension of credit to *** in the total sum of $421,000, of which $37,000 has been classified "Substandard" and $383,000 classified "Loss".
       (ii) An extension of credit to *** in the total sum of $218,000, of which $218,000 has been classified "Loss".
       (iii) An extension of credit to ***, in the sum of $97,000, of which $97,000 has been classified "Loss".
       (iv) An extension of credit to ***, in the sum of $377,000, of which $377,000 has been classified "Loss".
       (v) An extension of credit to *** in the sum of $69,000, of which $69,000 has been classified "Loss".
       (vi) An extension of credit to *** in the sum of $347,000, of which $25,000 has been classified "Substandard" and $322,000 classified "Loss".
       (vii) An extension of credit to *** in the sum of $17,000, of which $17,000 has been classified "Loss".
    {{4-1-90 p.A-1302}}
       (viii) An extension of credit to *** and related interests, in the sum of $1,425,000, of which $370,000 has been classified "Substandard", $861,000 has been classified "Doubtful", and $194,000 has been classified "Loss".
       (ix) An extension of credit to *** and related interests, in the sum of $278,000, of which $278,000 has been classified "Loss".
       (x) An extension of credit to *** in the sum of $332,000, of which $70,000 has been classified "Substandard" and $262,000 has been classified "Loss".
       (xi) An extension of credit to *** and ***, in the sum of $718,000, of which $262,000 has been classified "Substandard" and $456,000 has been classified "Loss".
       (xii) An extension of credit to ***, and related interests, in the sum of $588,000, of which $588,000 has been classified "Loss".
       (xiii) An extension of credit to *** and related interests, in the sum of $296,000, of which $103,000 has been classified "Substandard" and $163,000 has been classified "Loss".
       (xiv) An extension of credit to *** in the sum of $350,000, of which $350,000 has been classified "Loss".
   8. Respondent engaged or participated in unsafe or unsound banking practices and breached his fiduciary duty as an executive officer and a director of the Bank by causing or allowing charges to be made to the Bank's Loan Income account for payments on a loan to *** to avoid detection of the loan and its delinquent status. The loan is included in the totals in paragraphs 6 and 7 above.
   9. Respondent breached his fiduciary duty as an executive officer and a director of the Bank by causing or allowing an extension of credit to be made to *** without disclosing to the Bank's board of directors that he was a director of that company at the time the extension was made. This credit is included in paragraphs 6 and 7 above.
   10. Respondent engaged in unsafe or unsound banking practices and violated his fiduciary duty as an executive officer and director of the Bank by charging the Bank's Income Earned But Not Collected account on May 18, 1984, to remove from the Bank's books an extension of credit to the then defunct *** in an attempt to hide the loss from the Bank's board of directors.
   11. As a result of the violations, practices and/or breaches of fiduciary duty of Respondent alleged above, Respondent received financial gain, and/or the Bank suffered substantial financial loss or other damage, and/or the interests of the Bank's depositors were seriously prejudiced by reason of such violations, practices and/or breaches of fiduciary duty. Such violations, practices and/or breaches of fiduciary duty of Respondent demonstrated a willful or continuing disregard for the safety and soundness of the Bank, and evidence Respondent's unfitness to participate in the conduct of the affairs of the Bank, or any other FDIC insured bank.
   12. Notice is hereby given that a hearing will be held at ***, commencing 60 days from the date of service of this NOTICE on Respondent, unless an earlier or later date is set at the request of (A) Respondent for good cause shown, or (B) the Attorney General of the United States. The purpose of the hearing will be to take evidence on the charges herein specified in order to determine whether an order should be issued to prohibit the further participation of Respondent in the conduct of the affairs of the Bank; or any other bank insured by the FDIC. 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 that a public hearing is necessary to protect the public interest and in all respects will be conducted in compliance with the provisions of the Federal Deposit Insurance Act, 12 U.S.C. §1811-1813d, the FDIC Rules of Practice and Procedures, 12 C.F.R. Part 308, and the Administrative Procedure Act, 5 U.S.C. §§551–559.
   12. Respondent is hereby directed to file an answer to this NOTICE OF INTENTION TO PROHIBIT FROM FURTHER PARTICIPATION within 20 days from the date of service on Respondent, as provided by section 308.06 of the FDIC Rules of Practice and Procedures, 12 C.F.R. §308.06.
   Originals of all papers filed in this proceeding shall be served upon the Office of the Executive Secretary, 550 Seventeenth Street, N.W., Washington, D.C. 20429. Copies of all papers filed in this proceeding {{4-1-90 p.A-1303}}shall be served upon the Legal Division, Compliance and Enforcement Section, 550 Seventeenth Street, N.W., Washington, D.C. 20429, and upon the Regional Counsel, Division of Bank Supervision, for the *** Regional Office, ***, ***.
   By Direction of the Board of Directors.
   Dated at Washington, D.C., this 19th day of January, 1988.

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