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FDIC Enforcement Decisions and Orders

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   [5121] FDIC Docket No. FDIC-87-5g (11-8-88).

   Bank director and officer suspended and prohibited from further participation in the conduct of the affairs of Bank upon being indicted for a crime of dishonesty or breach of trust. Board refused to vacate order where respondent failed to sustain burden of proof.

   [.1] Suspension or Prohibition—Liability—Criminal Indictment and Conviction
   An action for suspension and prohibition based upon conviction of criminal offense involving dishonesty or breach of trust is different from an action for suspension and prohibition based upon an indictment on a felony charge involving dishonesty or breach of trust. The two actions have distinct remedies, and enforcement of either action will not render enforcement of the other action moot.

   [.2] Evidence—Admissability of Evidence on Issues Previously Adjudicated
   Evidence submitted for proof of an issue previously resolved in a criminal proceeding may be admissable in an FDIC administrative hearing.

   [.3] Suspension or Prohibition—Burden of Proof
   Respondent has the burden of proving that Respondent's participation in Bank's affairs is not likely to be a threat to depositors or to impair their confidence in the Bank.

   [.4] Suspension or Prohibition—Liability—Weight Given Prior Criminal Indictment
   In a pension and prohibition action against an individual indicted for a felony involving personal dishonesty or breach of trust, appropriate question for the Board is whether Respondent's actions affirmatively establish his respect for and willingness to comply with the regulatory process and not whether the Respondent is guilty.

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   [.5] Suspension or Prohibition—Liability—Incomplete Financial Statements
   Respondent's omission of the valuation of a partnership interest on a signed financial statement, notwithstanding the fact that the omission was not monetarily large, indicates Respondent's lack of respect for and unwillingness to comply with regulatory processes. Respondent's reliance on legalisms to escape the consequences of such omission is not persuasive.

   [.6] Definition—Accomodation Loans
   It is generally understood in the banking community that an Accomodation Loan is simply a loan taken out by one person for the benefit of another.

   [.7] Suspension or Prohibition— Factors Determining Liability—Dishonesty
   Respondent's failure to list Accomodation Loans on Officer's Questionnaire was equivocal so as to mislead or throw-off regulators as to the true purpose for which the loan proceeds were to be used. Such a practice suggests a less than total commitment to the ethical standard expected of a banker and a cavalier attitude toward the efforts of regulatory officials to monitor loan risk factors.

In the Matter of *** officer and director of
*** BANK


(Insured State Nonmember Bank—In
Receivership)


DECISION

   The Board of Directors ("Board") of the Federal Deposit Insurance Corporation, having reviewed the record as a whole, finds that Recommended Decision A (appended hereto), as submitted by the Presiding Officer following a hearing in this case, is in all material respects fully supported by the law and the evidence. Recommended Decision A concludes that the Notice and Order of Suspension and Prohibition issued against ***, officer and director of *** Bank, ***, under section 8(g) of the Federal Deposit Insurance Act ("Act") (12 U.S.C. 1818(g)) is merited.
   The Presiding Officer also supplied a Recommended Decision B which suggests vacating the section 8(g) Notice and Order on the grounds that the suspension from office or prohibition from further participation in the conduct of the affairs of the bank under section 8(g) is redundant since Mr. *** is also suspended pursuant to section 19 of the Act (12 U.S.C. 1829). The Board rejects Recommended Decision B1 because it ignores the fact that, although there are some similarities between the two suspensions, the scope of section 8(g) is broader2 and the sanction is against the individual, whereas section 19 provides for a money penalty against the bank for violation of the prohibition.
   The Board therefore adopts the Presiding Officer's Recommended Decision A and incorporates it herein by reference. Accordingly, the January 20, 1987 Notice and Order of Suspension and Prohibition (appended hereto) shall remain in full force and effect.
   By direction of the Board of Directors. Dated at Washington, D.C., this 8th day of November, 1988.
Hoyle L. Robinson
Executive Secretary

RECOMMENDED DECISION

In the Matter of *** *** BANK

(Insured State Nonmember Bank—In
Receivership)

Notice and Order of Suspension and
Prohibition

   Upon consideration of the record Respondent has not shown that his continued service in the conduct of the affairs of the *** Bank, *** ("Bank"), is not a threat to the interests of the Bank's depositors or is not likely to impair public confidence in the bank.


1 The Presiding Officer prepared alternative recommended decisions because, at the time, Mr. *** had pending before the United States Supreme Court a petition for certiorari seeking review of the criminal conviction that provided the basis for the section 19 prohibition. The Presiding Officer suggested that the Board adopt Recommended Decision B (vacating the section 8(g) suspension order if certiorari is denied) because of the outstanding section 19 suspension. The Supreme Court denied certiorari on October 3, 1988. The Board disagrees with the Presiding Officer that under these circumstances the section 8(g) order should be vacated for the reasons set forth herein.

2 Section 19 only prohibits participation by an individual as an officer, director or employee, whereas section 8(g) prohibits all participation in the affairs of a bank.
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   Notice and Order of Suspension and Prohibition continued in effect until further notice.
*** for Respondent
*** and *** for Federal Deposit Insurance Corporation.
*** for subpoened witnesses *** and ***

INTRODUCTION

   Pursuant to authority vested in the Executive Secretary of the Federal Deposit Insurance Corporation, hereafter referred to as either FDIC, the Corporation, or the Board, as set forth in 12 C.F.R. 308.61, which authority was exercised in a letter to the parties dated August 17, 1988, I was appointed as presiding officer to conduct the hearing in this proceeding and to submit a recommendation to the Board of Directors of the FDIC. The hearing was held in *** on September 8 and 9, 1988. All parties were represented by Counsel.

Background

   At the time this proceeding was first instituted *** hereafter referred to as Respondent, was president and a director of the *** Bank, ***. On December 10, 1986, he was indicted in the United States District Court for the Northern District of *** Central Division for knowingly making a false statement on an individual financial statement in violation of 18 U.S.C. §1014 (Count 1) and knowingly making a false statement in and Officer's Questionnaire in violation of 18 U.S.C. §1001 (Count 2). 12 U.S.C. §1818(g)(1) provides insofar as here pertinent that whenever a director or officer of an insured bank is indicted for a crime involving dishonesty or breach of trust which crime is punishable by imprisonment for a term exceeding one year the FDIC may, if continued service by the individual may pose a threat to the interests of the bank's depositors or may threaten to impair public confidence in the bank, by written notice suspend such director or officer or prohibit him from further participation in the affairs of the bank. The same section further provides that the suspension or prohibition shall remain in effect until the indictment is finally disposed of or until terminated by the FDIC.
   Pursuant to the aforesaid statute the FDIC on January 20, 1987, issued a Notice and Order of Suspension and Prohibition hereafter referred to as Notice and Order barring Respondent from further participation in the affairs of the Bank. The Notice and Order provided, consistent with the language of 12 U.S.C. §1818(g)(3), that within 30 days from service of the Notice and Order Respondent may request in writing an opportunity to appear before FDIC to show that his continued service in the affairs of the Bank does not or is not likely to pose a threat to the interests of the Bank's depositors or threaten to impair confidence in the Bank. Respondent submitted a request for hearing within the approved time frame. Consistent with the statutory terms, the hearing on Respondent's request was set to begin February 18, 1987, at ***. In the meantime, however, Respondent filed a complaint against the FDIC in the Federal District Court for the Northern District of *** seeking a preliminary injunction against the Notice and Order. On February 17, 1987, the Court in *** Bank v. FDIC. *** (1987), held the Notice null and void and enjoined FDIC from enforcing it on the grounds that the postsuspension process does not contemplate prompt disposition of the suspension and does not provide for a hearing where oral evidence can be presented. FDIC appealed and in Federal Deposit Ins. Corp. v. ***, *** (May 31, 1988), the Supreme Court held that the section 1818(g)(3) post suspension procedure is not unconstitutional and accordingly reversed the District Court's preliminary injunction. Subsequently the January 20, 1987, Notice and Order was reactivated; Respondent was afforded the opportunity to request a hearing and did in fact exercise his option as provided in 12 U.S.C. §1818(g)(3). As noted above the hearing was held in due course.1


1 Subsequent to the close of hearing several exhibits have been filed. On September 17, 1988. ***, a public accountant who testified in support of Respondent ***, submitted a sheaf of papers comprising the 1980, 1981 and 1982 Federal Income Tax Returns and supporting schedules of Respondent along with a four page letter of explanation. This group of papers is identified as Respondent's Exhibit 10 and is received in evidence. On September 21, 1988, Counsel for FDIC submitted a sheaf of papers comprising the September 9, 1988, Order of the U.S. District Court, Northern District of ***, permanently enjoining (1) *** Bank from employing Respondent in any capacity, and (2) Respondent from serving any capacity with *** Bank or any other FDIC insured bank. This document is identified as FDIC Exhibit 18 and is received in evidence. On September 23, 1988, Counsel for FDIC submitted a sheaf of papers (Continued)

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Procedural Issue

   A procedural issue was raised at the outset of the hearing by counsel for the FDIC which if found meritorious would obviate the need to consider the evidence presented at the hearing. Counsel poses the question whether the Notice and Order is relevant when considered in the context of events which have taken place since the Notice and Order was issued in early 1987. Attention is directed to Respondent's conviction of the criminal charges in a federal jury trial. Following the trial the FDIC's regional director sought to have Respondent preliminary enjoined as a director, officer, and employee of the Bank relying on 12 U.S.C. §1829 which provides that except with the written consent of the FDIC no person shall serve as a director, officer, or employer of an insured bank who has been convicted of a criminal offense involving dishonesty or a breach of trust. In Federal Deposit Ins. Corp. v. ***. *** 1987), the United States District Court for the Northern District of ***, Central Division, by order of June 1, 1987, granted the Corporation's request for a preliminary injunction and enjoined *** Bank, ***, from allowing Respondent to serve as a director, officer, or employee of the Bank. The injunction was made permanent (see footnote 1) and Respondent is no longer associated with the Bank.
   Subsequently, in a simultaneous and coordinated fashion, on July 30, 1987, the Superintendent of Banking for the State of *** declared the Bank insolvent, that it should be dissolved, and that the FDIC should be appointed as receiver. These actions were confirmed by the *** District Court for *** County and the FDIC (FDIC Exhibits 4,5,6). The Corporation arranged for another bank to take over the deposit liabilities of the Bank and the building that once housed the Bank now serves as the branch office of the assuming bank. Counsel suggests that in view of the above events there is no bank to which Respondent could be restored even in the unlikely event that his conviction might be reversed and the suspension lifted.
   Counsel for Respondent in his argument at the outset of the hearing pointed out that Respondent is seeking to have the United States Supreme Court review the decision of the United States Court of Appeals, Eighth Circuit, U.S. v. ***, *** (1988) which affirmed the conviction of the United States District Court for the Northern District of ***, Central Division. Respondent's writ of certiorari in the Supreme Court was filed ***, 1988, and is entitled *** v. United States of America, No. ***. Counsel submits that Respondent's conviction in the lower federal courts does moot the pending proceeding because a section 1818(g) suspension remains in effect until the charge against respondent is finally disposed of or until terminated by the FDIC. The language of 1818(g) makes it clear that a charge is not finally disposed of until the opportunity for appellate review is exhausted.

Discussion

   [.1] As noted in the above comments Respondent has been suspended from his positions with the Bank since June 30, 1987 pursuant to section 1829. The occasion for this action was his conviction under Count 2 of the indictment. Respondent however, is contesting the conviction in the Supreme Court by a writ of certiorari. As of the time the record in this proceeding was developed the Supreme Court had not ruled on the writ and one cannot know with certainty the outcome of the appeal. The remedies available to the Corporation under sections 1829 and 1818(g) are similar and perhaps in some situations duplicative, but certainly not in all situations. Together they give the Corporation a wide range of remedies. Whether in a given situation it is prudent to invoke either or both depends on the problem presented. Here should the Supreme Court grant the writ of certiorari Respondent's suspension under section 1829 might be in jeopardy. The granting of the writ however, would not require the lifting of a validly imposed section 1818(g) suspension. Furthermore though the Bank has been dissolved and its deposit liabilities have been transferred to a successor bank, Respondent is contesting the transfer before the *** Supreme Court in In the Matter of the Receivership of *** Bank, *** v. ***, No. ***. For these same reasons the Supreme Court in Federal Deposit Ins. Corp. v. *** supra, Note 7, held that Respondent's conviction


1 Continued: objecting to the letter commentary of witness *** in Respondent's Exhibit 10. Counsel's letter made certain calculations using the 1980 tax returns offered by witness ***. The predicate for his calculations, that is the 1980 tax returns, were included with his submission. This document is identified as FDIC Exhibit 19 and is received in evidence.
{{4-1-90 p.A-1384}}and his suspension under section 1829 does not make this proceeding moot. The situation as of the time of the hearing in this proceeding is in all essential respects the same as was the case when the Supreme Court considered the matter. I conclude that this proceeding is relevant, is not moot, and the Notice and Order of January 20, 1987, as subsequently reinstated ought not be vacated.

Evidence Dispute

   On August 30, 1988, Respondent through his Counsel, requested issuance of three subpoenas (witnesses ***, ***, and ***) and a subpoena for the production of documents directed to the Custodian of Documents, Department of Banking, State of ***, seeking documents of a 1978 examination made by the Department of the *** Bank. The purpose of the subpoenas as set forth in the covering letter is to establish the ambiguity, under *** law, of the meaning or definition of accommodation loans. The uncertainty in meaning, if established, would tend to show that Respondent's failure to list certain criticized loans was not knowingly false and therefore does not pose a threat to the interests of the Bank's depositors. Counsel for the FDIC was not initially informed of the request though on August 31, 1988, he was advised in a telephone communication by Respondent's Counsel, of the identity of the witnesses and the general purpose of the request. He was promised a copy of the covering letter but it was not received until September 6 or 7, 1988. The subpoenas were issued and the three witnesses appeared at the hearing. A sworn statement by the Custodian of Documents averred that it is the Department's practice to destroy files which are 10 years old and that such a procedure was routinely followed with respect to the documents in question.
   Counsel for the FDIC vigorously objected to receipt of evidence bearing on the meaning of accommodation loans pointing out that such loans were the subject of Count 2 of the indictment, and that the meaning of the term accommodation loans was thoroughly litigated first before the United States District Court, Northern District of ***, Central Division, in United States of America v. ***, No. Cr. ***, (the trial court) and before the United States Court of Appeals, 8th Circuit, in U.S. v. ***, *** (1988). In both cases Respondent was found guilty of the Count 2 charge.
Counsel cited Emich Motors Corp. v. General Motors Corp., 71 Sup. Ct. 408 (1951) for the principle that a prior criminal conviction works as an estoppel in favor of the government with respect to questions distinctly put in issue and directly determined in the criminal case. The Eighth Circuit followed the Emich rullng in McNally v. Pulitzer Pub. Co., 532 F. 2d 69 (1976). Counsel submits that the question of what constitutes accommodation loans was clearly an issue and was resolved against Respondent in the criminal proceedings and evidence relating to this issue must be rejected.

Discussion

   [.2] It is beyond dispute that Respondent may not in this proceeding defeat the reach of the Eight Circuit's finding which convicted him on both Counts in the indictment. However, this is an administrative hearing and the Corporation is not bound by the same rule of deference as would apply were Respondent in a civil proceeding seeking to defeat the thrust of a holding in a criminal case. Section 1818(g) affords the Corporation an element of discretion in deciding whether or not to invoke its powers. Rule 56(a) of the Federal Deposit Insurance Corporation's Rules of Practice and Procedures (12 C.F.R. 308) lays out the relevant considerations which are to guide the Corporation in exercising its section 1818(g) powers. It is apparent from the language of section 1818(g)(1) and (3) and the companion Rule 56(a) that in administering these provisions the Corporation will look mainly to whether or not the alleged offense is a crime punishable by imprisonment for a year or more and which involves dishonesty or breach of trust and whether or not the presence of Respondent in an official capacity is a threat to the Bank's depositors or may impair public confidence in the Bank. However, the second sentence of Rule 56(a) states "The Board of Directors may consider additional factors in the specific case that appear relevant to its decision to continue in effect, rescind, terminate, or modify a suspension, removal or prohibition order." Clearly this language authorizes the Corporation to weigh matters other than the statutory guides which it is required to evaluate. The second sentence of Rule 56(a) provides the Corporation as well as respondent a {{4-1-90 p.A-1385}}needed element of flexibility in responding to circumstances whose direction cannot always be predicted. It should be noted that the final sentence of Rule 56(a) provides that the Corporation may not consider the guilt or innocence of the respondent with respect to the matters raised by the indictment in the exercise of its section 1818(g) powers and that as of the hearing dates the question of innocence or guilt was not conclusively resolved. Accordingly it is concluded that evidence relating to the meaning of accommodation loans is admissible for the purpose of enabling the Corporation to meet its responsibilities under section 1818(g) and the associated Rule 56(a).

Evidence—Subpoened Witnesses

   Respondent subpoened witnesses ***, ***, and ***. The first two were represented at the hearing by the Assistant Attorney General, Administrative Law Division, State of ***, who objected to their being required to testify against their will. (Tr. 70–77). The move to quash was denied.
   Witness ***. (Tr. 82–115) was Superintendent for the Department of Banking for the State of *** from September 1975 to January 1986. He is experienced in banking practices both by reason of formal education and experience in commercial banking. During his tenure in the Department the question of the propriety of accommodation loans invariably related to lending limits. For example, X borrows money from a bank to give to Y who is also a borrowing customer of the bank. Thus the amount borrowed by X must be added to what Y already has borrowed to determine whether the amount owed by Y exceeds the State lending limit. This analysis presupposes that Y is a borrowing customer of the bank. The witness concedes that neither *** law nor regulations issued by the Department of Banking define the term accommodation loans. However, section 524.904(1b) of the *** Code provides as follows: "Obligations of a customer include obligations of others to a state bank arising out of loans made by such state bank for the benefit of such customer." (R-3). The witness also stated that in his judgment if Y is not a borrowing customer of the bank then the concept of accommodation loans would not be invoked. He can recall no occasion during his tenure with the Department that the concept of accommodation loans has ever been of concern except in cases where the ultimate recipient of the funds is also a customer of the bank.
   The witness defines an accommodation loan as one made to a person for the benefit of another person. The purpose of the loan has no bearing on whether it is an accommodation loan.
   On cross examination the witness conceded that accommodation loans are of concern to the State not only to ensure observance of the lending limits but in terms of a source of repayment. Thus regulators have an interest in accommodation loans even when the ultimate recipient is not a bank borrower. The witness testified that the State of *** has a report which makes the same inquiry as Question 5 of the FDIC's Officer's Questionnaire, to whit "List all extensions of credit since the last examination for the accommodation of others than those whose names appear on the bank's records or on credit instruments in connection with such extensions." The witness concedes that had a banker been told by *** officials that certain accommodation loans should have been listed in response to the above question and that same banker omitted to list those loans in a subsequently completed federal inquiry he would be concerned as a supervisor.
   Witness *** (Tr. 116–157) is college educated, worked as a bank examiner for the *** Department of Banking from early 1975 to late 1983, and as a commercial banker since late 1983. While employed as a bank examiner he participated in several examinations of Respondent's Bank including one of April 18, 1980. (R-4). The witness knows of no *** or Federal laws or regulations which define the term accommodation loans. He is of the opinion that section 524.904(1b) does not define the term accommodation loans but in effect is merely a requirement whereby loans by bank A to borrower B for the use of C who is also a bank A borrower may be lumped together to determine whether the State lending limits are exceeded. The witness does not believe that accommodation loans are limited only to loans where the beneficiary of the funds, C in the above example, is a borrower from the same bank (A) as B. As a bank examiner he was concerned with accommodation loans not only from the standpoint {{4-1-90 p.A-1386}}of lending limits but also to determine the credit-worthiness of the arrangement. This analysis involves consideration of the purpose of the loan and the source of repayment.
   Witness *** (Tr. 158–182) is college educated with a double major in accounting and business administration. He was employed about 10 years as a bank examiner for the FDIC leaving the agency in 1982. Since then he has been employed as an executive in the banking industry specializing in lending practices. During his tenure with the FDIC he was one of a group that conducted several examinations of Respondent's Bank. The witness believes that general banking practice defines accommodation loans as the borrowing of money by one person for the benefit of another and the latter need not be a customer of the lending institution. He concedes that section 524.904(1b) of the *** Code pertains to accommodation loans in situations where the borrower and the beneficiary are both customers of the same institution and in that situation their joint indebtedness is considered in determining whether the State lending limits are exceeded. Money borrowed to acquire a proprietary interest such as a share in a limited partnership would not be considered an accommodation loan but funds obtained to pay operating expenses would be considered an accomodation loan. In analyzing accommodation loans the source of repayment is an important factor to be determined.

Evidence—Public Witnesses

   Six witnesses testified voluntarily in support of Respondent (***, ***, ***, ***, ***, and ***). All are well educated professionals with careers in local government, farming, manufacturing, homemaking, and public accounting. They are long time residents of *** who became acquainted or formed a friendship with Respondent through civic, business, or professional endeavors. They maintained business and personal checking and savings accounts at the Bank and from time to time were also borrowers. With the exception of witnesses *** and ***, who both testified at the criminal trial in ***, they heard of the indictment either through the newspaper or word-of-mouth and were familiar with the charges only in a general way. Most believe the charges and the decision of the jury to be serious matters but in their business dealings with Respondent they found him to be forthright and trustworthy and they would resume their affiliation with Respondent and the Bank if it were possible. Through their community contacts they heard of no criticism of Respondent, with an isolated exception, and were not aware of any depositors who withdrew funds from the Bank following circulation of the news of the indictment.
   The witnesses generally took the position that the question of whether "loans for the accommodation of others" should have been listed in the Officer's Questionnaire (Count 2) was a matter of considerable uncertainty with the government claiming they should and Respondent with just as much logic and support saying it was not necessary. (Tr. 32, 9/9/88). One witness though, reluctantly conceded that the failure to list the loans could not be excused when he learned that an earlier State of *** examination had informed Respondent that loans of the type under consideration should be listed. (Tr. 216–220, 9/8/88).
   Concerning the charge of failure to list an asset in an Individual Financial Statement, FDIC Exhibit 12, the witnesses generally took the view that these statements are usually submitted to support a request for credit and that failure to list an asset is not as serious as would be the omission of a liability. (Tr. 33, 9/9/88). The asset in question was an investment of $10,000 in *** Limited Partnership. The Partnership was formed during May 1980, but Respondent did not make his financial commitment until after September 1980. Several witnesses testified that in their view omission of an asset of little or no value ought not be considered a serious infraction. Witness *** testified in detail on this subject. Initially, she stated the Partnership asset need not be reported because Respondent ceased his association December 31, 1981 (Tr. 34,35). Later the witness conceded (apparently when she came to understand that the financial statement was executed January 19, 1981), that the Partnership asset should have been shown. (Tr.-37). She stated however, that by January 1981 the worth of the investment had declined substantially but she was unable to recall the amount of loss reported on Respondent's 1980 Federal Income Tax return. She conceded that there was a market value for the Partnership interest as of the preparation of the financial statement but it would not have been significant, and any figure would be dependent {{4-1-90 p.A-1387}}on the availability of a willing buyer. (Tr. 53).
   Counsel for FDIC requested to be supplied with Respondent's 1980 and 1981 Federal Income Tax returns. Respondent was ordered to supply the requested material.
   On September 17, 1988, witness *** submitted the requested material along with a four page letter of explanation and argument. On September 23, 1988, counsel for FDIC moved to admit into evidence the 1980 K-1 schedules for the entity *** et al but to not consider the letter on the ground that it is argumentative. Should the letter be considered then Counsel requests that the hearing be reopened to permit cross-examination of witness *** on the contents of the letter.
   In her letter witness *** referring to the 1980 returns points out that Respondent's pro rata loss was $4,560 so that his capital account as of January 1, 1981 would have been $5,440 ($10,000 original investment minus 1980 loss of $4,560). The witness does point out that failure to list the $5,440 partnership interest understated assets by .57% and net worth by .93%, each less than one percent. She repeats contentions made at the hearing concerning the materiality of the omission, the significance of omitting an asset as distinguished from omitting or understating a liability, and that the worth of the asset could be considered as its fair market value rather than the balance in the capital account. All these contentions were raised by witness *** and others at the hearing and do not constitute new material. Accordingly the objection is overruled as to these matters.
   However, the final paragraph beginning on page 3 and extending over to page 4 of the letter makes the argument that Respondent did not prepare the statement to obtain credit from the FDIC though this is the basis for the Count 1 charge. This point was not raised at the hearing and it may not now be considered and FDIC Counsel's motion will be granted in this respect.
   Finally, for all above reasons the six witnesses were unanimous in testifying that Respondent was not a threat to depositors nor does his presence impair confidence in the Bank.

Evidence—Respondent

   Respondent *** was called by his Counsel to identify and testify concerning Respondent's exhibits 5, 6, 7 and 8. The Exhibits are identified as "Daily Statements" for September 30, 1986, January 1, January 6, and February 2, 1987, respectively. The earliest exhibit was prior to indictment while the last three were all subsequent to the filing of the charges. In his testimony Respondent referred to the figures for total demand deposits (checking accounts), savings deposits (passbook), certificates of deposit, and the total of all three. Thus the totals were $16,241,692, $16,761,259, $17,096,282, and $16,774,213, respectively. Respondent testified that the selection process was made at random and that the variation in the totals are typical of the fluctuations that are routine in the banking business. He states that the increase in deposits for the periods subsequent to the indictment establish that public confidence in the Bank was not adversely affected by the filing of the charges. At no time subsequent to the indictment was there every any significant withdrawing of deposits. He maintains the Bank was solvent at the time it was closed by the *** authorities. The Daily Statements do not show the status of accounts with deposits exceeding $100,000. Respondent concedes that accounts with deposits over $100,000 could be found in the certificates of deposit category and in the category of demand deposits (checking), He estimates the Bank has about 2,000 checking accounts but he had no knowledge as to how many maintained balances of over $100,000. The certificates of deposit category totaled $9,838,873 on 9/30/86, and $9,280,782, $9,207,707, and $8,815,805 for the selected days in early 1987. The approximately one million dollar decline does not, according to Respondent, indicate the flight of uninsured deposits following circulation of news of the indictment.
   Over Respondent's objection Counsel for the FDIC was permitted to call Mr. *** as an adverse witness. (Tr. 70–78).
   Respondent concedes and FDIC Exhibit 17 shows on page 3-2-17 that an examination of the Bank on August 13, 1982, by the State of *** Department of Banking referred to designated loans to ***, *** and ***, as accommodation to *** Limited Part- {{4-1-90 p.A-1388}}nership at which time *** was not a borrower of the Bank. Respondent testified however that at the time he completed the Officer's Questionnaire in November 1982 that he had not been told by the Department of Banking that the loans referred to above were accommodation loans (Tr. 90). He concedes however, testifying to the contrary in his criminal trial, but on further investigation he finds that, in fact he had not been told by the *** Department of Banking that the items in question were accommodation loans. (Tr. 92). This matter was not explored by Respondent's Counsel following Respondent's testimony as an adverse witness.
   Sometime in 1976 or 1977 Respondent made an agreement with a car salesman whereby the Bank would lend money to the salesman for the purchase of a cadillac from the dealership which employed the salesman but with title to the car reposing in Respondent. Respondent stated that he had a half interest in the car and paid one-half of the interest (and apparently the principal) on the car loan to the salesman who in turn paid the Bank. This arrangement was structured in this way so the salesman could earn a commission. Respondent was told by the salesman that if he were to purchase the car in his own name he would not be entitled to a commission. Because the car was one of the last convertible models made by cadillac the participants expected to make money on the deal.
   Respondent concedes that the purpose for which a loan is made is generally taken into account when deciding upon the creditworthiness of the proposal, but more attention is paid to the borrower's financial statement and collateral. Respondent would not intentionally insert on a loan document a "purpose of loan" statement that was incorrect. Counsel for FDIC refers to a note of April 16, 1987 (FDIC-14), one of December 30, 1980 (FDIC-15) and one of November 1980 (FDIC-16) which is the section headed "Purpose of Credit" carry the notations "Taxes", "Operating", and "Fall Expenses". Respondent prepared the notes and concedes that the sums advanced to the borrowers were not used to pay the taxes, the operating expenses, or fall expense of the borrowers, but rather were used to pay the taxes and expenses of *** Limited Partnership, and that he knew at the time the notes were prepared of the real purpose of the loans, and that he had an interest in the Partnership. It is admitted that State or Federal bank examiners looking at these notes, for evaluation purposes, would have no way of knowing that the proceeds were for the use of someone other than the borrower named on the note.
   Pages 110–114 of the Transcript for September 9, 1988, refers to lending limit violations in the *** Department of Banking examinations of April 18, 1980 (R-4) and August 13, 1982, (FDIC-17). Respondent was questioned whether in the August 13 report the loans which were considered as being loans for the accommodation of *** were also considered as violations of the State lending limits. Though Respondent at one point stated that the same loans were responsible for two infractions (Tr. 113) elsewhere he appeared to state that the lending limit violations occurred because in June 1982 *** acquired an interest in another entity *** who apparently was a Bank borrower and this addition caused a lending limit violation. (Tr. 111). In any event the record does not contain sufficient information to resolve the dispute and it will not be taken into account in the disposition of this proceeding.

Discussion on the Merits

   [.3,.4] The structure of section 1818(g)(3) places on Respondent the burden of establishing that his participation in the affairs of the Bank is not likely to be a threat to interests of the Bank's depositors or threaten to impair confidence in the Bank. The question which the Board must pass upon is not one of guilt or innocence but rather whether or not Respondent's actions affirmatively establish his respect for and willingness to comply with regulatory processes. It is submitted that Respondent has failed to meet his burden.
   Taking up first the propriety of the failure to list the *** interest in the January 19, 1981, Individual Financial Statement, the Board ought not consider the legal issue of whether the layout of the form and the signed affirmation at the bottom of the Statement suffice to support a criminal conviction. Rather it ought to consider the question of whether an executive officer who submits a signed financial statement affirming the veracity of the submission, but who omits listing an asset, has met his burden under 1818(g)(3).

   [.5] It is true the omission was not monetarily large, amounting to less than one percent of net worth, but it was significant in {{4-1-90 p.A-1389}}terms of Respondent's commitment to regulatory oversight. It is no excuse that the value of the asset may have been difficult to determine. Respondent is the chief executive of a Bank. He listed the present value of several insurance policies each of whose present worth was stated to be less than $5,000. Respondent's reliance on legalisms to escape the consequences of not listing the Partnership interest is not persuasive.

   [.6] Coming now to the failure to include in the Officer's Questionnaire certain loans for the accommodation of others, the Board ought not dwell on this matter in the context of the fraud statute. Again it should consider this subject in light of what it shows about Respondent's attitude toward regulatory supervision. Witnesses *** and ***, both experienced bank examiners, testified that loans for the accommodation of others were of interest to regulators not only for purpose of ensuring conformity to lending limits but also as a supervisory device to monitor credit risk. True there is no statutory or regulatory definition of accommodation loans but all three subpoened witnesses stated that in general banking parlance such extensions of credit are known simply as loans taken out by one person for the benefit of another. Witnesses *** and *** both stated that section 524.904(1b) of the *** Code does not purport to define the term accommodation loan, but it is merely a tool to make certain that borrowers who obtain such loans do not slip through the lending limit rule. The very terms used in the posing of Question 5 of the Officer's Questionnaire, to whit, disclose loans "made for the accommodation of others than those whose names appear on the bank's records as credit instruments," are quite clear. A prudent conscientious official ought not mistake the meaning of this language.
   Finally it must be noted that an audit by the *** Department of Banking advised Respondent that the very loans in question should be listed as accommodation loans in an *** report similar to the federal form. That audit was made several months before Respondent completed the Federal Officer's Questionnaire. Clearly then he was charged with notice of the correct response to Question 5.

   [.7] The record refers to several practices which suggests a less than total commitment to the ethical standard expected of a banker as in the case of the 1977 cadillac, and a cavalier attitude toward the efforts of regulatory officials to monitor loan risk factors. As shown in FDIC Exhibits 14, 15, and 16, the stated purpose of the loans was equivocal so as to mislead or throw-off regulators as to the true purpose for which the loan proceeds were to be used.
   Six public witnesses support Respondent. Their support is based on many years of professional and/or social contact and they uniformly found the banker to be beyond reproach. They were customers of the Bank and would resume the association were it possible. They refer to the uncertainty surrounding the meaning of accommodation loans and that failure to list an asset of perhaps marginal value are both mitigating circumstances which do not shake their support for and belief in the integrity of Respondent.
   The witnesses present one facet of Respondent's career as a banker. As they say, he was a community leader who helped bring a doctor and retirement home to ***, and who supported local businesses and the framing community. They were however, for the most part unfamiliar with the backroom activities where Respondent was cutting corners and engaging in hide and seek maneuvers with regulators. The purpose of the State of *** and the federal regulation of banks is to encourage sound banking practices.
   Respondent ***, as did the public witnesses, testified that following notice of the indictment there were no Bank runs. Mr. *** submitted Exhibits 5, 6, 7 and 8 which show that the Bank's deposit accounts both prior to the indictment (9/30/86) and subsequent thereto (3 days in early 1987) remained stable. In fact deposits were higher in early 1987 than on 9/30/86. It is noted that certificates of deposit which were $9,838,873 on 9/30/86 declined to $8,815,805 by 2/2/87. It is apparent that depositors with accounts over $100,000 are likely to have their funds in this category of account, and to feel the need to transfer out of the Bank for purposes of safety. Furthermore, the period selected for study is too compacted to form any reliable conclusions. In early February 1987, Respondent still faced major problems and the Board would not be justified in concluding that {{4-1-90 p.A-1390}}this study of Bank balances for three days in early 1987 was a forecast of the future.
   In summary I conclude that Respondent has failed to show that he is not a threat to depositors and that his continued presence in the Bank does not threaten to impair public confidence in the Bank.
   It is recommended that the Notice and Order of Suspension and Prohibition be continued.
Richard A. White
Presiding Officer

ORDER

   The Board of Directors finds that Respondent has not met his burden under 12 U.S.C. 1818(g)(3) and that the Notice and Order of Suspension and Prohibition be and is hereby continued in effect until further notice.
   By order of the Board of Directors, dated ***, 1988.
Hoyle L. Robinson
Executive Secretary

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