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FDIC Enforcement Decisions and Orders |
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Individual participating in conduct of Bank's affairs prohibited from further participation in affairs of Bank or any insured bank. Individual engaged in unsafe or unsound practices, showed personal dishonesty and willful disregard for Bank's safety, violated banking laws, and caused Bank to suffer substantial financial losses. (A previous decision in Docket No. FDIC-87-79c&b appears at [¶
[.1] Prohibition, Suspension, or RemovalFDIC Authority to Order
[.2] Participants in Conduct of AffairsEffective Control and Manipulation
[.3] Prohibition, Removal, or SuspensionParticipants in Bank's Affairs
[.4] Prohibition, Removal, or SuspensionDefensesRepayment of Losses
[.5] Change in Bank Control ActCompliance
[.6] Prohibition, Removal, or SuspensionFactors Determining Liability Dishonesty
{{4-1-90 p.A-1391}}
[.1] The FDIC issues orders of removal and prohibition pursuant to the authority granted to it by Congress in section 8(e)(5) of the FDI Act, 12 U.S.C. § 1818(e)(5). As a result, the narrow issue before the Board is whether the FDIC has the authority under this section to issue an order prohibiting the Respondent from participating in the affairs of any FDIC-insured bank without the prior written approval of the relevant federal banking authority.
ORDER
Having found and concluded that ***, in his capacity as a participant in the conduct of the affairs of *** Bank, *** ("Bank"), engaged in conduct and practices with respect to the Bank which resulted in substantial financial loss, has evidenced personal dishonesty and a willful or continuing disregard for the safety and soundness of the Bank, and has evidenced his unfitness to participate in the conduct of the affairs of any other bank insured by the FDIC, IT IS HEREBY ORDERED that ***:
RECOMMENDED DECISION
IN THE MATTER OF: ***, Individually
***, Regional Attorney, *** Regional
MICHAEL O. MILLER, Administrative Law Judge: I heard this matter on January 19, 20 and 21 and March 29, 1988, in ***, upon a Notice of Charges and Hearing (FDIC-87-79c & b) issued by the Board of Directors of the Federal Deposit Insurance Corporation (herein FDIC) on April 16, 1987 and a Notice of Intention to Prohibit from Further Participation (FDIC-87-143e) which issued on July 21, 1987, all pursuant to the Federal Deposit Insurance Act, 12 U.S.C. Sections 1811-1831d and FDIC Rules of Practice and Procedure, 12 C.F.R. part 308.1
FINDINGS OF FACT3
A. *** Bank
*** Bank is an *** Corporation operating a small (approximately $5,000,000) insured state nonmember bank in ***.4 In 1986, it had sustained an operating loss of $67,000 and was showing a small profit in early 1987. In January of 1987,5 the Bank's major stockholders, Mr. and Mrs. ***, who held about 64 percent, ***, their son, and ***, a director, listed their shares for sale with a broker. They offered to sell at least 634 shares, out of a total of 674 owned by them, at $545 per share, the approximate book value. Other shares were held in lesser amounts by other directors.
B. Transactions with *** Corporation and
*** Corporation is a publicly held corporation with an office in ***, engaged in the origination and sale of mobile home loans. *** is its vice-president of secondary marketing. In mid-June 1986,13 *** received a letter of commitment from *** to purchase $7,691,041 in mobile home loans, known as "Conventional Pool #83." They were to be acquired in thirds, one-third each month commencing on August 1. The seller was to pay a one percent commitment fee, from which the broker's fees would be paid (FDIC Exh. 19) and *** Bank of *** (herein called ***) was to act as custodian of the contract files. *** agreed to fund the first part of the transaction on August 1 and the contracts were assigned (but title did not pass) to *** on July 18. *** was to audit the loan files on July 21 and the parties were to meet and finalize the deal on July 25 (FDIC Exh. 20 and 40).
Discussion
A. General-Elements to the Established
In First National Bank of Scotia v. United States, 530 F.Sup. 162 (D.C., 1985), it was stated, at 166:
C. Respondent's Participation in the
[.2] *** was not a director, officer, or employee of the *** Bank and denied that he was a participant in its affairs such as would bring him within the purview of Section 1818(b), (c) and (e). He was, he claims, merely proffering a transaction which the Bank's directors, officers, and employees were free to accept or reject, admittedly influencing events but not controlling them. I find that the facts belie Respondent's contention; he was, in fact, manipulating both the people and the events, in a Svengali-like fashion, to achieve his desired ends and thereby was participating in the conduct of the Bank's affairs.
D. Unsafe and Unsound Practices
As with the question of who is a "participant" in the affairs of a bank, the statute does not define what is an "unsafe or unsound" banking practice. Here, however, there is precedent to offer guidance. In First National Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674, 685 (5th Cir. 1983), the Court adopted the definition which had been proposed by the Comptroller in First National Bank of Eden v. Department of the Treasury, 586 F.2d 610, 611, fn. 2 (8th Cir. 1978):
[.3] Here, the FDIC's Assistant Regional Director testified that, in his and the Agency's opinion, the transactions between Respondent and Respondent's businesses, *** (for whom he was at least the agent) and the Bank were unsafe and unsound for a number of reasons.16 First and foremost among the practices labeled unsafe and unsound, i.e., contrary to accepted standards of banking operations, was the Bank's payout of $2,260,000 without having received any documentation on the loans being purchased, without "knowing the collateral," a fundamental banking precept. As noted by ***, vice-president of ***, it is contrary to the practice of banks to release funds for loans before receiving adequate documentation absent an ongoing relationship with the seller. Here, the Bank had never done business with *** or his companies before and did not even seek to document his legitimacy or that of his companies (a related but separate element of unsafe and unsound practices). The loans could have been lacking in present value and the assurances given in the loan commitment agreement would not necessarily have protected the Bank. They did not permit the Bank to reject any loan it deemed undesirable, only those which did not "meet the requirements of the commitment."17 Moreover, the Bank paid for these undocumented loans with a cashier's check and an unscrupulous seller could have presented the Bank's check for payment (or insisted upon early withdrawal of the funds represented by the CDs) and absconded without ever delivering the promised loans. Similar practices have previously been found to be unsafe and unsound (First National Bank of Eden, supra) and I find that they were here.
E. Substantial Losses
[.4] Complainant contends, and I agree, that both the Bank and *** suffered substantial financial losses, bringing Respondent's conduct within the ambit of Section 1818(j). The Bank paid nearly $2,260,000 for loans it never received, it paid nearly $23,000 in fees for the purchase of those same loans and it incurred a loss of the $50,000 brokerage fee paid to Respondent for the unrequested capital infusion. It is immaterial that this money was ultimately repaid or reimbursed to the Bank by its shareholders. First State Bank of Wayne County v. F.D.I.C., 770 F.2d 81 (6th Cir. 1985) and cases cited therein at page 83. Anonymous v. FDIC, supra. Additionally, it incurred legal fees in excess of $39,000.
F. Violations of the Change in Control
[.5] Respondent, on behalf of ***, a corporation, acquired 24 percent of the Bank's stock and options, fully paid-for and nonrefundable, on an additional 64 percent, without filing change of control applications in either *** or with the FDIC. This was deemed, by the *** Commissioner of Banks, to violate the *** Banking Act, Section 15(9), which requires that an application be filed upon acquisition of more than 10 percent of a bank's stock. I further find that it violates the Federal Change of Control Act, 12 U.S.C. 1817(j).
G. Personal Dishonesty and Willful or
[.6] Complainant contends that Respondent's dealings with the Bank, *** and *** establish his personal dishonesty. I am compelled to agree. The record here is replete with instances of what may best be described as misrepresentation, high pressure sales tactics, and self-dealing.
PROPOSED ORDER
IT IS HEREBY ORDERED, that ***, his employees, agents, successors or assigns:
CERTIFICATION OF RECORD
I, Michael O. Miller, Administrative Law Judge, hereby certifies that the following: |
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Last Updated 6/6/2003 | legal@fdic.gov |