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FDIC Enforcement Decisions and Orders

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   [5137] Docket Nos. FDIC-85-82e, FDIC-85-83k (7/26/89).

   Civil money penalty not assessed and removal not ordered. Loans made to chairman of the board and principal shareholder and to his related interests violated lending limitations. FDIC concluded that sanctions were inappropriate because, among other things, proceedings had already continued for more than 3 years, Respondent was no longer involved in banking, and Respondent had already paid a substantial civil money penalty for similar violations at an affiliated bank.

   [.1] Regulation O—General Prohibitions—Approval by Board of Directors
   Extensions of credit to a director and to his related interests are subject to regulatory limitations and require approval of Bank's board of directors.

   [.2] Regulation O—Lending Limitations—Unsecured Loans
   Where extensions of credit to director's related interests are not secured by "readily marketable collateral," the appropriate limitation on lending is the 15 percent limitation applicable to unsecured extensions of credit.

   [.3] Regulation O—Lending Limitations—Installment Consumer Paper
   Extensions of credit to a director's related interests arising from the discount of installment consumer paper are subject to a 25 percent limitation.

   [.4] Regulation O—Lending Limitation—Statutory Exceptions Strictly Construed
   Statutory exceptions to limitations on extensions of credit to related interests must be strictly construed.

   [.5] Regulation O—Defenses—Recovery of Charged Off Loan
   The ultimate recovery of a charged-off loan does not eliminate or excuse violation of lending limitations.

   [.6] Regulation O—Loans to Directors—Approved by Board of Directors
   The requirement that Bank's board of directors approve extensions of credit to a director's related interests is not satisfied if the director involved participates in the vote.

   [.7] Civil Money Penalties—Amount of Penalty—Statutory Standard
   In assessing a civil money penalty, FDIC is required to take into account the appropriateness of the penalty with respect to the financial resources and good faith of the person charged, the gravity of the violation, the history of previous violations, and such other matters as justice may require.

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   [.8] Prohibition, Removal, or Suspension—Defenses—No Threat to Banking Industry
   FDIC may dismiss removal action without prejudice to Respondent where, among other things, Bank is closed and Respondent does not pose a threat to the banking industry.

In the Matter of
* * *
Individually and as Chairman of the
Board, Director and Principal Shareholder,
* * * BANK
(Insured State Nonmember Bank—In
Receivership)


DECISION

I. Procedural History

   The Federal Deposit Insurance Corporation ("FDIC") initiated this removal and prohibition action against * * * ("Respondent") on April 1, 1985, pursuant to section 8(e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. §1818(e), and Part 308 of the FDIC Rules of Practice and Procedure ("FDIC Rules"), 12 C.F.R. Part 308, by issuing a Notice of Intention to Remove from Office and to Prohibit from Further Participation ("Notice of Intention to Remove"). 12 U.S.C. §1818(e)(1) and (4).
   The Notice of Intention to Remove recited, inter alia, that Respondent had breached his fiduciary duty as Chairman of the board of directors and as a principal shareholder of * * * Bank, * * * ("Bank"), violated various laws and regulations, and exhibited personal dishonesty and/or a continuing disregard for the safety and soundness of the Bank, and that those acts or omissions resulted in, or were likely to result in, substantial loss to the Bank.
   Specifically, the Notice of Intention to Remove stated that Respondent had committed or engaged in acts or omissions during a two year period from 1982 to 1984 which caused Respondent or the Bank to violate: (1) section 22(h) of the Federal Reserve Act, as amended (the "Act"), 12 U.S.C. §375b, and section 215.4(c) of Regulation O of the Board of Governors of the Federal Reserve System ("Regulation O"),1 12 C.F.R. §215.4(c), by repeatedly permitting extensions of credit to be made to Respondent and/or his related interests, as defined in section 215.2(k) of Regulation O, 12 C.F.R. §215.2(k), which exceeded the Bank's aggregate lending limits as imposed by section 215.2(f) of Regulation O, 12 C.F.R. §215.2(f); (2) section 215.4(b) of Regulation O, 12 C.F.R. §215.4(b), by failing to obtain the prior approval of the Bank's board of directors with respect to numerous extensions of credit (collectively, sometimes referred to as the "Regulation O violations"); (3) section 23A of the Act, 12 U.S.C. §371c, by reason of certain covered transactions as defined in section 23A(b)(7), which extensions of credit exceeded the amount of covered transactions that a bank may engage in with an affiliate pursuant to section 23A(a)(1) and which were not secured by collateral which satisfied the requirements under section 23A(c) of the Act (the "section 23A violations")2
   As a result of Respondent's engagement or participation in these practices, the Notice of Intention to Remove stated that Respondent had received financial gain and the Bank had suffered or probably would suffer substantial loss or other damage and the interests of the Bank's depositors could be seriously prejudiced, all of which evidenced Respondent's unfitness to participate in the affairs of the Bank or any bank insured by the FDIC.
   On April 3, 1985, the FDIC issued to Respondent and others,3 pursuant to the provisions of section 18(j)(3) of the FDI Act and Part 308 of the FDIC Rules, 12 C.F.R. Part 308,4 a Notice of Intention to Remove. The Order to Pay in the Notice of Assessment of Civil Money Penalties, Findings of Fact and Conclusions of Law, and Order to Pay ("Notice of Assessment") assessing Re-


1 Regulation O is made applicable to insured state nonmember banks by section 18(j)(2) of the FDI Act, 12 U.S.C. §1828(j)(2).

2 These sections of the Act are made applicable to insured state nonmember banks by sections 18(j)(1) and (2) of the Federal Deposit Insurance Act, 12 U.S.C. §§1828(j)(1) and (2).

3 Six other directors and/or executive officers were initially named as respondents. All were subsequently dismissed as parties as the result of negotiated settlements with the FDIC.

4 The provisions of section 18(j)(3) of the FDI Act have been recodified as 12 U.S.C. §1828(j)(4).
{{4-1-90 p.A-1460}}spondent a penalty of $923,000, for substantially the same grounds cited in the Notice of Intention to Remove. The Order to Pay in the Notice of Assessment also stated that the penalty assessed against Respondent would continue to accrue at the rate of $1,000 per day for each day during which his Regulation O and section 23A violations continued beyond the date of the assessment.
   Following protracted prehearing discovery, including an interlocutory appeal to the Board of Directors of the FDIC ("the Board"), a hearing on the merits commenced in * * * on December 8, 1986. At that time, the removal and civil money penalty actions were consolidated for hearing. The hearing lasted all or part of 21 days and concluded on March 12, 1987. The hearing record for these proceedings consists of 3,126 pages of transcript and 86 exhibits.
   On April 28, 1988, Administrative Law Judge Thomas J. Howder ("ALJ")5 issued a Recommended Decision in these proceedings which did not include a decision as to the merits of the section 8(e) issues. On June 30, 1988, FDIC enforcement counsel filed Exceptions to the Proposed Findings of Fact and Conclusions of Law of the Recommended Decision ("FDIC Exceptions"). On July 5, 1988, pursuant to section 308.16 of the FDIC's Rules, 12 C.F.R. §308.16, the consolidated case was submitted to the Board of Directors for decision.
   The Board has carefully reviewed the record in its entirety. In its discretion and in consideration of the totality of the circumstances discussed herein, on September 27, 1988, while finding violations of law and regulation, the Board determined not to assess a civil money penalty in this action. With respect to the section 8(e)(1) violations, in consideration of the totality of the circumstances, the Board determined not to remand the action for further proceedings but rather to dismiss the action without prejudice. At the time the Board issued its Order in this matter, it stated that its decision would follow. This Decision (the "Decision") adopts in part and modifies in part the ALJ's Recommended Decision, Findings of Fact and Conclusions of Law. As discussed herein, the Board had modified certain findings and conclusions made by the ALJ with respect to the Regulation O and section 23A violations.

II. Discussion

   At all relevant times, Respondent served as Chairman of the Bank's board of directors and was its principal shareholder, owning 72.95 percent of the common stock of the Bank's parent company. R.D. at 6.6 The Bank was, at all times relevant to this proceeding, an insured state nonmember bank subject to the FDI Act, 12 U.S.C. §§1811-31d, the FDIC Rules and Regulations, 12 C.F.R. Chapter III, and the laws of the State of * * * R.D. at 5. All of the violations of law and regulation which are the subject of these actions pertain to various loans and other extensions of credit made by the Bank to, or for the benefit of, Respondent and/or his related interests during the period between 1982 and 1984. For ease of reference, these transactions were identified during the hearing and discussed in the Recommended Decision under the following names:
   1. * * *
   2. * * *
   3. * * *
   4. * * *
   5. * * *
   6. * * *
   7. * * *
   8. * * *
   9. Respondent * * *, personally. R.D. at 7.7 Respondent admitted in his answers, and at all other times, that the loans to * * *; * * *; * * *; * * *; and to himself personally, were loans made to him and his related interests within the meaning of the applicable laws and regulations. R.D. at 7-


5 Administrative Law Judge Fred E. Pickett was initially appointed to hear both the removal and penalty actions. For the reasons discussed in the Recommended Decision, at 1–3, Judge Pickett ultimately issued a recommendation dated April 11, 1986, that he be disqualified from further involvement in either of these actions and the FDIC subsequently accepted that recommendation. On May 8, 1986, the U.S. Office of Personnel Management appointed ALJ Thomas F. Howder to hear these actions.

6 Citations to the record herein shall be as follows:
—to the Recommended Decision: "R.D. at ____";
—to the transcripts of testimony: "Tr. at ____";
—to the exhibits: "FDIC Ex. ____ "; Resp. Ex. ____".

7 During the course of the hearing, FDIC counsel withdrew allegations with respect to another respondent, Mr. * * *, as the allegations related to Respondent * * *, as being erroneously pleaded. R.D. at 67; Tr. at 2771-73.
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8. In dispute are the charges related to the * * *, * * *, * * *, and * * * transactions. R.D. at 8. In discussing whether these transactions, either individually or in the aggregate, violated the limitations on extensions of credit or "insiders" and bank affiliates, and the prior approval requirements for such extensions of credit, we will first examine the limitations as they apply here and then address the disputed transactions.

   [.1] A. Section 22(h) and Regulation O.
   Respondent has been charged with violations of the limitations on extensions of credit to "insiders" and bank affiliates, and the prior approval requirements for such extensions of credit. Section 22(h) of the Act, as implemented by Regulation O, establishes limitations on the aggregate extensions of credit which a bank may make to an executive officer or principal shareholder and to such person's related interests ("insider"), 12 C.F.R. §215.4(c).8 The aggregate lending limit imposed by Regulation O on unsecured extensions of credit to an insider is 15 percent of a bank's unimpaired capital and surplus; extensions of credit equaling an additional 10 percent of capital and surplus may be made where extensions are fully secured by "readily marketable collateral," the current market value of which may be ascertained through a regularly published listing or an electronic reporting service. 12 C.F.R. §32.4(b); see also 12 C.F.R. §§32.4(c), 221.1(j).
   Regulation O also requires prior approval by a majority of a bank's board of directors in which the insider or director did not participate for extensions of credit exceeding the greater of $25,000 or five percent of a bank's capital and surplus to insiders or to directors and their related interests. 12 C.F.R. §215.4(b).9

   B. Section 23A.

   Section 23A of the Act limits the amount of credit a bank may extend to a single affiliate to ten percent of the bank's capital and surplus, 12 U.S.C. §371c(a)(1)(A), and limits a bank's aggregate loans to affiliates to twenty percent of capital and surplus, 12 U.S.C. §371c(a)(1)(B). These lending limits apply to the extent that "the proceeds of the transactions are used for the benefit of, or are transferred to," an affiliate. 12 U.S.C. §371c(a)(2).

   C. Respondent's Liability.

   Liability for lending limitation violations of Regulation O and section 23A is ascertained by straightforward mathematical calculations. The Recommended Decision contains a tabular summary (the "Tabular Summary") which shows the aggregate amounts of the loans made by the Bank to Respondent and/or his related interests, as well as the Bank's total capital and surplus at the time each extension of credit was originated and as of September 28, 1984, the date of the relevant FDIC Examination Report (FDIC Ex. 1) (the "Examination Report") (which amount is reflected in the table as the "final balance"). R.D. at 36–41.

   [.2] Although the summary correctly reflects the amounts and dates of a majority of the extensions of credit (see exceptions, below), the ALJ erred in his use of the 25 percent limitation rather than the 15 percent limitation on lending for Regulation O purposes. Specifically, since none of the extensions of credit were secured by "readily marketable collateral," which would raise the limitation to a maximum of 25 percent (most of the collateral pledged was real estate, which fails to satisfy this test), the ALJ erred in not using the 15 percent lending limitation applicable to unsecured extensions of credit in calculating whether Respondent violated Regulation O. The Board therefore modifies the findings and conclusions in the Recommended Decision in all relevant respects to reflect the correct 15 percent limitation for the Regulation O violations.10
   1. * * * Consumer Paper.


8 An "extension of credit" to an insider, to the extent pertinent to this action, takes place when: (1) a loan is made or renewed to an insider, (2) a non-recourse participation is acquired in a loan to an insider; (3) a loan is made which is assumed or guaranteed by an insider; or (4) a loan is made, the proceeds of which are "used for the tangible economic benefit of, or are transferred to," an insider. 12 C.F.R. §215.3. If an insider receives an economic benefit from the proceeds of a loan, it is immaterial to the existence of an "extension of credit" that a third party may also benefit from the loan.

9 In any event, all extensions of credit exceeding $500,000 to insiders or directors or their related interests must receive prior approval of a disinterested majority of the bank's board of directors. 12 C.F.R. §215.4(b).

10 The Board notes that, without further modification, the application of the 15 percent limitation to the ALJ's findings results in a violation by Respondent of Regulation O for at least a two month period prior to the examination date.
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   The Board finds that the ALJ failed to include extensions of credit to * * * in connection with the Bank's purchase of the "* * * Consumer Paper" in determining whether Respondent violated the provisions of Regulation O and section 23A here. R.D. at 32–34. The parties agree that from time to time over a two-year period, the Bank purchased from * * * a large amount of consumer installment notes with full recourse to * * *. The * * * Consumer Paper originated from individuals who had financed their health club memberships with the * * * health club organization, an admitted affiliate and related interest in Respondent. R.D. at 32. The aggregate amount of these purchases outstanding on the Bank's books as of September 28, 1984 was approximately $1,996,000. R.D. at 32.
   The issue with respect to the * * * Consumer Paper is whether these extensions of credit are "legally cognizable" for Regulation O and section 23A purposes, that is, whether the outstanding amounts should be considered in determining if applicable lending limitations were exceeded. R.D. at 32.

   [.3] As to applicability of Regulation O, Respondent contended that certain exceptions to section 84 of the National Bank Act, 12 U.S.C. §84 (which contains the applicable lending limitations, as further implemented in Regulation O), were applicable, which serve to raise the lending limitation ceiling to levels in excess of the standard 15 percent on extensions of credit secured by certain types of collateral or arising out of certain situations. In particular, Respondent claimed that subsections (c)(8)(A) and (c)(8)(B) of 12 U.S.C. §84 apply here. Subsection (c)(8)(A) states: loans or extensions of credit arising from the discount of negotiable or non-negotiable installment consumer paper which carries a full recourse endorsement or unconditional guarantee by the person transferring the paper shall be subject to a maximum limitation equal to 25 per centum of such capital and surplus, notwithstanding the collateral requirements set forth in ... this section. Subsection (c)(8)(B) states:

    If the bank's files or the knowledge of its officers of the financial condition of each maker of such consumer paper is reasonably adequate, and an officer of the bank designated for that purpose by the board of directors of the bank certifies in writing that the bank is relying primarily upon the responsibility of each maker for payment of such loans or extensions of credit and not upon any full or partial recourse endorsement or guarantee by the transferor, the limitations of this section as to the loans or extensions of credit of each such maker shall be the sole applicable loan limitations." See also 12 C.F.R. §32.6(h)(4) and (5).
   First, the Board notes that there is substantial question as to whether the * * * Consumer Paper was in fact "discounted" consumer paper for purposes of section 84(c)(8)(A). There is no documentary evidence in the Bank's records or the Examination Report to indicate that the notes were purchased from * * * at a discount. See, e.g., FDIC Ex. 1 at 2-a-2 and 2-a-3; FDIC Ex. 8 at 1. Examiner-in-Charge * * * stated that he did not believe that the Bank was buying the notes at a discount. Tr. at 152. He further stated that the Examination Report (which was based upon the Bank's records) revealed only that dealer reserves were to be maintained and funded through merchant discounts in order to make payments on or pay off any of the contracts that would become seriously delinquent or uncollectible. Tr. at 153-54.
   The only evidence presented which supports Respondent's contention that the notes were sold at a discount and with recourse (and thus potentially subject to the exceptions contained in section 84) is Respondent's only testimony and that of Mr. * * *, a close confidant of Respondent who was also an official of the Bank and an employee of Respondent and/or his affiliates for over 20 years. Tr. at 1308-09, 1320. While Mr. * * * stated that he was the officer responsible for buying the consumer paper for a period of time at a discount of approximately 35 percent, the Board finds that the testimony is not consistent with the Bank's records and the Examination Report. While there is some conflicting evidence, we believe the greater weight of the credible evidence in this proceeding indicates that the Bank established and maintained a dealer reserve incident to the purchase of the * * * Consumer Paper. See Tr. at 1310-13; see also, testimony of * * * (former cashier of the Bank, who testified as to the dealer reserves established with respect to the * * * Consumer Paper), Tr. at 821-22. This evidence is inconsistent with the purchase of the paper at a "discount".

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   [.4] The Board also finds that Respondent has failed to show that subsection (c)(8)(B) is applicable here. While acknowledging that there was no "written certification" present, the ALJ apparently concluded that the Bank need only comply with one of the two requirements of this subsection in order to "be covered in substance by the statutory exception." R.D. at 34. The Board rejects this conclusion and holds that the statutory exceptions contained in section 84 must be strictly construed. Moreover, the Board finds that Respondent failed to satisfy even the first requirement of the exception; that is, he failed to show that the Bank's files or the knowledge of its officers concerning the financial condition of each maker of such consumer paper was reasonably adequate to permit the Bank to rely primarily upon each maker individually for repayment of such loan.
   Although Mr. * * * states that he and others were instructed to purchase "each individual contract on its own merits," he also states that officers of the Bank called on the average only ten percent of the makers of the notes as "just kind of a spot check" to verify such basic information as employment (Tr. at 1310, 1323) "that gave us [the Bank] the opportunity to solicit the people for our banking services," Tr. at 1310. There is no evidence that the Bank ever refused to purchase a note based upon its examination of any maker and, in fact, the Bank apparently bought on a regular basis, in bulk, every note which * * * financed. Tr. at 1323. In addition, the Examination Report contains information concerning the financial condition of * * * which casts serious doubt upon the bona fides and economic value of the recourse endorsement running with the notes at the time of sale to the Bank. The quality of the paper was extremely poor and * * * had virtually no assets. Tr. at 149-50; FDIC Ex. 1 at 2-a-2 and 2-a-3. The Bank had knowledge of the fact that the * * * health clubs were rapidly deteriorating and/or closing due to poor management. Tr. at 1313-15. Given these facts, and the fact that no officer certified in writing that the Bank was relying primarily upon the responsibility of each maker for payment of the * * * notes (nor was any officer designated by the board of directors of the Bank to do so), the Board concludes that the ALJ erred in his finding that the exceptions set forth in subsections 84(c)(8)(A) and (B) apply here, and thus modifies the findings in the Recommended Decision in all relevant respects to include the * * * Consumer Paper as extensions of credit to be aggregated with others in determining whether Respondent violated the Regulation O and section 23A lending limitations. The Board thus finds that Respondent violated the lending limitation restrictions under Regulation O as early as April 1983 and continuing up to and including the date of the Examination Report 17 months later. R.D. at 36; Tr. at 145-48; FDIC Ex. 1 at 2-a-22 and 2-a-23, 6-b-1 through 6-b-2. Further, pursuant to section 23A, the Board concludes that Respondent violated the 10 percent limitation on extensions of credit to a single affiliate ( * * * ) as early as February 1983, and the 20 percent limitation on aggregate loans to affiliates generally as early as July 1983, all of which violations continued up to and including the examination date. Id.
   2. * * *

   [.5] Respondent admits that * * * is an affiliate and related interest. He contents, however, that since the * * * was intended to serve, in part, as the headquarters of the Bank and since the extensions of credit to * * * did not result in a loss to the Bank, that the extensions of credit to * * * should not be aggregated with other extensions of credit to Respondent for Regulation O purposes. The ALJ apparently adopted this rationale, finding that since the amounts "charged off during the FDIC's criticism were subsequently entirely recovered through the sale of the building", and "in consideration of all that has occurred in this case, to find the * * * loan a violation of law would fly in the face of any notion of fairness, or negate any sense of a realistic view of events" and thus concluded that the violations should not be deemed "cognizable" for purposes of Regulation O. R.D. at 44.11 The Board concludes that the ALJ's findings in this respect are in error. The fact


11 The ALJ places great significance on the * * * transaction since, given his other findings, it was this series of loans which "limit-wise" put Respondent "over the forbidden Regulation O line on August 13, 1984," and thus "[the Regulation O] `violation' existed for less than seven weeks prior to the date of the pivotal evidentiary charging document." R.D. at 42. Given the Board's findings herein with respect to the overall Regulation O lending limitations and * * *, the significance placed on the * * * transaction is no longer at issue.
{{4-1-90 p.A-1464}}that charged-off portions of the * * * loan was ultimately recovered does not eliminate or excuse the existence of the violation of Regulation O. Therefore, the Board modifies the findings of the ALJ with respect to the * * * loans and finds that those extensions of credit constituted additional Regulation O violations attributable to Respondent.

   3. * * * and * * *

   The Board affirms the ALJ's findings that FDIC enforcement counsel failed to carry its burden of proof by a preponderance of the evidence with respect to extensions of credit to * * * and * * * and the affiliation of those companies to Respondent. R.D. at 17, 31. Particularly with respect to * * *, however, the Board notes that although it is of the opinion that the transaction most likely "was for the `benefit' or `tangible economic benefit' of Respondent", it concurs with the ALJ that FDIC enforcement counsel did not satisfy its burden of proof with respect thereto.

   4. Direct Loans to Respondent.

   [.6] Section 215.4(b) of Regulation O, 12 C.F.R. §215.4(b), requires that bank insiders obtain prior approval of a majority of the bank's board of directors for each extension of credit that exceeds the higher of $25,000 or 5 percent of the bank's capital and unimpaired surplus, or any extension of credit which in the aggregate exceeds $500,000. A review of the record in the proceeding indicates that the Bank's records are clear that Respondent did not abstain from voting on his personal line of credit with the Bank and, by so doing, violated Regulation O. See R.D. at 45. Minutes of the board of directors of the Bank dated January 10, 1984, FDIC Ex. 13, clearly state that the motion with respect to Respondent's personal line of credit was initiated by President * * * and seconded by * * *. FDIC Ex. 13 at 1–2. The only evidence presented to refute that statement was the uncorroborated testimony of Respondent, which is instrinsically self-serving. The Board therefore modifies the ALJ's findings in this regard and holds that Respondent also violated Regulation O by failing to obtain the proper prior approval of the bank's board for extension of credit received in his personal capacity.

III. Conclusion

   [.7] The record in this case clearly establishes multiple violations of law and regulation by Respondent over at least a seventeen month period of time. Section 18 (j)(4)(A) of the FDI Act authorizes the FDIC to impose a maximum civil money penalty of $1,000 per day for each day during which a violation of section 22(h) or 23A of the Act, or any unlawful regulation promulgated thereunder, continues. In determining the amount of the civil money penalty, section 18(j)(4)(B) requires that certain factors be considered by the FDIC. Specifically, the FDIC must "take into account the appropriateness of the penalty with respect to the size of the financial resources and good faith of the...person charged, the gravity of the violation, the history of previous violations, and such other matters as justice may require." 12 U.S.C. §18(j)(4)(B). Since the ALJ found no violations by Respondent in his Recommended Decision, he made no findings with respect to the factors set forth above. Therefore, the Board is faced with the decision either to remand the case for further findings on the amount of the penalty to be assessed against Respondent, a process which would prolong indefinitely a proceeding which already has lasted over three and a half years at considerable cost, or, in the interest of justice, decline to assess a penalty and put an end to the proceeding. Particularly in light of the recent decision in FDIC-85-87k, in which the Board assessed against Respondent a penalty of $1.2 million for similar violations at an affiliated bank, the Board has determined that the punitive nature and deterrent effect of the imposition of a civil money penalty against Respondent has already been satisfied. Thus, while finding substantial violations of law and regulation, the Board has determined, in light of the totality of the circumstances discussed herein, that the interests of justice are best served by the Board's exercise of its discretion by declining to remand this case for further proceedings and further declining to assess an additional penalty against Respondent in this proceeding.

   [.8] With respect to the section 8(e)(1) removal proceeding, the ALJ again made no findings as to whether Respondent engaged or participated in unsafe or unsound banking practices or other practices in violation of section 8(e)(1) since he "assume[d] that {{4-1-90 p.A-1465}}these are all tied to the specific loan transactions complained of" and thus did not need to be addressed independently of his determination with respect to violations of laws or regulations. In light of the Board's findings of section 23A and Regulation O violations herein, it is faced with two alternatives—either to remand the case for further proceedings on the removal issue or to dismiss the action without prejudice. The Board is cognizant of the fact that remanding this action and reopening the record herein may forestall a resolution of this matter for an additional year or more and involve substantial additional costs and resources. * * * Bank has been closed for over two years and, to the Board's knowledge, Respondent currently is not actively involved in banking. Thus, since Respondent currently does not appear to pose a present threat to any bank, or to the banking industry generally, the Board has determined not to remand the case for further proceedings on the section 8(e)(1) action, but rather to dismiss the action without prejudice. If circumstances change in the future and it is determined that Respondent poses a threat to the banking industry, an action can be initiated under section 8(e)(2), 12 U.S.C. §1818(e)(2), on the basis of the evidence in this proceeding and in FDIC-85-87k.
   This Decision issued at Washington, D.C., the 26th day of July, 1989, pursuant to the Order of the Board of Directors dated September 27, 1988.

In the Matter of
* * *, individually and as Chairman of the
Board of Directors and Principal
Shareholder of * * * BANK
(Insured State Nonmember Bank-In
Receivership)
ORDER

   This matter is before the Board of Directors ("Board") of the Federal Deposit Insurance Corporation upon the Recommended Decision of the Administrative Law Judge. The Board having considered the Recommended Decision, the exceptions of the parties, the record in its entirety, and such other matters as justice may require, as set forth in the Decision to be issued nunc pro tunc,
   IT IS HEREBY ORDERED, that Respondent, * * *, be found to have engaged in violations of section 22(h) and 23A of the Federal Reserve Act, 12 U.S.C. §§375b and 271c, and Regulation O.
   IT IS FURTHER ORDERED, that for the reasons set forth in the Board's Decision, no civil money penalty be assessed against Respondent.
   IT IS FURTHER ORDERED, that the Notice of Intention to Remove From Office and to Prohibit From Further Participation issued to Respondent * * * in FDIC-85-82e be dismissed without prejudice for the reasons fully set forth in the Board's Decision in this matter.
   IT IS FURTHER ORDERED, that copies of this Order and the Board's Decision, when issued, be served upon all parties of record in this proceeding, the Administrative Law Judge, and the Commissioner of Financial Institutions of * * *.
   By order of the Board of Directors.
   Dated at Washington, D.C. this 27th day of September, 1988.

In the Matter of
* * * et. al.
Individually, and as Chairman of The
Board, Director and Principal Shareholder
* * * BANK * * *
(Insured State Nonmember Bank)
* * *, Esq.
Assistant General Counsel * * *, Esq.
Regional Counsel * * *, Esq.
Attorney Counsel for Federal Deposit
Insurance Corporation.
* * *, pro se * * *.

Before: Thomas F. Howder
Administrative Law Judge

INITIAL DECISION

I. SUMMARY OF PROCEEDINGS

   The Federal Deposit Insurance Corporation ("FDIC") initiated this removal and prohibition action against * * * ("Respondent") on April 1, 1985, pursuant to Section 8(e) of the Federal Deposit Insurance Act ("Act") (12 U.S.C. §1818(e)) and Part 308 of the FDIC Rules of Practice and Procedures (12 C.F.R. Part 308) by issuing a Notice of Intention to Remove from Office and to Prohibit from Further Participation ("Removal Notice") and an Order of Suspension from Office and Prohibition from Further Participation on that same date, {{4-1-90 p.A-1466}}pursuant to Sections 8(e)(1) and (4) of the Act (12 U.S.C. §§1818(e)(1) and (4)).
   On April 3, 1985, the FDIC issued to Respondent a Notice of Assessment of Civil Money Penalty, Findings of Fact and Conclusions of Law, and Order to Pay ("Assessment Notice"), assessing him $923,000 for substantially the same grounds cited in the Notice of Intention to Remove.
   On May 10, 1985 and June 19, 1985, the U.S. Office of Personnel Management appointed Administrative Law Judge ("ALJ") Fred E. Pickett, Social Security Administration, * * *, * * * to hear both the removal and penalty actions. Following Judge Pickett's appointment, Respondent's attorney initiated a series of discovery requests, including a request on July 9, 1985 to depose the members of the FDIC Board of Review, the body with delegated authority from the FDIC Board of Directors to initiate civil money penalty actions.
   Judge Pickett granted Respondent's request to subpoena the members of the FDIC Board of Review on July 16, 1985, issuing the subpoena on July 19, 1985. The FDIC then moved on July 30, 1985 that Judge Pickett quash the subpoena. The Judge denied that motion on August 5, 1985.
   On August 22, 1985, FDIC counsel petitioned the FDIC Board of Directors to permit an interlocutory appeal on the issuance of the subpoena, pursuant to Section 308.12(e) of the FDIC Rules of Practice and Procedures (12 C.F.S. §308.12(e)), citing, inter alia, the Board of Review's deliberative privilege.
   On September 18, 1985, while the FDIC's interlocutory appeal was still pending, Judge Pickett held another prehearing conference in * * *, * * *, at which he stated that he would recommend dismissal of the civil money penalty action against Respondent if the FDIC failed to comply with his subpoena by October 1, 1985. On October 3, 1985, Judge Pickett issued an Order Recommending Dismissal, for failure of the FDIC to honor the subpoena.
   On December 9, 1985, the FDIC Board of Directors granted the request for an interlocutory appeal and quashed the subpoena. Following the filing of exceptions to the Order Recommending Dismissal, the FDIC Board of Directors rejected Judge Pickett's recommended dismissal, and remanded the action to him on January 13, 1986.
   On March 7, 1986, the FDIC moved that Judge Pickett recuse or disqualify himself for bias, prejudice, or the appearance thereof, or in the alternative, request appointment of another administrative law judge to rule on disqualification. On April 11, 1986, Judge Pickett issued a recommendation that he be disqualified from further involvement in either of these actions. The FDIC accepted that recommendation.
   On May 8, 1986, the U.S. Office of Personnel Management appointed ALJ Thomas F. Howder, Federal Trade Commission, Washington, D.C. to hear these actions. On October 3, 1986, a prehearing conference was held in Washington, D.C. with the FDIC counsel and Respondent's then counsel.
   The hearing on the merits commenced on * * *, * * * on December 8, 1986. The hearing took all or part of 21 days from December 8 to 11, 1986, January 21 to 24 and 26 to 30, 1987, and March 3 to 6 and 9 to 12, 1987. At the beginning of the hearing on December 8, 1986, these two actions were consolidated for trial.
   The hearing transcript ("tr.") consists of 3,126 pages. The FDIC submitted 33 exhibits, 31 of which were admitted into evidence, the remaining 2 being consolidated into 2 of the 31 exhibits admitted. Respondent submitted 57 exhibits, of which 55 were admitted into evidence.
   All motions filed in this proceeding, not heretofore ruled upon, either specifically or by the necessary effect of this Initial Decision, are hereby denied.

II. THE ALLEGATIONS

   In the Removal Notice, the FDIC asserts that Mr. * * *, both individually and in his capacity as a director, chairman of the board and principal stockholder of the * * * Bank, * * * ("Bank"): (1) violated law, rules and regulations; (2) engaged or participated in unsafe or unsound practices in the Bank's operations; and (3) engaged in acts, omissions, or practices amounting to a breach of fiduciary duty.
   According to the FDIC, the basis for instituting its removal action against Mr. * * * was its "reason to believe" that "such violations, practices and breach of fiduciary duty": (1) caused or would probably cause substantial financial loss or other damage to the Bank; (2) could seriously prejudice the {{4-1-90 p.A-1467}}interests of depositors; and (3) result in financial gain to Mr. * * *.
   The removal pleading further asserts that the complained-of activities "involve personal dishonesty" on the part of Mr. * * * "and/or demonstrate a willful or continuing disregard for the safety or soundness of the Bank", and, in addition, "demonstrate the unfitness of Respondent to continue to serve as a director and officer and to participate in the conduct of affairs of the Bank or of any other Bank insured by the FDIC."
   The stated purpose of this proceeding, according to the pleading, was to be one of determining whether an appropriate removal order should be issued against Mr. * * *. Attached to the Removal Notice is an order suspending Mr. * * * "pending the completion" of the proceeding.
   In its Assessment Notice, the FDIC asserts that Mr. * * *, and others officially associated with the Bank1, violated specific provisions of banking law and regulations. The pleading sets forth various "FINDINGS OF FACT AND CONCLUSIONS OF LAW", and contains an order assessing Mr. * * * a penalty of $923,0002. The order stays such penalty upon request for an administrative hearing, and an opportunity to file answer to the charges.
   Mr. * * * answered, substantially denying the charges, but admitting the following allegations, as of the time of the pleadings:
   The * * * Bank, * * *, is a corporation existing and doing business under the laws of the State of * * *, having its principal place of business in * * *. The Bank is and was, at all times pertinent to this consolidated proceeding, an insured State nonmember bank. The Bank is subject to the Federal Deposit Insurance Act (12 U.S.C. §§1811-31d), the Rules and Regulations of the FDIC (12 C.F.R. Chapter III), and the laws of the State of * * *.
   At all times pertinent to the charges, Respondent * * * served as chairman of the Bank's board of directors, and was its principal shareholder, owning 72.95% of the common stock of the Bank's parent company.
   Apart from the above, Mr. * * * vigorously disputes that the allegations brought against him constitute violations of law, although he admits to the truth of several asserted transactions.

III. FINDINGS OF FACT

   The gravamen of the charges concerns whether Mr. * * * violated, or caused the violations of Section 215.4(c) of Regulation O (12 C.F.R. §215.4(c)) by repeatedly permitting extensions of credit to be made to him and his related interests, as defined in Section 215.2(k) of Regulation O (12 C.F.R. §215(k)), which exceeded the Bank's aggregate lending limits imposed by Section 215.2(f) of Regulation O (12 C.F.R. §215.2(f)). In addition to the "Regulation O" charges, the pleading documents also accuse Mr. * * * of violations of Section 23A of the Federal Reserve Act (12 U.S.C. §371(c)), made applicable to State nonmember banks by Section 18(j)(1) of the Act (12 U.S.C. §1828(j)(1).
   The additional charges concern whether Mr. * * * violated Section 215.4(b) of Regulation O (12 C.F.R. §215(b)), by failing to obtain the prior approval of the Bank's board of directors on enumerated transactions allegedly involving him or his related interests (Removal Notice); or whether violations at the Bank occurred in certain loans to Mr. * * * and his related interests in contravention of Section 215.4(c) of Regulation O which exceeded the Bank's aggregate lending limits imposed by Section 215.2(f) of Regulation O (Assessment Notice.)3
   Apart from the * * * transactions, all of the charges respecting Mr. * * * concern an identical set of loans allegedly made to him or his related interests. These are identified as, and will be discussed under, the following names:
   1. * * *, Inc;
   2. * * *, Inc;
   3. * * *, Corporation;


1 In addition to Mr. * * *, the Assessment Notice names * * * and * * * "individually and as directors and executive officers" of the Bank, and * * *, * * *, * * *, and * * * "individually and as directors" of the Bank. The charges have been settled as to all named persons save for Mr. * * *.

2 The order further specifies that the penalty assessed against Respondent * * * "shall continue to accrue at the rate of $1,000 per day for each day" during which his violations shall continue.

3 During the course of the hearing, FDIC counsel withdrew these * * * allegations as they related to the Respondent * * *, as being erroneously pleaded (tr. 2771-73).
{{4-1-90 p.A-1468}}
   4. * * *, and * * *, * * * and * * *,
* * * and * * *, and * * *
   5. * * *, Inc;
   6. * * * Management;
   7. * * *, Inc;
   8. * * *, Inc;
   9. Respondent * * *, personally.
   In his answers, and at all other times, Respondent * * * has admitted that the loans to * * *, * * *, * * *, * * * and to himself personally were loans made to himself and his related interests within the meaning of the applicable laws and regulations. What he sharply disputes are the charges based upon the transactions identified as "* * *", "* * *", "* * * Management", and "* * *". Each of these are addressed in turn.
   A. * * *, INC.
   1. It is charged that on September 22, 1982, Respondent caused the Bank to extend a loan to * * *, Inc., in the amount of $752,995, and additional loans in the amounts of $60,836 on October 7, 1982 and $330,786 on September 28, 1984. Mr. * * * admits such loans were made to * * *, but denies that this company was one of his related interests.
   2. In support of its assertion that * * * was an * * * affiliate, the FDIC submitted a Report of Examination of the Bank dated September 28, 1984 (FDIC 1), containing a write-up adversely classifying the * * * loans. On page 2-a-4 of this Report appears the following language of the Examiner in Charge, Mr. * * *:
       "On 9-21-82, 50% of the voting stock of the corporation ( * * * ) was transferred to * * * of * * *, Inc. This corporation was reported to be a shell corporation of Director * * * that was primarily formed for the purpose of holding the voting stock of * * *. Management stated this transfer of stock was to further protect the bank's collateral position and was a mutual agreement between all parties."
   3. In his testimony, Mr. * * * repeatedly stated that he received the above information from Mr. * * *, the President of * * * Bank, and that, in addition, he was shown evidence regarding this stock transaction contained in the files of the Bank (tr. 78, 82–83, 241-44, 253, 2987, 300, 391). The witness testified that he believed Mr * * * (tr. 297, 300), but that his memory was somewhat unspecific regarding the particular documents he saw.4
   4. Throughout this proceeding, Mr. * * * vigorously denied that loans made by the Bank to * * *, Inc., were loans made to him or his related interests. In support of this defense, Mr. * * * subpoenaed Mr. * * *, who gave the following pertinent testimony:
   5. Mr. * * *, along with a Mr. * * *, had been in a partnership enterprise named * * *, which owned and managed numerous residential rental properties (tr. 928, 932, 937, 964; FDICX 1, pp. 2-a-3-4). In 1982, the partnership encountered "some bad financial problems", and needed to borrow more money from * * * Bank (tr. 29). To accomplish this, according to the witness, it became necessary to reorganize the partnership into a corporate format (tr. 936-37, 964).
   6. Accordingly, * * *, a * * * corporation, was chartered on September 16, 1982 (tr. 923-23; RX 14). Its incorporators were Messrs. * * * & * * * and their respective wives. A total amount of 200 shares of stock were authorized. One hundred (100) of these were Class "A" voting shares, 25 of which were issued to each of the four incorporators. One hundred (100) Class "B" non-voting shares were also issued and distributed in the same manner (RX 14). The witness * * * testified that, to his knowledge, he never physically received any of these shares (tr. 26–27).

4 "This was sometime back, but I believe the stock certificates were held in the bank's collateral file or credit file, whichever it may have been" (tr. 78). While his report contains no copy, "[t]here was some indication of that in one of the files I looked at" (tr. 82). "To the best of my recollection, there was stock certificates that I saw somewhere that were presented to me, shown to me, or whatever, at some point during the examination. I am not sure that it was in the collateral file; I am not sure that it wasn't in the collateral file. But I do believe that I saw stock certificates" (tr. 241). "I repeat that I believe, to the best of my recollection, that I did see stock certificates and/or an agreement to the effect enough to convince myself that they actually existed" (tr. 243). "I believe in my opinion, they were issued, based on the evidence that I was given during the examination" (tr. 244). "To the best of my recollection, I remember either seeing the shares or an agreement of some type in the file, or that was presented to me during the exam, to substantiate this fact, further substantiate the fact" (tr. 253). Although the witness was "not sure", "I believe I saw stock certificates and/or an agreement to that effect" (tr. 253). "I believe I testified it was either in the file, or showed to me by Mr. * * * or some one during the examination" (tr. 391).
{{4-1-90 p.A-1469}}
   7. As he understood it, the purpose of incorporating the * * * was to permit the Bank to have control over its business transactions, so as to protect the collateral position of the Bank on loans to * * * (928, 936-37, 956, 964)5 A central figure in making these arrangements was the President of * * * Bank, Mr. * * * (tr. 928, 930, 936, 1123).6
   8. The witness * * * testified that he believed the Bank controlled him under the new procedures through the Secretary of the * * * corporation (tr. 933, 942, 956, 964, 1112, 1124). The original Secretary was a Mr. * * *, who resigned on November 2, 1983 (RX 25), being thereafter succeeded by Mr. * * * (tr. 933, 942, 1125; RX 16).7
   9. According to Mr. * * *, it was originally intended to control * * *, Inc., directly through the Bank. He believes that at some point this concept was shifted to control over * * * by using another corporate device, * * *, Inc., whose exact name the witness had some trouble remembering (tr. 927-29, 937, 940-41, 956, 964, 1114-15).
   10. Following the formation of the * * * corporation, the witness * * *, although President, testified that he left the entire operation to Mr. * * * (tr. 933, 966-67, 1123, 1134). However, approximately a year later, with repayments to the Bank seriously in arrears, Mr. * * * was called upon "to bail the thing out" (tr. 933). For some reason, Mr. * * * was allowed to be released from the financial obligations, with Mr. * * * assuming primary responsibility (RX 19, 969-72).
   11. After Mr. * * *'s exit, Mr. * * *, still President, testified that he heard nothing about * * *'s affairs for approximately another year, while financial matters continued to deteriorate (tr. 941, 1135). It is clear from his testimony that he felt he was "drowning" (tr. 957).
   12. At this juncture, testified Mr. * * *, Respondent * * * paid a visit to him at his office on a Saturday morning, with an eye towards working out a realistic repayment plan. During this meeting, Mr. * * * reached a "moral decision", admitting to Mr. * * * that he had been making "kick-back" payments to the Bank's President, Mr. * * *, in connection with certain real estate "deals", overdraft charges, appraisals and a portion of the money loaned by the Bank to * * * (tr. 959). Describing himself as a "credit junkie" (tr. 958), the witness referred to pressure from Mr. * * * to borrow even more money, nothwithstanding his over-extended status (tr. 960). Mr. * * * also executed an affidavit setting forth these allegations in detail (RX 17), which was read into the transcript (tr. 949-54).8
   13. Mr. * * *, while professing ignorance of corporate details, testified that to his knowledge no shares of * * * stock were transferred to * * * Inc. by him (tr. 926, 929, 934, 943-44). He stated that he had never issued any shares to Respondent * * * and that Mr. * * * was never personally in any way involved with his corporation or business affairs (tr. 934); and that he had never made any payments of money to him (tr. 955). In fact, he testified that Mr. * * * was an "honest" man (tr. 959-60; see tr. 1127).9
   14. Mr. * * * testified that during his tenure as Secretary of * * * (from September 1982 to October 1983), the only shares which were issued were those specified in RX 14, discussed supra (tr. 994; see tr. 992-96; RXs 23, 24). This witness was also able to shed some light upon the origin of the

5 It must be observed that Mr. * * *'s testimony concerning these arrangements was often confusing and difficult to follow. See tr. 927-29, 932-38, 940-42, 956-57 and other portions of the transcript containing his testimony.

6 Mr. * * *, at that time an * * * employee, was also involved in those arrangements (tr. 928, 936, 1116, 1119).

7 Mr. * * *, a certified public accountant, who appeared on Mr. * * *'s behalf, testified on this point that he had "held the title" of Secretary of * * * for about a one-year period "at the request of the attorney who drew up the corporation", Mr. * * * (tr. 992, 1004). He did this merely as a matter of formality and accomodation, and his letter of resignation recites that he had "no participation in the corporation and no knowledge concerning any of its activities" (RX 25; see tr. 992-96, 999–1004). He stated that he was unaware of his succession by Mr. * * * (tr. 1005).

8 Mr. * * *'s testimony makes many colorful references to the financial woes attendant to his business enterprises (tr. 928, 933, 936-37, 941, 956, 960-61, 1126-27).

9 Mr. * * * was of the opinion that, rather than dominating his business subordinates, Mr. * * * may have given them "too much leeway" (tr. 1127).
{{4-1-90 p.A-1470}}corporation * * *, Inc, the supposed link to Respondent * * *.10
   15. According to Mr. * * *, an * * * corporation named * * *, Inc. was formed in * * * in 1976 to operate a loan office in * * *. The witness remembered that in 1981 or 1982 Mr. * * * closed the * * * office and desired to bring this corporation into * * * for use in business in that state. An attorney was engaged for this purpose, who apparently misunderstood instructions, and formed a new * * * corporation named * * * Inc. When Mr. * * * discovered the error and again approached the attorney, he was informed that the performance of the original request by him was not legally feasible (tr. 997).
   16. Thus, to the knowledge of witness * * *, * * *, Inc. was never an operational entity, but was totally dormant. The witness never set up any books on it, never saw any books on it of any kind, nor saw "any bank statements on it or anything else" (tr. 997-98). Nor were any shares ever issued to it from * * *, Inc. while he was Secretary of the latter corporation (tr. 998).
   17. The statements and testimony of Respondent * * * shed further light on the corporate status of * * *, Inc., and its alleged relationship with * * *, Inc. Throughout the hearing, he continued to flatly deny that * * * was "any related interest of any of my corporations, or to me personally, whatsoever" (tr. 2543).
   18. As to the origin of * * *, Inc., Mr. * * * earlier identified the company as "a dormant corporation, formerly known as * * * in ", a loan company no longer in existence with no shares, assets, or liabilities (tr. 939-40). Later, after checking further, he admitted that both he and Mr. * * * has not been accurate on that point. An inquiry to the state of * * *, made at the time of the hearing by attorney * * * at Mr. * * *'s request, revealed the present existence of a corporation named * * * of * * *, Inc., described in the state's official records, as "Type Inactive" (tr. 2545-46; RX 50).
   19. Mr. * * *'s explanation for the * * * imbroglio in this case was that the whole thing was an arrangement hatched by Messrs. * * * and * * *, purportedly to control the business activities of Mr. * * * to safeguard the Bank's financial position (tr. 939, 942, 2546, 2555; RX 51). Despite the intent, according to Mr. * * *, the arrangement never came to fruition, and * * * stock was never issued to * * * Inc. (tr. 939, 2547, 2553-55; RX 51).11
   20. At first, Mr. * * * testified that he was unaware why the * * * arrangement had not been consummated (tr. 2547). Later, following a timely telephone call to Mr. * * *, and further testimony from Mrs. * * *, he remembered that he himself had put a stop to it, in an effort to preserve friendly personal relations between Mrs. * * * and Mrs. * * * arising from children/school associations (tr. 2659-71).
   21. There is an additional piece of evidence bearing on the * * * matter, not previously discussed. It is a document located eight pages from the bottom of Examiner * * *'s work papers on the * * * loans (FDIC 2). It is entitled "Assignment Of Option Agreement", and is dated sometime (illegible) in December, 1983. It recites that on that day * * *—the Partnership—composed of its Partners, the * * * and the * * *, appeared before a Notary and stated that on September 21, 1982, * * * of * * *, Inc. gave the * * * the option to purchase 50 shares of Class "A" (voting) stock in * * *, Inc. The document then goes on to recite that the * * * * * * in turn "[b]y these presents" was conveying this option to * * * and his wife * * *.
   22. No explanation of this puzzling document appears in the record. It seems to say (1) that on September 21, 1982—five days after the incorporation of * * *, Inc.— * * *, Inc. held an option to purchase 50 shares of its Class "A" voting stock; and (2) that over a year later, the * * * (* * *, * * * and their wives) came before a Notary Pubic and averred that on September 21, 1982, * * * * * *, Inc. assigned this option to the Partnership; and (3) that sometime in December, 1983, the Partnership was giving over this option to Mr. * * * and his wife personally (who, according to the rec-

10 Mr. * * * identified himself as an independent certified public accountant, who performed accounting services for a number of business clients. He testified that he was in no way under the domination or control of Respondent * * * (tr. 990, 1003). Attesting to Mr. * * *'s good character, Mr. * * * outlined his accounting relationships with Respondent extending back to 1961. "During this time, I have always found him to be very open, honest and fair in his business dealings" (tr. 991; RX 22).

11 Mr. * * * testified that he executed the affidavit, RX 51, dated June 10, 1985, in response to a request from an attorney representing * * *, Inc. in bankruptcy proceedings (tr. 2551).
{{4-1-90 p.A-1471}}ord, apparently already owned this amount of voting stock upon the formation of corporation (see supra)).
   23. I have been unable to relate the events depicted in this "Assignment of Option Agreement" to what the remainder of the record evidences concerning the * * * affair. Since no witness appeared to explain its meaning, or where it fits in the overall picture, I can make no finding of fact based upon it.
   24. Based upon the above review, I am constrained to find that the FDIC has not carried its burden of proof by a preponderance of the evidence concerning the alleged affiliation between Mr. * * * and * * * Inc., on loans made by the Bank to that corporation.

1. THE * * * STORY

   25. As noted earlier, FDIC Examiner * * * testified that he received crucial information linking Mr. * * * and * * *, Inc., through the device of * * *, Inc., from Mr. * * *, President of * * * Bank.
   26. Mr. * * * did not testify in this proceeding, being called neither by FDIC counsel nor by Mr. * * *. There is, however, a great deal of testimony and documentation in the record concerning Mr. * * *, and certain of his activities.
   27. Mr. * * * testified that after knowing Mr. * * * in banking circles for three of four years, he hired him as President and Chief Executive Officer of * * * Bank (tr. 2252-53). He stated that he thought he had "the finest bank president in town", and that he "relied on him completely to run every facet of that bank..." (tr. 2244). Mr. * * *'s satisfaction with Mr. * * *'s performance was to continue for the next several years (tr. 2244, 2253).12
   28. The witness * * * claimed that he had no cause for doubt concerning his bank president, until he received a troubling phone call from the Bank's Cashier, Mr. * * *, who "told me about the CDs on the * * * loan. And at that time was when I became suspicious of him" (tr. 2244).
   29. On this point, the witness * * *, Cashier of * * * Bank, testified concerning his telephone conversation with Mr. * * *, who at that time was in * * *. This was at a time when Mr. * * * was also away from * * *, on vacation in Europe. Mr. * * * informed Mr. * * * that he had become aware of possible irregularities regarding "overdrafts" and release of collateral in connection with a loan customer, a Mr. * * *, concerning the Bank's * * * credit (tr. 853-65).
   30. According to Mr. * * *, his suspicions became further aroused when he was shortly thereafter informed by the Bank's internal auditor that he was never permitted to check Mr. * * *'s loans advanced by the bank at his behest (tr. 2260).13
   31. At the next board meeting, Mr. * * * asserted that he questioned Mr. * * *, who together with Director * * * tried to convince Mr. * * * that the * * * loan had been previously discussed with him (tr. 2251). In fact, this loan had been brought before the board in Mr. * * *'s absence by Mr. * * * (tr. 578-79, 2251; FDIC 17, p. 6-b-4).
   32. The record is somewhat unclear about what transpired concerning the * * * matter over the next several months of late 1984 and early 1985. Mr. * * * testified that he reduced Mr. * * *'s personal lending authority (as opposed to board authorized loans) from $250,000 to $100,000 (tr. 2261).
   33. Mr. * * * stated that he confided his suspicions to his wife, and began to call Mr. * * * "every night at home, going over the loan, and I knew something was wrong" (tr. 2252). Evidence further mounted in his mind when it was reported to him by a jewelry store employee acquaintance that Mr. * * * had recently purchased a $20,000 two-carat diamond (tr. 2254-55). "Then I realized this man had access to money" (tr. 2255).
   34. Whatever blank pages there may be, the record is clear regarding the events which followed the * * * "confession" in March, 1985, discussed supra. At the turn-


12 Mr. * * *, a man of many business enterprises (tr. 683, 2196), describes his role in * * * Bank as mainly a promotional one, such as "bringing people to the bank" (tr. 2246). As earlier noted, he also involved himself in handling seriously delinquent accounts. See * * *, supra. As Chairman of the Board, however, he attended board meetings on a regular basis (tr. 2248).

13 Mr. * * * testified that he fired the auditor's superior Mr. * * * upon his return to * * *, apparently because of this and other suspicions of wrongdoing (tr. 2261).
{{4-1-90 p.A-1472}}ing of April, 1985, Mr. * * * and Mr. * * * met at the office of Mr. * * * 's attorney, Mr. * * *. Mr. * * * testified that at that meeting Mr. * * * admitted taking a "fee" of $4,500 in connection with the * * * venture, and agreed to take a "voluntary leave of absence" from the Bank pending further investigation of his activities (tr. 714-15). Mr. * * *, through Attorney * * *, engaged a private investigating firm out of * * *, to conduct this investigation (tr. 715). As a consequence of this inquiry, Mr. * * * filed, on the Bank's behalf, a substantial bonding claim with the Bank's insurance carrier of some four or five million dollars (tr. 716-17).
   35. The results of this investigation are set forth in RX #46, dated April 25, 1985, and in RX #47, a more comprehensive document, dated May 28, 1985. These reports were admitted into evidence over objection, not as "proof" of all matters asserted therein—for they are but investigative files—but to establish that such investigation occurred, and that the reports contain what was uncovered. It was made clear in the evidentiary ruling that the reliability of each purported "fact" would have to stand or fall upon the extent of its documentation in the reports and elsewhere in the record (tr. 2454-57).
   36. Concerning these reports, the record contains the testimony of Mr. * * *, a former FBI Agent, experienced in "investigating bank frauds and embezzlement-related activities," presently employed by a private firm by the name of * * * * * * Co. (tr. 1810). Mr. * * * spent the better part of two days on the witness stand explaining his methods of investigation and the contents of RX #46 and RX #47 (tr. 1809–1922, 1955–2114).
   37. Based upon these reports, and the testimony of Mr. * * *, it must be said that his investigation documented an apparently extensive pattern of wrongdoing or questionable activity on the part of Mr. * * * and certain of his associates. These included "kick-backs" in the form of money or valuable properties (oil/gas interests); loans from the bank to borrowers with ostensibly shadowy backgrounds; and instances involving questionable or non-existent collateral. While some of the "facts" contained therein are not as well established as others, the reports set forth instances where such transactions appear well documented in court records or in sworn affidavits. The report recites that as early as April 9, 1985, both the FBI and the local U.S. Attorney were informed of the investigation (RX 46, p. 10, tr. 1884).
   38. Mr. * * * testified that Mr. * * * "refused to talk to us" concerning the investigation (tr. 1829). And when Mr. * * * was asked in the instant proceeding why Mr. * * * had not been summoned as a witness, he replied that "I felt he would lie" (tr. 2273), or "would plead the Fifth Amendment" (tr. 2277).
   39. Another individual whose name surfaced in Mr. * * *'s investigation was Mr. * * *, a Director of * * * Bank (tr. 1876, 1881, 2021-23; RX #47, p. 19). While he was initially cooperative, testified Mr. * * *, as "we got further into our investigation, he refused to talk to us" (tr. 2005).
   40. Another bank director, Mr. * * *, who became Board Chairman following Mr. * * *'s removal by the FDIC, attempted to and did halt the investigation when it had been underway but a short time, although it was subsequently restarted (tr. 2004-05, 2051-53).
   41. Both Mr. * * * and Mr. * * * were supoenaed as witnesses in this proceeding in Mr. * * *'s defense. Each refused to testify on Fifth Amendment grounds (tr. 916, 912). An unsuccessful attempt was made to obtain a grant of immunity for them from the U.S. Attorney General, through the Office of the U.S. Attorney in * * * (tr. 1391-92). Subsequently, Mr. * * * brought a formal action in the U.S. District Court in * * *, to compel these witnesses to testify. This relief was denied by Judge Stagg on the grounds that Messrs. * * * and * * * had indeed validly asserted their constitutional rights against self-incrimination.
   42. Apart from these affairs at * * * Bank, Mr. * * *'s investigation also uncovered evidence of wrongdoing on the part of Mr. * * *, president of Mr. * * *'s Bank of * * *, * * * (tr. 1857). Mr. * * *'s affidavits attesting to "kick-backs" to Mr. * * * are set forth in the attachments to RX 46. In addition, the trial record also contains evidence of wrongdoing involving Mr. * * *, the President of Mr. * * *'s * * * Bank in * * *. Mr. * * * * * *, that bank's attorney, testified that Mr. * * *, acting together with Mr. * * *, engaged in improper covert releasing of collateral, resulting in assignment to them of royalty inter- {{4-1-90 p.A-1473}}ests in oil leases (tr. 697–7010). When confronted with this information, Mr. * * * promptly resigned (tr. 710). At the time of the hearing, Attorney * * * had filed a lawsuit, and the FBI was conducting an ongoing investigation of the matter (tr. 701).
   43. According to Mr. * * *, he had hired both Mr. * * * and Mr. * * * on Mr. * * *'s recommendation. A Mr. * * * was similarly hired and installed as president of Mr. * * *'s bank in * * * (2257-58). As to this man, Mr. * * * testified that he "has been fired and charged and the bonding company paid off at * * * Bank in * * *" (tr. 2258).
   44. The above recitation necessarily casts grave doubt on the reliability of information supplied to bank examiners by Mr. * * * (or by Messrs. * * * and * * *) in this proceeding. While examiners should be entitled to rely upon the word of bank officials (and should not be faulted for doing so), their reliance in this case was clearly misplaced.

B. THE * * * TRANSACTION

   45. It is charged that on July 1, 1983, Respondent * * * caused the Bank to extend credit to * * * and * * *, * * * and * * * and * * *, and * * *, in the amount of $806,000.14 It is alleged that the proceeds of this loan were used to purchase property which was leased on July 1, 1983 to * * * of * * *, Inc. ("* * *") in exchange for making all interest payments on the loan. It was further charged that * * * was a related interest of Respondent, and that the proceeds of the loan constituted a "tangible economic benefit" for him.
   46. Mr. * * * admits the Bank's extension of credit to the above-named individuals, and that * * * was one of his businessrelated interests. He denies, however, that he caused the credit to be extended, and that this transaction violated applicable law.
   47. The record concerning the * * * loan, as with * * * contains the testimony of FDIC Examiner * * * and his Report of Examination and supporting data (FDIC 1, 5). At the outset of his testimony regarding this loan, it became clear that Mr. * * *'s information was seriously at variance with the assertions set forth in the formal pleadings.
   The Report of Examination states (FDIC 1, p. 2-a-20):

       "The property was acquired on 7-5-83 for $1,305,560 by * * *, Inc., an affiliate of the bank, from various individuals. * * * sold the property to the current makers on 7-1-83, before it acquired title. Both documents were recorded on 7-5-83. The collateral was leased to * * * of * * *, Incorporated, an affiliate of the bank, for a one-year term beginning 7-1-83 with payment limited to the interest on the debt.... In reality, the loan was for the benefit of Chairman of the Board * * * and/or his affiliates...".
   49. At the hearing, during Mr. * * *'s testimony, Respondent * * * pointed out the unexplained interjection of * * * * * *, Inc. (admittedly an * * * affiliate) into the formal * * * allegations, and that he was not prepared to defend against new material (tr. 105).
   50. At this point, FDIC counsel explained that in the course of their trial preparation they had developed "three separate theories" of violation concerning the * * * transaction, requesting that they be allowed to make a "full showing" to demonstrate the "interrelationships involved here" (tr. 105-06; see 107-10).15
   51. Following further argument (tr. 112-13, 258-59, 262-63), FDIC counsel identified their "three theories" as: 1) bank funds were used for the benefit of * * *, an * * * interest, in that these funds financed the acquisition of property which was subsequently leased to * * *; 2) bank funds were used to enable the "* * * Organization" to acquire property from third parties; and 3) bank funds were used to enable * * *, Inc., having acquired these properties, to "unload" such property to * * *, et al. (tr. 269-70).
   52. Although FDIC counsel were accorded latitude to demonstrate the overall facts bearing upon the * * * transaction, it was ruled that all parties were to be bound by the charges set forth in the formal allega-

14 The original amount of this loan was some $1,305,000. A $500,000 "participation" was subsequently sold to Mr. * * *'s * * * Bank * * * (tr. 2596, 2673).

15 FDIC counsel: "This is a rather complicated transaction, probably the most complicated of the ones that we will be addressing today" (tr. 106). Counsel further described the transaction as "convoluted" (tr. 108).
{{4-1-90 p.A-1474}}tions of the FDIC (tr. 258-59; set tr. 106-10, 112-13, 262-63).
   53. Accordingly, Mr. * * * testified as to his version of the transaction, as near as he could make out from what was written in his report. At tr. 104-05 he stated that the proceeds of the loan went to * * *, and that the * * * group purchased the property from that entity. * * * paid $1,305,560.22 for the property on July 5, 1983, "the exact amount of the loan" made to the * * * group (tr. 104-05). At tr. 113-14 the witness testified that the loan to * * *, also of $1,305,560.22, originated on July 1, 1983; and that * * * * * * sold the property to the * * * group on that date "before it acquired title". At tr. 114 he indicated that the collateral was subsequently leased by * * * on July 8, 1983 to * * * for a one-year term "with payment limited to the interest on the debt", during which time * * * could purchase the property from * * * for $1,305,560.22, "the amount of the loan proceeds".
   54. Mr. * * * at tr. 114, reiterated that the * * * group acquired the property in question from * * *. When asked where * * * obtained the purchase money, the witness responded that "[a]pparently the loan proceeds to * * * et al. went to * * * to purchase this property on 7/5—the property which they had sold on 7/1 to * * * et al." (tr. 115). He then repeated his version of these vents to a confused Administrative Law Judge (tr. 115-17). Subsequently, he placed the date of the lease by * * * to * * * on July 1, 1983 (tr. 118).16
   55. On cross examination, Mr. * * * denied testifying that the "loan was made to * * *, Inc.", although, "I did say I think the proceeds went" to that company (tr. 259). As to his awareness whether the loan already preexisted on the Bank's books "in the name of the * * * family", he responded "[n]ow that you mention it, I believe that may have come out at that time" (tr. 260), although he was not aware or did not remember whether the * * * loan balance was $1,305,000 (tr. 260). The witness indicated that he did not know how funds were channeled to * * * * * *, given the existence of a * * * loan and a new loan to * * * et al. (tr. 260-61).
   56. When pressed further on the subject, the witness again explained his version (tr. 261-62);
    The loan was made on 7/1/83 to * * * et al. On 7/5/83, * * *, Inc. purchased that property from a third party. I do not know who. * * * sold this property to the makers, Mr. * * *, et al., on 7/1/83, and then subsequently the property was leased to * * * ...
   57. Mr. * * * again stated his belief that "[t]he transaction appears to be for the benefit of * * * or * * * * * *", affiliates of Respondent * * * under the applicable regulations (tr. 262).
   58. The witness admitted that, so far as he could determine, the * * * individuals to whom the loan was made were legally responsible for repayment, not * * *. He testified that, although his report indicated otherwise, he had no present documentation that * * * was paying the interest on the loan. Nor did he have a copy of the lease agreement (tr. 270-71). Later, Mr. * * * explained that his report indicated that the payments under the lease from * * * to * * * was "to be the same as the amount of the interest on the debt" (tr. 379; see tr. 392).
   59. The record's incoherence regarding the * * * transaction was not dispelled until the testimony of Respondent * * * * * *, late in the hearing. Mr. * * * testified that * * *, Inc., a wholly-owned affiliate, was in the rural development business. In addition, the company was engaged in property management (collecting rents, etc.) mostly for Mr. * * *'s sundry corporations (tr. 2584). It sometimes also handled properties of non-related enterprises, this aspect of its affairs characterized by Mr. * * * as "[a] little bit; very little for other people. We just—it was set up to handle our own stuff" (tr. 2585).
   60. Mr. * * * testified that the forty townhouses here involved, the collateral for the * * * loan, were built several years ago by an individual named * * * (tr. 2585). These properties were thereafter sold to certain friends of Mr. * * *, the * * * family (tr. 2587), with * * * Bank financing the transaction (tr. 2588).
   61. There came a time when Mr. * * * became associated with Mr. * * * in the building business, and "[w]e were fixing to

16 Of the * * * group, Messrs. * * * and * * * had performed legal services for Mr. * * * and/or his enterprises, and Mr. * * * was President of Mr. * * *'s Bank of * * * (tr. 118-20, 2955).
{{4-1-90 p.A-1475}}start building townhouses" (tr. 2587). Mr. * * *'s friends, the * * *, "agreed to give us an option to buy the townhouses" (tr. 2587). This option was given to Mr. * * *'s company, * * * * * *, Inc. (tr. 2587). Sometime later, for some reason Mr. * * * and Mr. * * * became disassociated in business, and the option was never exercised (tr. 2587).
   62. However, the * * * group did want to exercise the option, according to Mr. * * *, for tax depreciation purposes (tr. 2587).17 The purchase price was $1,305,000, "which was exactly the amount of the option" (tr. 2588). The financing was also done at * * * Bank, the loan presently at issue in this case. Thus, the * * * loan was paid off, and the * * * purchasers became liable for making payments to the Bank on their new loan (tr. 2589).
   63. Mr. * * *'s * * *, which had been managing the townhouses for the * * * owners, was approached by the * * * buyers to continue the management operations (tr. 2591). * * * agreed to do so, according to Mr. * * * (tr. 2582, 2591).
   64. Under the management arrangement, * * * agreed to lease these homes from the * * * group. The amount of the lease was established as the amount of interest to be paid to the Bank by the * * * owners, plus an additional one percent (tr. 2589, 2592, 2589, 2596). The term of the lease was for one year, at the end of which * * * would have an option to buy the 40 townhouses for the amount of the outstanding loan, $1,305,000 (tr. 2590).
   65. As it turned out, the enterprise was not profitable for Mr. * * * and * * *. Mr. * * *, Mr. * * *'s CPA, testified that over the 22-month period from July 1, 1983 to April 30, 1985, * * *' management of the * * * townhouse project resulted in a loss to * * * of just under $130,000 (tr. 1008; RX 26). The option to buy was accordingly never exercised by * * * (tr. 2590), and eventually * * * withdrew from the management operation, leaving this task to the * * * individuals themselves (tr. 2593).
   66. Turning to the "three theories" of violation asserted by FDIC counsel, it must be said that there is no evidence to support theories two and three, viz., that bank funds were used to enable the "* * * Organization" to acquire property from third parties; or that bank funds were used to enable * * *, Inc., having acquired these properties, to "unload" such property to * * *, et al. (see tr. 269-70). Nor, upon analysis, is there reliable, probative evidence to support "theory" one—the allegation set forth in the formal charges.
   67. My reading of the evidence outlined above is that the * * * loan was not a concocted device for the enrichment of Mr. * * *. The core fact is that the loan was made to the * * *, who were legally liable for its repayment, including interest charges. The fact that the lease to * * * was pegged to the amount of the interest paid by the * * * is an ancillary arrangement, not going to the heart of the questioned loan. Rather than revealing something sinister, the evidence shows, as near as I can determine, that the entire matter was a straightforward business arrangement, where all parties hoped to economically benefit. This affair nevertheless resulted in a loss to Mr. * * * of some $130,000.
   68. Accordingly, FDIC counsel have failed to carry their burden of proving by a preponderance of the evidence that the * * * transaction was done for the "benefit" of, or "tangible economic benefit" of Respondent * * *.18 I have examined the legal citations provided, and can find no precedential support for the proposition advanced in the charges.19

C. THE * * * CONSUMER PAPER

   69. In both the Removal and Assessment pleadings, for purposes of determining vio-


17 Mr. * * * testified that at this time his business enterprises already possessed enough tax write-offs, another reason for his not purchasing the properties (tr. 2585).

18 Subsequent to the hearing, FDIC counsel moved that I accept into the record new materials arising from another proceeding involving Mr. * * *, purportedly bearing upon the * * * allegation. I do not believe it is appropriate to consider testimony taken in another trial, where I have had no opportunity to observe credibility, or place such materials in context.

19 As to the exact role of * * *, Inc. in the * * * events, the record is unclear. Admittedly, this * * * entity at one time had an option to purchase the properties. However, there is nothing to support the testimony of Mr. * * *, or the assertions in his report regarding * * * (FDIC 2-a-20). In his post-hearing briefing, Mr. * * * raises the "possibility" that because of this option "it may have been necessary legally", in the course of preparing the * * * loan papers, to transfer title from the * * *'s to * * * * * * for simultaneous transference to the * * *. This technicality, of course, would not alter the substance of the * * * transaction.
{{4-1-90 p.A-1476}}lations of Regulation O and Section 23A, the FDIC lists the Bank's purchase of consumer contract paper from an organization identified as * * *, Inc.
   70. There is no dispute in the record that the Bank did, in fact, engage in such transactions. The parties agree that from time to time over a two-year period (September 18, 1982 through September 28, 1984) the Bank purchased the contracts of numerous individuals originating with the * * * health club organization. And there is no dispute that the aggregate amount of these purchases outstanding on the Bank's books on September 28, 1984 was $1,996,000 (FDIC 1, p. 2-a-22).
   71. There nevertheless is a dispute between the parties as to whether these extensions of credit are legally cognizable under Regulation O and Section 23A, and whether these amounts should be counted in considering whether the lending limits imposed thereunder may have been exceeded.
   72. As to Regulation O, Mr. * * * (tr. 338) urges the consideration of Section 5200 of the Revised Statutes, 12 U.S.C. 84, which is subject to several exceptions. The exceptions, set forth at 12 U.S.C. §84 (c), consist of loans or extensions of credit secured by certain types of collateral or arising out of particular situations that give rise to different lending limits. Such exceptions are not to be aggregated with other extensions of credit when calculating violations.
   73. One of the enumerated exceptions is for "loans or extensions of credit arising from the discount of negotiable or non-negotiable installment consumer paper which carries a full recourse endorsement" (12 U.S.C. §84 (c)(8) (A)). Those extensions of credit are subject to a twenty-five percent limit. It is further provided that "if the bank's files or the knowledge of its officers of the financial condition of each maker of such consumer paper is reasonably adequate, and an officer of the bank certifies in writing that the bank is relying primarily upon the responsibility of each maker for payment of such loans, "then the lending limits shall apply to the individual maker rather than the seller of the paper". 12 U.S.C. 84 (c)(8)(B); see 12 C.F.R. §32.6 (h)(4) and (5).
   On this score, the record contains the testimony of Mr. * * *, an official of the * * * Bank involved in the purchase of the * * * Club paper (tr. 1309). Mr. * * * testified that in purchasing such notes, he and others (all of long experience in the particular field) were instructed to purchase "each individual contract * * * on its own merit" (tr. 1310). Accordingly, on each such case, a credit bureau file was "pulled", and phone calls were made for verification of employment or to check for customer satisfaction with their contracts (tr. 1310). Mr. * * * further testified that the Bank purchased the paper for 65 cents on the dollar, hoping to collect the full amount of the contract from the individual consumers (tr. 1311).
   74. Apart from the question of "written certification", the Bank's purchase of the * * * Paper appears to be covered in substance by the statutory exception, and I so rule.20While Regulation O, 12 C.F.R. 215.3 (5), does specify promissory notes and "similar paper", the statute would take precedence. As for 23A, that statute does refer to the purchase of "assets" from an affiliate, 12 U.S.C. 371 c(b)(3)(B)(7)(C). This language too must yield to the more specific language of 12 U.S.C. §84 (c)(8)(A).21
   75. There is much dispute in the record concerning the soundness of the Bank's purchase of * * * paper, and the extent of any losses attributable to such transactions. In view of the ruling, there is no need to detail this evidence, much of it cutting in Mr. * * *'s favor. Nor is there particular need to elaborate the history of Mr. * * *'s long financial involvement in * * * affairs, or the circumstances of his affiliation with that organization.

D. * * *

   76. At this point in the Initial Decision, I believe it is appropriate to insert the following chart. This chart sets forth a chronological analysis of what transpired financially concerning the alleged violations of Regulation O and Section 23A in this case. These data have been compiled to deliberately exclude the * * *, * * * and * * * Consumer transactions which, as heretofore discussed, do not constitute violations. Immediately following the chart, the loan of the Bank made to * * * is discussed.


20At the hearing, when this question was brought to FDIC counsel's attention, I was informed that it would be dealt with in their briefing "at considerable length" (tr. 339). Yet I find nothing in their post-hearing filings which addresses this question.

21FDIC counsel point out that the "old" (pre-October 1982) section 23A specifically covered the "discount of promissory notes". The focus of this proceeding, however, is directed at events occurring at a later time period.
{{4-1-90 p.A-1477}}

Date, Extension of Credit Amount of Extension of Credit * * * Bank's Capital & Unimpaired Surplus for Regulation O Purposes 25% of This Figure—Amount of Permissible Lending With Proper Collateral Aggregate Balance of Extensions of Credit to Respondent for Reg O Purposes *** Bank's Capital & Unimpaired Surplus for §23A Purposes 20% of This Figure Amount of Permissible Lending Aggregate Balance of Extensions of Credit to Respondent for §23A Purposes

Amount of Loan Final Balance FDIC Method1 Actual2 FDIC Method1 Actual2
1.
Oct. 8, 1982 $6,000 $1,000 $3,685K $921.25K $1,000 $6,000 $3,685k $737K $1,000 $6,000
* * * CMP Stip ¶2 TR 475-7 TR 475-7,
8(e) Answer ¶6(b), FDIC #21 FDIC #21
FDIC #3
2.
Nov 30, 1982 $13,959 $5,816 $3,685K $921.25K $6,816 $19,959 $3,685K $737K $6,816 $19,959
* * * CMP Answer ¶3(c), TR 475-7, TR 475-7,
Corporation CMP Stip ¶3, FDIC #21 FDIC #21
8(e) Answer 6(c).
FDIC #4
3.
Dec 1, 1983 $14,263 $10,697 $4,135k $1,033.75k $17,513 $31,459 $4,135k $827k $17,513 $31,459
* * * CMP Answer ¶3(c) TR 192-208 TR 192-208
Corporation CMP Stip ¶3 FDIC #15 FDIC #15
8(e) Answer ¶6(c)
FDIC #1

{{4-1-90 p.A-1478}}

Date, Extension of Credit Amount of Extension of Credit * * * Bank's Capital & Unimpaired Surplus for Regulation O Purposes 25% of This Figure—Amount of Permissible Lending With Proper Collateral Aggregate Balance of Extensions of Credit to Respondent for Reg O Purposes *** Bank's Capital & Unimpaired Surplus for §23A Purposes 20% of This Figure Amount of Permissible Lending Aggregate Balance of Extensions of Credit to Respondent for §23A Purposes

Amount of Loan Final Balance FDIC Method1 Actual2 FDIC Method1 Actual2
4.
Dec. 6, 1983 $46,000 $25,316 $4,135K $1,033.75K $42,829 $77,459 $4,135k $827K $42,829 $77,459
* * * CMP Answer ¶3(f) TR 192-208 TR 192-208
Management CMP Stip ¶6(b), FDIC #15 FDIC #15
8(e) Answer ¶6(f)
5.
Dec 6, 1983 $181,213 $161,213 $4,135K $1,033.75K $204,042 $258,672 $4,135k $827k $204,042 $258,672
* * * CMP Answer ¶3(f), TR 192-208 TR 192-208
Management CMP Stip ¶6(b), FDIC #15 FDIC #15
8(e) Answer ¶6(f)
6.
Dec 30, 1983 $8,000 $0 $4,135K $1,033.75K $204,042 $266,335 $4,135k $827k $204,042 $266,335
* * * CMP Stip ¶5, TR 192-208 TR 192-208
FDIC #1, #6, #7 FDIC #15 FDIC #15
7.
Jan 3, 1984 $9,000 $0 $4,075K $1,018.75K $204,042 $275,335 $4,089k $817.8k $204,042 $275,335
* * * CMP Stip ¶15, TR 192-208 TR 192-208
FDIC #1, #6, #7 FDIC #15 FDIC #15, #16

{{4-1-90 p.A-1479}}

Date, Extension of Credit Amount of Extension of Credit * * * Bank's Capital & Unimpaired Surplus for Regulation O Purposes 25% of This Figure—Amount of Permissible Lending With Proper Collateral Aggregate Balance of Extensions of Credit to Respondent for Reg O Purposes *** Bank's Capital & Unimpaired Surplus for §23A Purposes 20% of This Figure Amount of Permissible Lending Aggregate Balance of Extensions of Credit to Respondent for §23A Purposes

Amount of Loan Final Balance FDIC Method1 Actual2 FDIC Method1 Actual2
8.
Jan 10, 1984 $36,000 $0 $4,075K $1,018.75K $204,042 $311,335 $4,089k $817.8k $204,042 $311,335
* * * CMP Stip ¶15, TR 192-208 TR 192-208
FDIC #1, #6, #7 FDIC #15 FDIC #15, #16
9.
Jan 13, 1984 $25,923 $25,923 $4,075K $1,018.75K $229,965 $337,258 $4,089k $817.8k $229,965 $337,258
* * * CMP Stip ¶8, TR 192-208 TR 192-208
Insurance 8(e) Answer ¶6(h) FDIC #15 FDIC #15, #16
10.
Jan 27, 1984 $18,500 $0 $4,075K $1,018.75K $229,965 $355,721 $4,089k $817.8k $229,965 $355,721
* * * CMP Stip ¶5, TR 192-208 TR 192-208
FDIC #1, #6, #7 FDIC #15 FDIC #15, #16
11.
Feb 10, 1984 $55,600 $43,100 $4,075K $1,018.75K $273,065 $411,321 $4,089k $817.8k $273,065 $411,321
* * * CMP Stip ¶5, TR 192-208 TR 192-208
FDIC #1, #6, #7 FDIC #15 FDIC #15, #16
12.
Mar 2, 1984 $68,500 $68,500 $4,075K $1,018.75K $341,565 $479,821 $4,089k $817.8k $341,565 $479,821
* * * CMP Stip ¶5, TR 192-208, TR 192-208
FDIC #1, #6, #7 FDIC #15 FDIC #15, #16

{{4-1-90 p.A-1480}}

Date, Extension of Credit Amount of Extension of Credit * * * Bank's Capital & Unimpaired Surplus for Regulation O Purposes 25% of This Figure—Amount of Permissible Lending With Proper Collateral Aggregate Balance of Extensions of Credit to Respondent for Reg O Purposes *** Bank's Capital & Unimpaired Surplus for §23A Purposes 20% of This Figure Amount of Permissible Lending Aggregate Balance of Extensions of Credit to Respondent for §23A Purposes

Amount of Loan Final Balance FDIC Method1 Actual2 FDIC Method1 Actual2
13.
Mar 23, 1984 $14,400 $14,400 $4,075K $1,018.75K $355,965 $452,153 $4,089k $817.8k $355,965 $452,153
* * * CMP Stip ¶5, TR 192-208, TR 192-208
FDIC #1, #6, #7 FDIC #15 FDIC #15, #16
14.
Apr 10, 1984 $29,700 $29,700 $4,089K $1,022.25k $385,665 $461,170 $4,347k $869.4k $385,665 $461,170
* * * CMP Stip ¶5, TR 192-208, TR 192-208
Second Loan FDIC #1, #6, #7 FDIC #16 FDIC #16
15.
Apr 23, 1984 $8,000 $8,000 $4,089K $1,022.25k $393,665 $469,070 $4,347k $869.4k $393,665 $469,070
* * * CMP Stip ¶5, TR 192-208, TR 192-208
Second Loan FDIC #1, #6, #7 FDIC #16 FDIC #16
16.
May 10, 1984 $27,800 $27,800 $4,089K $1,022.25k $421,465 $486,870 $4,347k $869.4k $421,465 $486,870
* * * CMP Stip ¶5, TR 192-208, TR 192-208
Second Loan FDIC #1, #6, #7 FDIC #16 FDIC #16

{{4-1-90 p.A-1481}}

Date, Extension of Credit Amount of Extension of Credit * * * Bank's Capital & Unimpaired Surplus for Regulation O Purposes 25% of This Figure—Amount of Permissible Lending With Proper Collateral Aggregate Balance of Extensions of Credit to Respondent for Reg O Purposes *** Bank's Capital & Unimpaired Surplus for §23A Purposes 20% of This Figure Amount of Permissible Lending Aggregate Balance of Extensions of Credit to Respondent for §23A Purposes

Amount of Loan Final Balance FDIC Method1 Actual2 FDIC Method1 Actual2
17.
May 15, 1984 $125,000 $125,000 $4,089K $1,022.25k $546,465 $611,870 NOT
* * * CMP Stip ¶7, TR 192-208, APPLICABLE
8(e) Answer ¶6(g) FDIC #16
FDIC #1, #10
18.
Jul 10, 1984 $20,000 $20,000 $4,347K $1,086.75k $566,465 $579,702 NOT
* * * CMP Stip ¶5, TR 192-208, APPLICABLE
8(e) Answer ¶6(g) FDIC #16
FDIC #1, #10
19.
Jul 11, 1984 $4,000 $4,000 $4,347K $1,086.75k $570,465 $583,702 4,463k $892.6k $425,465 $438,702
* * * CMP Stip ¶5, TR 192-208, TR 192-208
Second Loan FDIC #1, #6, #7 FDIC #16 FDIC #16
20.
Jul 11, 1984 $20,000 $20,000 $4,347K $1,086.75k $590,465 $603,702 NOT
* * * CMP Stip ¶7, TR 192-208, APPLICABLE
8(e) Answer ¶6(g) FDIC #16
FDIC #1, #10

{{4-1-90 p.A-1482}}

Date, Extension of Credit Amount of Extension of Credit * * * Bank's Capital & Unimpaired Surplus for Regulation O Purposes 25% of This Figure—Amount of Permissible Lending With Proper Collateral Aggregate Balance of Extensions of Credit to Respondent for Reg O Purposes *** Bank's Capital & Unimpaired Surplus for §23A Purposes 20% of This Figure Amount of Permissible Lending Aggregate Balance of Extensions of Credit to Respondent for §23A Purposes

Amount of Loan Final Balance FDIC Method1 Actual2 FDIC Method1 Actual2
21.
Jul 12, 1984 $50,000 $50,000 $4,347K $1,086.75k $640,465 $653,702 NOT
* * * CMP Stip ¶7, TR 192-208, APPLICABLE
8(e) Answer ¶6(g) FDIC #16
FDIC #1, #10
22.
Jul 26, 1984 $9,000 $9,000 $4,347K $1,086.75k $649,465 $662,702 $4,463k $892.6k $434,465 $447,702
* * * CMP Stip ¶5, TR 192-208, TR 192-208
FDIC #1, #6, #7 FDIC #16 FDIC #16
23.
Jul 26, 1984 $10,300 $10,300 $4,347K $1,086.75k $659,765 $673,002 NOT
* * * CMP Stip ¶7, TR 192-208, APPLICABLE
8(e) Answer ¶6(g) FDIC #16
FDIC #1, #10
24.
Jul 27, 1984 $150,000 $150,000 $4,347K $1,086.75k $809,765 $823,002 NOT
* * * CMP Stip ¶7, TR 192-208, APPLICABLE
8(e) Answer ¶6(g) FDIC #16
FDIC #1, #10

{{4-1-90 p.A-1483}}

Date, Extension of Credit Amount of Extension of Credit * * * Bank's Capital & Unimpaired Surplus for Regulation O Purposes 25% of This Figure—Amount of Permissible Lending With Proper Collateral Aggregate Balance of Extensions of Credit to Respondent for Reg O Purposes *** Bank's Capital & Unimpaired Surplus for §23A Purposes 20% of This Figure Amount of Permissible Lending Aggregate Balance of Extensions of Credit to Respondent for §23A Purposes

Amount of Loan Final Balance FDIC Method1 Actual2 FDIC Method1 Actual2
25.
Aug 13, 1984 $283,000 $283,000 $4,347K $1,086.75k $1,092,765 $1,106,002 NOT
* * * CMP Stip ¶7, TR 192-208, APPLICABLE
8(e) Answer ¶6(g) FDIC #16
FDIC #1, #10
26.
Sep 21, 1984 $536,000 $536,000 $4,347K $1,086.75k $1,628,765 $1,640,238 $4,463k $892.6k $970,465 $981,938
* * * CMP Stip ¶9, TR 192-208, TR 192-208
Respondent 8(e) Answer ¶6(i) FDIC #16 FDIC #16
Individually FDIC #1, #12
27.
Sep 21, 1984 $32,260 $32,260 $4,347K $1,086.75k $1,661,025 $1,660,780 $4,463k $892.6k $1,002,725 $1,002,489
* * * TR 192-208, TR 192-208,
Management FDIC #16 FDIC #16
Overdraft


1This figure reflects the method used by the FDIC in their brief to calculate extensions of credit to the respondent. The FDIC took the low balance of each loan and aggregated them, without taking into account diminishing balances.

2 Amount of total daily balances, based on loan payment charts for * * * (FDIC #3) * * * (FDIC #7), and * * * Management (FDIC #8). The payments on* * * were applied to the earliest extensions of credit on the respondent. The FDIC took the low balance of each loan and aggregated them, without taking into account diminishing balances.
{{4-1-90 p.A-1484}}
77. It is charged that on January 5, 1984, Respondent caused or allowed the Bank to make a loan to * * *, Inc. in the amount of $658,300 (an advance on a $3M line of credit). While Respondent * * * does not dispute that such an extension occurred, and that this corporation is a related entity, he denies that the questioned transaction was unlawful.
   78. The * * * loan was not pleaded as a Section 23A violation, but only as a violation of Regulation O. This is because Section 23A specifically exempts transaction with "any company engaged solely in holding the premises of the member bank". (12 U.S.C. §37/c(b)(2)(B).
   79. The challenged loan is significant in that my reading of sequential events—as set forth on the foregoing chart—indicates that Mr. * * * limit-wise stepped over the forbidden Regulation O line on August 13, 1984, upon an advance of $283,000 to the * * *. Since Examiner * * *'s report (FDIC 1) is dated September 28, 1984, it is apparent that Mr. * * *'s "violation" existed for less than seven weeks prior to the date of the pivotal evidentiary charging document.
   80. Throughout the hearing, Mr. * * * maintained that the * * * loan was for the purpose of building a branch facility for * * * Bank (tr. 156, see tr. 2677-91). The structure to be built, however, was not merely intended to house a bank office, but was to be a general office building, with numerous independent business tenants (tr. 2678-79, 2682).
   81. Examiner * * * testified that, as of the date of his report, $2,658,300 had been extended by * * * Bank for purposes of the * * *, "with participation sold of $2,000,000 which left a balance in the bank's books of $658,000" (tr. 159; see Ar. 161,315).
   82. On cross examination, it was brought to Mr. * * *'s attention that the Bank's books carried similar loans for the construction of branch facilities; the so-called "* * *" and "* * *" branches, the latter loan in the amount of $650,000 (tr. 317-18). When asked why these loans had not been questioned in his report—unlike the * * * loan—he was at first unable to furnish an explanation (tr. 318-21). Later, with the balance of the "* * *" loan established as $663,000, he distinguished the three loan transactions. In his view, the difference was that in the case of "* * *" and "* * *", the entire physical facility was employed as a bank office, while in the case of the * * *, only a portion of that building was designed to be used as a bank branch (tr. 368, 383-86). When asked whether the balance of the * * * loan ($2M having been sold off in participation)—substantially the same as the amount of the outstanding "* * *" loan —was a sufficient sum for the building of a bank branch, the witness tentatively agreed (tr. 393).22
   83. There was some dispute in the record concerning the appraised value to be accorded to the * * * property, collateral for the loan. The FDIC report (FDIC 1, p. 2-a-19) describes an earlier $3.745M appraisal of the building as "highly unrealistic", whereas a "more realistic" value would be approximately $2.142M. On this point, there was testimony that, in actuality, the building was subsequently sold to the * * * organization for $2.904 (tr. 693, 1016-18, 2674).23
   84. As to whether there was any actual monetary loss to the Bank, despite the loan classification in the report as "substandard" and "loss", the witness * * * (former President of * * * Bank following Mr. * * *'s removal) testified that the amounts charged off following the FDIC's criticism were subsequently entirely recovered through the sale of the building (tr. 1188).
   85. In consideration of all that has occurred in this case, to find the * * * loan a violation of law would fly in the face of any notion of fairness, or negate any sense of a realistic view of events. It simply cannot be seen as judicially cognizable to serve as a cornerstone to support the Removal and assessment actions brought against Mr. * * *.

IV. CONCLUSION

   Factually, the * * * and * * * allegations have not been proven by a preponderance of the evidence.24The * * * * * *


22Examiner * * * who conducted a prior examination of the Bank, dated September 12, 1983 (RX 28), testified that he was not aware of any violation at that time involving "* * *" or "* * *" (tr. 1236-37; 1243-44).

23Mr. * * * testified that he "had to sell the building in order to satisfy this situation", at a price far below what he thought it was worth (tr. 2683-84). His credible narrative depicting the entire * * * story is set forth at tr. 2676-85.

24Similarly unproven are the allegations respecting "prior approval" of alleged * * * related loans. The evidence on this point boils down to an interpretation of the Board's minutes, dated January 10, 1984 (FDIC 13). The minutes
(Continued)

{{4-1-90 p.A-1485}}loans are exempt as a matter of law. Any violation attributable to the * * * credit is only a technical one, causing no harm to the Bank. Excluding these loans, no lending limits have been exceeded on Mr. * * *'s part. The charges brought under FDIC-85-82e and FDIC-85-83K have not been sustained, and my recommendation is for the dismissal of these charges, including the assessment of any penalty.

Addendum

   In resolving the above charges, I have not relied in any affirmative way upon the witnesses called to attest to Mr. * * *'s character. Nor have I relied at all upon the polygraph results presented by Respondent. The latter can, and might as well be, stricken from the record.
   As to those recitations in the charges, couched in such terms as "unsafe or unsound practices", "breach of fiduciary duty", "personal dishonesty", "willful disregard", etc., I assume that these are all tied to the specific loan transactions complained of, and do not have to be independently addressed. Such open-ended charges standing alone would not afford an individual the sufficient notice required in a due process proceeding.


24 Continued:state, concerning the approval of Mr. * * *'s personal line of credit, that the motion was carried at the initiation of President * * *, "seconded by * * * and unanimously carried" (FDIC 13, p. 2). Did, in fact, Mr. * * * abstain from this voting? Mr. * * *, unsurprisingly was not called as a witness. Directors * * * and * * * took "the Fifth". Secretary * * *'s testimony was vacillating and inconclusive (tr. 1709-10). Former Director * * *—an impartial witness—could not remember specifically, but testified that it was standard board policy for all interested directors to abstain when their loans were being formally considered (tr. 1932-34, 1948-49). It was Mr. * * *'s testimony that he did remember in this particular instance, and that he did, in fact, absent himself from the January 10, 1984, meeting while his credit limits were being deliberated by the Board (tr. 2519-27), see also (tr. 2773-75). In any event, because of the unreliability of President * * * (as discussed previously), to rely as proof of allegations upon minutes written by Secretary * * * under Mr. * * *'s supervision would not be appropriate (tr. 1544-46).

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