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{{11-30-94 p.A-1489}}
   [5140] In the Matter of Harold A. Hoffman and Joseph L. Hayes and Alaska Continental Bank, Anchorage, Alaska, Docket No. FDIC-88-156c&b(9-12-89).

   Cease and Desist Order including order to make restitution of unjust enrichment. Following notice from FDIC and state banking authorities that Bank was insolvent, Bank made certain payments for the benefit of officers and directors, including the `cashing out' of president's employment contract; the creation of a self-insurance fund for potential liabilities of officers and directors; the payment of fees to a director's law firm; and the payment of fees to a director for lobbying activity. FDIC found that payments constituted self dealing and unsafe or unsound practices and ordered Respondents to make restitution of unjust enrichment to FDIC as Bank's receiver. (Motion for Stay Pending Appeal denied 7-11-89; see ¶5141. This decision was affirmed by the U.S. Court of Appeals for the Ninth Circuit, 912 F.2d 1172 (1990). This order was terminated by orders of the FDIC dated 4-29-94 and 9-13-94; see ¶¶9015 and 9016.)

   [.1] Practice and Procedure—Exceptions to Recommended Decision— Request for Oral Argument
   Request for oral argument denied where factual and legal arguments are fully set forth in submissions, no benefit will be derived from oral argument, and respondent will not be prejudiced by lack of oral argument.

   [.2] Unsafe or Unsound Practices—Statutory Interpretation—Case-by-Case Determination
   FDIC establishes unsafe or unsound practices on a case-by-case basis, considering specific expenditures in context of timing, information available, and resemblance to other ordinary expenditures.

   [.3] Directors and Officers—Duties and Responsibilities—Outside Counsel
   Retaining a law firm to challenge state banking authorities or FDIC does not constitute an unsafe or unsound practice.

   [.4] Practice and Procedure—Burden of Proof—Civil Money Penalties
   When FDIC has established that expenditures were made, Respondent bears burden of showing that nature and amount of expenditures were not improper.

   [.5] Board of Directors—Duties and Responsibilities—Insolvency
   Once FDIC and state banking authorities have found that Bank is insolvent and communicated finding to Bank's officers and directors, directors must act to preserve assets for protection of creditors and depositors rather than for their own benefit.

   [.6] Practice and Procedure—ALJ Inference from Assertion of Fifth Amendment
   ALJ may draw adverse inferences from Respondent's failure to testify and invocation of Fifth Amendment right against self-incrimination.

   [.7] Cease and Desist Order—Affirmative Remedies—Restitution
   Where Bank has closed, FDIC may order Respondents to make restitution of unjust enrichment to FDIC as Bank's receiver.

{{11-30-94 p.A-1490}}
In the Matter of
HAROLD A. HOFFMAN,individually,
and as president, director, and
participant
in the conduct of the affairs of Alaska
Continental Bank, Anchorage, Alaska,
and
JOSEPH L. HAYES, individually, and
as
chairman of the board of directors and
participant in the conduct of the affairs
of
Alaska Continental Bank, Anchorage,
Alaska,
and
ALASKA CONTINENTAL BANK
ANCHORAGE,ALASKA
(Insured State Nonmember Bank—In
Liquidation)
DECISION AND ORDER TO CEASE
AND DESIST

I. INTRODUCTION
   The Federal Deposit Insurance Corporation ("FDIC") initiated this action on July 1, 1988, pursuant to sections 8(b) and 8(c) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. ¶ 1818(b) and (c), by issuing to Alaska Continental Bank, Anchorage, Alaska ("Bank"), Harold A. Hoffman ("Hoffman"), and Joseph L. Hayes ("Hayes") (collectively "Respondents"), Findings of Fact and Conclusions of Law, Temporary Order to Cease and Desist, and Notice of Charges and of Hearing ("Notice"). The Notice charged the Bank and Respondents with removing sums of money from the Bank for the personal benefit of various officers and directors, including the Respondents, after learning that the FDIC and the State of Alaska considered the Bank to be insolvent and subject to closure by the state. The Bank and Respondents challenged the Temporary Order to Cease and Desist in the United States District Court for the District of Alaska. Their petition for a temporary restraining order against the FDIC was denied by Order dated July 20, 1988.
   A prehearing conference was held on September 7, 1988. The administrative hearing took place in Anchorage, Alaska before Administrative law Judge Steven M. Charno ("ALJ") between January 6, 1989, and January 14, 1989. Briefs and reply briefs were filed by each party. On May 19, 1989, the ALJ issued his Recommended Decision which found each of the expenditures at issue to have been an unsafe or unsound banking practice and which ordered the transactions to be "reversed" and the expenditures to be "recaptured" by the Bank. Should the Bank fail to reverse the transactions and recapture the funds, ALJ Charno further ordered the individual Respondents to reimburse the Bank to the extent that each personally benefited from any of the transactions.
   The Board of Directors ("Board") affirms the general conclusion reached by the ALJ that Respondents engaged in unsafe or unsound banking practices and are properly the subjects of a cease and desist order, and adopts those findings of fact and conclusions of law of the ALJ not specifically addressed in this decision. As more fully discussed below, however, upon its review of the record herein, the Board makes certain findings of fact which modify those made by the ALJ and which, therefore, require the modification of the ALJ's Recommended Decision and Order.

II. REQUEST FOR ORAL ARGUMENT

   [.1] After considering the Respondents' request and the allegations and arguments presented in the parties' briefs, the Board finds that (1) the factual and legal arguments are fully set forth in the parties' submissions, (2) no benefit will be derived from oral argument, and (3) Respondents will not be prejudiced by the lack of oral argument. Therefore, the Board declines to exercise its discretion under section 308.17 of the FDIC's Rules and Regulations (12 C.F.R. §308.17 (1988)) and denies Respondents' request for oral argument.

III. DISCUSSION

A. Summary

   In summary, this case involves four (4) expenditures by the board of directors of the Bank and the Respondents in their capacities as officers and/or directors of the Bank after they were informed on May 18, 1988, by the Alaska State Banking Authority ("State") and the FDIC that these regulatory authorities found the Bank to be insolvent and the State would begin steps to close the Bank immediately. The four expenditures are: (1) the "cashing out" of Bank President Hoffman's employment contract on May 26, 1988; (2) the creation of a self-insurance fund for officers and directors on June 10, 1988; (3) the payment of legal fees between May 27 and July 8, 1988, to the law firm of Bank director Rob-
{{4-1-90 p.A-1491}}ert A. Breeze for the establishment of a selfinsurance fund and the development of a defense against the FDIC and the State; and (4) the payment of lobbying fees to chairman of the board Hayes on June 10, 1988.
   The FDIC alleges that: (1) each of these expenditures was entered into at a time the board of directors of the Bank knew or should have known that the Bank was insolvent and/or was on the verge of being closed; (2) each expenditure constituted self-dealing because it resulted in a benefit to the individual Respondents and/or the board of directors; (3) each expenditure was a breach of the Respondents' fiduciary duty to the Bank, its shareholders and depositors; and (4) each expenditure was an unsafe or unsound banking practice which removed assets from the Bank to the detriment of all who might have had a claim on those assets after the Bank closed.
   Respondents deny these allegations and assert that each expenditure had a sound business basis, was taken in the ordinary course of the Bank's business and was based on management's belief in the solvency and continued viability of the Bank.
   The Board finds that the circumstances of this case make clear the disingenuous nature of Respondents' position. The Board agrees with the findings of the ALJ that the transactions were consummated at a time when "the Bank's board of directors, including chairman Hayes, were ... in possession of reliable and well-supported confidential information that the FDIC and the State believed the Bank to be insolvent and that the government agencies were engaged in a course of action which would culminate in the closing of the Bank in the immediate future." Rec. Dec. at 4.1 The Board further concurs in the ALJ's finding that "the affected members of the Bank's board of directors acted on confidential information and in anticipation of the Bank's imminent closure to benefit themselves by removing assets from the Bank to the detriment of all who might have had a claim on those assets after the Bank closed." Rec. Dec. at 11. And, the Board further adopts the ALJ's finding that "since that group of claimants included, not only the Bank's creditors, but its depositors and shareholders, [I] further find that the payments in question were made in breach of the affected directors' fiduciary duty." Id. Accordingly, the Board finds that, with the exception of the payment of legal fees for defense against closure of the Bank, the expenditures made constitute unsafe or unsound banking practices in violation of section 8(b) of the FDI Act.

   [.2] B. The Expenditures
   Respondents suggest various hypotheses which, in the right set of circumstances, could lead to a conclusion that each of the expenditures at issue in this case was an acceptable business practice. Yet, the "right set of circumstances" is not before the Board. The Board is presented with specific circumstances which differ considerably from Respondents' proposed hypotheses. This case involves a determination of Respondents' actual motive for taking the actions at issue, rather than what their motives might have been had other facts or circumstances pertained. What may be an acceptable business practice in one context can very well be an unsafe or unsound banking practice in another. That is the reason the FDI Act does not enumerate unsafe or unsound banking practices, but leaves the regulatory agencies to make a determination on a case by case basis.2 In analyzing this case, the Board considered the specific expenditures at issue in the context of the information available to Respondents, the timing of the expenditures, and the extent to which they resemble expenditures made in other, ordinary months, i.e., payments to suppliers, regular payroll, employee benefits, etc. It is a change in pattern, a change in payment practice, or an "extraordinary" expense, which raises the specter of selfdealing. The Board finds substantial evidence in the record, given the timing of these transactions and our finding, below, that the Respondents knew or should have


1 Citations in this decision shall be as follows:
Recommended Decision—"Rec. Dec. at ____."
Transcript— "Trans. at ____."
Exhibits—"FDIC Ex. ____", or "Resp. Ex. ____."
Exceptions—"FDIC Excp. at ____" or "Resp. Excp. at ____."

2 See Statement of the Chairman of the Federal Home Loan Bank Board, John E. Horne, Financial Institutions Supervisory and Insurance Act of 1966: Hearing on S. 3158 before the House Comm. on Banking and Currency, 89th Cong., 2d Sess. 49-50 (1966).
{{4-1-90 p.A-1492}}known that the Bank was insolvent, which supports the Board's conclusion that these were expenditures made for the benefit of the Respondents in contemplation of the Bank's closing.3

IV. FINDINGS OF FACT
A. The Respondents Knew or Should Have Known the Bank was Insolvent at the Time of the Expenditures.
   The ALJ indicated in his Recommended Decision that "the record does not demonstrate whether the Bank was in fact insolvent" and "Petitioner FDIC has not demonstrated by substantial evidence that the Respondents knew or should have known that the Bank was insolvent at the time the payments were made." Rec. Dec. at 12. Both parties filed exceptions to these findings. The FDIC asserts that they are incorrect based on the evidence in the record. Respondents assert that there is an internal inconsistency in the ALJ's Recommended Decision which, while making these findings, concludes that the expenditures were made in contemplation of the Bank's closing. The Board agrees with FDIC counsel that this record contains ample data, which was within the control of, or made available to Respondents, indicating that the Bank was insolvent at least as early as the May 18, 1988, meeting with the FDIC and State, and that Respondents were aware of this data or should have been.4
   FDIC examiner Jeffrey Mitchell testified that on May 18, 1988, he informed the Bank's board of the following as a result of the joint FDIC and State examination of the Bank as of March 31, 1988: (1) the Bank's total equity capital equalled $1,309,000, and valuation reserves equalled $1,194,000—for a total of $2,503,000 in total equity capital and reserves (Tr. at 88–90); (2) the Bank had $3,403,000 in assets classified "Loss," $410,000 in assets classified "Doubtful," and $11,913,000 in assets classified "Substandard" and adverse classifications had increased to 29% of total assets from 24%, 12%, and 5% at the three previous examinations; (3) that assets classified "Loss" exceeded total equity capital and reserves by $900,000—before adjustment for assets classified "Doubtful" or "Substandard" (Tr. at 92, 145); and (4) that approximately 20% of total assets of the Bank were non-earning. In addition, in 1986, the Bank experienced a net operating loss of $1,534,000, in 1987, a loss of $1,522,000, and from January 1, 1988, to March 31, 1988, the Bank incurred a net loss of $204,000 (Tr. at 91).
   Bank President Hoffman was informed by the FDIC and the State of the preliminary findings of the examination at meetings held on May 6 and 17, 1988, and he was supplied with a list of assets which had been found subject to adverse classification (Tr. at 74, 266, 273, 788-92, 795; FDIC Ex. 31). This list showed that assets subject to adverse classification equalled $15,724,686 and that "Loss" classifications alone amounted to $3,402,558, which exceeded the Bank's total equity capital and reserves (Tr. at 83, 85–86). No one acting on behalf of the Bank ever attempted to supply the FDIC or State with any evidence indicating that the classifications were in error, Rec. Dec. at 2 n.5. No change in the condition of the Bank was communicated to the examiners during the examination process or during subsequent meetings between Respondents and the FDIC and State (Tr. at 264, 275, 794).
   In addition, on several occasions prior to the May 18, 1988, meeting, various Bank employees made reports to the Bank's board either directly concerning the impaired financial condition of the Bank, or which reflected the effects of the impaired financial condition of the Bank (Tr. at 295-97).
   Based on the ALJ's findings and this evidence, the Board finds it impossible to reach a conclusion other than that Respondents knew or should have known at the time the four expenditures were made that the Bank was insolvent and faced imminent


3 In addition to the findings of fact made by the ALJ, the Board also finds the following evidence persuasive: the payment of the Bank's employees' accrued vacation, FDIC Ex. 16; the fact that Hayes had previously lobbied for the Bank as part of his duties as chairman of the board without pay, Tr. at 1556, 6622; unlike the Bank's other lobbyists, Hayes submitted an employee expense voucher for the lobbying trip at issue, FDIC Ex. 81, Tr. at 1652, 1659; that Hayes immediately used the payment to bring current four loans at the Bank which were in arrears and for which Hayes was liable either as principal or guarantor, FDIC Ex. 31, 61; the absence in the Bank's records prior to May 17, 1988, of reference to a self-insurance fund; and, Hoffman's published statement of intent to resign at the end of December, 1988, Rec. Dec. at 5.

4The fact that Respondents ignored the data or chose not to accept its obvious import is not a valid defense.
{{4-1-90 p.A-1493}}closure. The findings of fact are modified accordingly.5
   Respondents assert that they justifiably relied upon an audit report prepared by Price Waterhouse which indicated that the Bank was solvent. This report was excluded from the record in this case by the ALJ for not having been timely provided to counsel for the FDIC. Thus, the audit report is not part of the evidentiary record of this proceeding, and the Board will not consider it.
B. Payment of Legal Fees for Establishing a Self-Insurance Indemnity Trust Constitutes an Unsafe or Unsound Practice. Apportionment of the Legal Fees, However, is not Supported by the Record.
   The Board concurs in part, and modifies in part the findings made by the ALJ with respect to the payment of legal fees. The Bank's directors and officers liability insurance had lapsed in 1986, and the Bank had been unable to replace it. (Tr. at 1279-80). At a May 17, 1988, meeting of the Bank's board of directors, President Hoffman, who at this time possessed confidential information regarding the Bank's imminent closure, suggested that a self-insurance fund might be established. FDIC Ex. 14. The Bank's records contain no prior reference to such a fund. Hoffman also reported on an "emergency preparedness" plan which included "the establishment of a self-insurance fund" and employee severance pay "should the Bank not make it." Id. On May 20, 1988, the board voted to retain Bank director Breeze's law firm, Boyko, Davis, Dennis, Baldwin & Breeze ("Law Firm"), for two purposes: the setting aside of a legal fund to protect directors from possible suits that might occur should the Bank close, and the defense of actions taken by the State and FDIC. FDIC Ex. 16. At a June 10, 1988, executive session of the board, director Tope's motion to transfer $100,000 for "legal fees/insurance" to the Bank's parent company was passed, and Hoffman indicated he "would purchase a CD at another bank with the funds." FDIC Ex. 21. The same day, the Bank made a $100,000 payment into the account of its parent, Alaska Continental Bancorp, and this money was ultimately used to buy a certificate of deposit at another institution. The ALJ found that "the self-insurance fund was established in anticipation of the Bank's imminent closure in order to benefit the members of the Bank's board of directors," and that this is an unsafe and unsound banking practice. Rec. Dec. at 8, 15. The Board concurs.

   [.3] The Board also agrees with the ALJ that, notwithstanding the timing of the arrangement, the absence of a written retainer agreement, and the absence of independence of counsel, engaging a law firm to challenge the State Banking Authority or the FDIC does not constitute an unsafe or unsound banking practice.6
   Significantly, however, the ALJ further found, and the Board agrees, that "the record does not permit a determination of the exact amount expended by the Bank" as legal fees for the purpose of challenging the regulatory authorities. Rec. Dec. at 9. Nonetheless, certain determinations can be made.

   [.4] The Board finds that the FDIC met its burden of proving that improper expenditures were made to the Law Firm and of proving the amount paid to the Law Firm. The burden then shifted to Respondents to show that the nature and amount of certain expenditures were not improper. This burden has not been met. While the Board finds that the payments for challenging the State and the FDIC were not improper, the Board can make no finding regarding the amount of these expenditures. Because the Board considers this part of Respondents' burden and finds that Respondents have failed to provide sufficient evidence, the Board concludes that the entire expenditure must be treated as improper. The Board would ordinarily issue an order requiring the entire sum of $100,000.00 to be recaptured by the Bank.7 However, for reasons explained in part VI, infra, such relief would not be appropriate.

V. RESPONDENTS' EXCEPTIONS
A. Exceptions 1 Through 4.
   These exceptions, although stated differently, essentially challenge the findings


5 The Board thus adopts the first of the FDIC's Exceptions and rejects Respondents' Exception seven.

6 In reaching this same conclusion, the ALJ also made a specific finding that "it was not demonstrated by substantial evidence that the Bank's management knew the Bank was insolvent when they made the payments for legal services." Rec. Dec. at 9. In accordance with the Board's contrary finding in Part A, above, the Board rejects this finding.

7 Thus, upon the premise urged by Respondents in their Exception 10, the Board reaches the opposite conclusion.
{{4-1-90 p.A-1494}}made by the FDIC and the State that indicate the Bank's insolvency or the way in which these findings were communicated, and ultimately, of course, the Bank's closing by the State which flowed from the findings. The focus of the challenge is summarized in Respondents' Exceptions:
       The ALJ decision is based on the assumption that the transactions were unsafe or unsound practices if transactions are done after the [b]ank has confidential information that the FDIC and/or State intend to close the [b]ank even if the reason for the intended action by the FDIC or State is in error. (Emphasis in original). Resp. Excp. at 6.
   First, the Board will deal briefly with Respondents' various charges related to the manner in which the regulatory agencies informed the Bank of their findings. This record is replete with examples of the open and continuous communication between the parties during the entire examination process, up through the failure of the Bank. See, e.g., Tr. at 203–206, 264-65, 272, 275, 301-65, 792-93, 804; FDIC Ex. 33). Respondents' assertion that they were somehow denied the appropriate opportunities to ask questions, discuss issues, or challenge the regulators during and after the examination process is not credible.
   Second, while there can be no dispute that when faced with a regulatory action to close it, a bank may challenge that action, Respondents appear to have selected the wrong forum for that challenge. The State of Alaska alone has the authority to close the Bank—not the FDIC, and the laws of the State of Alaska provide the only mechanism for challenging the State's action.8 While the record indicates that an action was filed in state court challenging the closing or the determinations upon which it was based, the success or failure of that action is not part of this record. Tr. of Prehearing Conf., Sept. 7, 1988, at 38–39. In any event, Respondents Exceptions 1–4, which are in the nature of a challenge to the State's action, are rejected.

   [.5] The Respondents may wish to debate the issue of insolvency for as long as possible; however, the public interest is not furthered by such activities. The statutory and regulatory scheme under which banks are supervised has as its focus the protection of the public interest and the deposit insurance fund. The interests of the public and the fund require that the Board not risk permitting potential wrongdoers to "raid the safe" until their assertions of solvency are proven to have been wrong. It is clear that Respondents were well aware of the conclusions and the intentions of the regulators. Rec. Dec. at 4. Once findings of insolvency and an intention to close a bank have been communicated to a bank, it is no longer "business as usual." The fiduciary responsibilities of the officers and directors require that they act to preserve assets for the protection of the depositors and other creditors, rather than expend assets for their own benefit, no matter how prudent those expenditures may be in another context. While a bank may attempt to keep the state from closing it, its directors must at all times continue to fulfill their fiduciary responsibilities and not improperly expend assets of the bank for their own benefit.

B. Exceptions 5 and 6.

   [.6] Respondents take exception to the ALJ's statement that he drew "the adverse inference" from Respondent Hoffman's failure to testify, and allege violations of the federal and state protections against self-incrimination. This argument is made without any citation to legal authority—because none exists. First, and obviously, the administrative hearing held in this case is not a criminal action, and the protections against self-incrimination which Respondent claims are inapplicable. The inference drawn by the ALJ is permissible in a civil proceeding. Baxter v. Palmigiano, 425 U.S. 308 (1976); Farace v. Independent Fire Ins. Co., 699 F.2d 204 (5th Cir. 1983). Even if the Respondent Hoffman had been the subject of a criminal investigation and had exercised his rights against self-incrimination under the Fifth Amendment, his argument would still be without merit.9 In a civil proceeding, adverse inferences can be drawn from both a failure to testify and the invocation of the Fifth Amendment during testimony. Id. Finally, the Board finds that


8 See, Alaska Stat. §06.05.470(d) (1988). Other states have similar provisions, see, e.g., Tex. Code Ann. §342–805 (Vernon 1973); Idaho Code §26–909 (1977); Neb. Rev. Stat. §8-195 (1987). That each state acts independently in determining to close a bank is evidenced by the instances where a state fails to close a bank although the examination performed by the FDIC indicates closure to be appropriate.

9 At no time was Hoffman or Hayes notified that the FDIC had made them the subject of a criminal referral, or that the appropriate state or federal prosecutorial authorities were investigating them.
{{5-31-92 p.A-1495}}substantial evidence supports its finding of fact and conclusions of law without drawing an adverse inference from Hoffman's silence, and, thus, the issue is not material to the Board's decision.

C. Exception 8.

   Respondents assert that the ALJ erred in ignoring testimony by FDIC Assistant Regional Director Densmore which contains "admissions against interest." Their arguments in support of this Exception are a distortion of the testimony in the record. The statements made by Densmore cited in Respondents Exceptions, though accurately quoted, are taken out of context or are responses to hypothetical questions and are thus an inaccurate portrayal of the witness's testimony. Resp. Excp. at 22–24. The Board finds Mr. Densmore's testimony to be clear, consistent and contrary to its interpretation by Respondents. Therefore, the Board rejects Respondents' Exception 8. Mr. Densmore found each of the expenditures to be an unsafe or unsound practice primarily because of its timing. Although he did agree with Respondents' counsel that certain of the expenditures might not be per se inappropriate (Tr. at 1041, 1042, 1056), he repeated his belief that, given the information known to Respondents and the timing of the expenditures, they were, in this set of circumstances, unsafe or unsound practices. (Tr. at 1022, 1026, 1099).

D. Exceptions 9, 11, 12, 13, and 14.

   These Exceptions challenge the findings of fact made by the ALJ with respect to three of the four expenditures and are essentially nothing more than an attempt to reargue Respondents' position.10 The substance underlying these Exceptions is that the ALJ did not agree with certain of Respondents' evidence and arguments. As previously stated, the Board's review of the record finds substantial evidence in support of the findings of fact made by the ALJ at issue in these exceptions. No purpose would be served by repeating here the analysis contained in the ALJ's Recommended Decision which rebuts the Respondents' proposed findings of fact and conclusions of law and Exceptions.

IV. REMEDY

   [.7] In accordance with the Board's findings that Respondents engaged in unsafe or unsound banking practices, an Order against Respondents to cease and desist from and to correct these practices and violations through recovery of the funds which improperly inured to the benefit of Respondents would ordinarily be appropriate. However, the Bank closed over a year ago and it is now in receivership. Thus, as a practical matter, neither the Bank nor these individual Respondents is in a position to "reverse" the transactions and "recapture" the funds to the Bank as proposed by the ALJ in his Recommended Order. Thus, the ALJ's proposed relief is no longer entirely appropriate. Furthermore, it is a matter of public record that the Bank's receiver has initiated litigation seeking to recover the improper payments that are the subject of this proceeding. However, to the extent that the individual Respondents have been unjustly enriched by the unsafe or unsound practices in which they engaged, the Board finds that it is still appropriate and within the scope of its authority under section 8(b) of the Act to order reimbursement of those funds received by the individuals and by which they were unjustly enriched. Larimore v. Comptroller of the Currency, 789 F.2d 1244, 1254 (7th Cir. 1986); First National Bank of Eden v. Dept. of Treasury, 568 F.2d 610 (8th Cir. 1978). Therefore, the Order has been modified accordingly.

ORDER TO CEASE AND DESIST

   The Board of Directors of the FDIC, having considered the record and the applicable law finds and concludes that, as set forth in this Decision, Respondents have engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Act.
   Accordingly, IT IS HEREBY ORDERED, that Respondents Harold A. Hoffman and Joseph L. Hayes take immediate affirmative action as follows:
   1. Respondent Hoffman shall immediately repay to the FDIC as receiver for Alaska Continental Bank the $61,796.48 payment of May 26, 1988, by which he was unjustly enriched.


10 The Board has addressed Respondents' Exception 10, dealing with the expenditure for legal fees, above.
{{5-31-92 p.A-1496}}
   2. Respondent Hayes shall immediately repay to the FDIC as receiver for Alaska Continental Bank the sum of $25,000.00 by which he was unjustly enriched.
   The effective date of this Order shall be thirty (30) days from the date of its issuance. The provisions of this Order shall be binding upon the Bank, its directors, officers, employees, agents, successors, assigns and other persons participating in the affairs of the Bank.
   The provisions of this Order shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this Order shall have been modified, terminated, suspended, or set aside in writing by the Board.
   By direction of the Board of Directors.
   Dated at Washington, D.C. this 12th day of September, 1989.

_________________________________________
RECOMMENDED DECISION

In the Matter of
Harold A. Hoffman
Joseph L. Hayes
and
Alaska Continental Bank
Anchorage, Alaska
(Insured Nonmember State Bank)

Steven M. Charno, Administrative Law Judge:
   A Notice of Charges and of Hearing ("Notice") was issued by the Federal Deposit Insurance Corporation ("FDIC" or "Petitioner") on July 1, 1988, alleging that Alaska Continental Bank ("Bank"), Harold A. Hoffman and Joseph L. Hayes (collectively, "Respondents") had engaged in unsafe or unsound banking practices. Contemporaneously, the FDIC issued a Temporary Order to Cease and Desist against the Respondents pursuant to 12 U.S.C. § 1818(c). Respondents' Answers denied that they had engaged in any such practices. AT a prehearing conference on September 8, 1988, Petitioner was allowed over Respondents' objection to amend the Notice by including an additional specification of behavior alleged to constitute an unsafe or unsound banking practice.1
   This case was heard before me in Anchorage, Alaska on January 6 through 14, 1989.2 Initial briefs were filed by Petitioner and Respondents under due date of April 5, 1989, and reply briefs were filed by all parties under due date of April 20, 1989.

DISCUSSION

A. Background

   On approximately April 18, 1988,3 the Alaska State Banking Authority ("State") and the FDIC began an examination of the Bank as of March 31. On May 6, the examiners met with Hoffman, the Bank's President, in the latter's office. During the meeting, FDIC Examiner-in-Charge Mitchell mentioned the impact of losses on the capital ratio and stated that the Bank was "technically insolvent." Hoffman replied "I agree."4 The parties then discussed the FDIC's procedures for selling the Bank, Hoffman disputed at least three adverse asset classifications and the examiners re-


1 In proposed findings of fact submitted November 17, 1988, Petitioner for the first time attempted to assert that eight additional members of the Bank's Board of Directors who were not named as respondents in the Notice should be held personally liable for the reimbursement of any monies disbursed by the Bank as a result of unsafe or unsound banking practices. At the hearing, I ruled that due process considerations precluded any finding of personal liability on the part of the unnamed directors. Accordingly, I further ruled that the unnamed directors were not parties to the proceeding, that they were exempt from my sequestration order and that evidence going to their personal defenses was irrelevant and would not be reviewed. Petitioner's attempt to again raise this matter on post-hearing brief not only ignores my prior ruling, but is Constitutionally unsound in view of the fact that the unnamed directors received neither adequate notice nor any opportunity for hearing.

2 The unopposed motions of Petitioner and Respondents to correct the transcript are granted; those corrections, together with my own, appear in the Appendix to this Decision.

3 All dates hereinafter are 1988, unless otherwise indicated.

4 The record is unclear as to whether Hoffman was agreeing that the Bank was insolvent or that the FDIC's analysis showed the Bank to be insolvent; the former interpretations appears more probable in view of Hoffman's comment at the end of the meeting.
{{4-1-90 p.A-1497}}viewed the Bank's condition in greater detail.5 Mitchell inquired whether the Bank's employees were aware of the situation; Hoffman responded in the negative, stating that he would "rather keep it quiet." The meeting closed after Hoffman stated that he "did not want to be at the bank on the last day" and asked if the FDIC would grant him that courtesy.6 Based on the foregoing facts, I find that Hoffman was on May 6 in the possession of confidential information that the FDIC and the State intended to close the Bank because they had found it to be insolvent. I further find that Hoffman then believed that the Bank would be closed in the immediate future.
   At a May 11 meeting, Hoffman advised a majority of the Bank's Board of Directors that the preliminary examination results had been interpreted by the FDIC to indicate that the Bank had a negative net worth of approximately one million dollars. He stated that it would be necessary to discontinue plans for a public stock offering and to be prepared to make "plans to save some assets," possibly through the Bank's parent holding company, if efforts to raise additional capital remained unavailing.7
   On May 12, Mitchell supplied Hoffman with a detailed listing of adversely classified assets, and a slightly revised list was supplied to Hoffman on May 17.8 The loans appearing on both lists had been discussed during the examination with the Bank's loan officers, and, when the examiners "thought that [a] loan should be classified," the loan was discussed with Hoffman. On and after May 12, all documentation and other information relating to adversely classified assets was within the Bank's exclusive custody and control.
   At a May 18 meeting, FDIC and State officials informed the Bank's Board of Directors that the examiners had determined that the Bank had a $1,138,000 deficit capital position and was technically insolvent. In support of this declaration, the officials explained that the Bank's total equity capital and reserves amounted to $2,503,000, while assets in the amount of $3,403,000 were classified "Loss," assets valued by the Bank at $410,000 were classified "Doubtful" and assets carried by the Bank at $11,913,000 were classified "Substandard." The officials further explained that adversely classified assets had climbed to an excessive level of 29% of total assets, as compared with 24% in 1987, 12% in 1986 and 5% in 1985. The officials also advised the Board that the Bank was experiencing high loan losses and that 20% of the Bank's total assets were non-earning. In a effort to gain the Board's cooperation in selling the Bank to an outside bidder, the officials described the procedures the FDIC would use to transfer ownership of the Bank.9 Some members of the Board expressed concern that the Bank was going to be taken by the government agencies without due process.10 Although it was then anticipated that outside bidders would be inspecting the Bank's records during the weeks of May 16 and 23, FDIC officials indicated to the Board that the Bank would not be closed before "early in June."11 Based on the foregoing facts, I find that the members of the Bank's Board of Directors, including Chairman Hayes, were on May 18 in possession of reliable and well-supported confidential information that the FDIC and the State believed the Bank to be insolvent and that the government agencies were engaged in a course of action which would culminate in the closing of the Bank in the immediate future.12

5 While Hoffman and other members of the Bank's management challenged a number of adverse classifications at various times, it is undisputed that no one acting on the Bank's behalf ever attempted to supply the FDIC or the State with any evidence indicating that the classifications were in error.

6 Findings concerning the content of statements made during this meeting are based on Mitchell's credited recollection, while those concerning the sequence of statements are based on a contemporaneously prepared memorandum. Although Hoffman was present throughout the majority of the hearing, he did not testify, and I draw the adverse inference from his failure to do so.

7 The Bank's minutes so state.

8 Bank Director Brecht did not recall seeing such a list, and it is uncertain whether Hoffman ever made the list, which was the principal document underlying the examiners' determination of the Bank's insolvency, available to the Bank's Board of Directors.

9 The credited testimony of FDIC employees to this effect is corroborated by Mitchell's notes and FDIC Assistant Regional Director Densmore's May 23 memorandum.

10 I credit Densmore's admission to this effect on cross examination.

11 FDIC Field Office Supervisor Kroeger credibly so testified.

12 The fact that Bank Director Breeze billed the Bank for 32 hours of legal research performed between May 14 and 17 concerning ways to contest the examination lends support to Petitioner's contention that the members of the Board did not become aware of the implications of the examination for the first time on May 18.
{{4-1-90 p.A-1498}}    At a May 20 executive session of the Board attended by a majority of the directors, Hoffman reported that outside bidders would not begin reviewing the Bank's records until the week of June 1313 and that "the State and FDIC would close the Bank down on the fourth of July weekend." Hoffman stated that he had informed the FDIC that the Bank's management "would live up to the fourth of July closing." Hoffman suggested that the Board should be prepared to make a decision concerning future action on May 24, the day on which they would learn whether there was any possibility of obtaining a capital infusion from an outside investor. The fact that additional capital would not be forthcoming was reported to a meeting of the Board on May 25. In an executive session the following day, the Board voted to pay the Bank's employees for all vacation pay accrued as of May 31.14
   On June 1, Hoffman reported to an executive session of the Board that the "FDIC had already asked for a resolution from the Board to peacefully come in and shut the bank down."15 On the same day, the State transmitted to the Bank a summary of the findings of the examination, including the finding that "the bank is technically insolvent." The Bank was placed under conservatorship on July 7.
   B. Hoffman's Employment Contract
   Prior to the examination, it was Hoffman's announced intention to remain the Bank's employ until the expiration of his employment contract on December 1.16 At a May 20 executive session of the Board of Directors, "Hoffman said he would be resigning effective June 10th, assuming that the Bank was headed for foreclosure...." Later in the meeting, Hoffman clarified that his resignation was contingent upon the Bank's being unable to obtain outside capital on May 24. He then indicated that he "expected by June 10th to be cashed out on his contract." At the May 25 executive session of the Board, Hoffman announced that additional capital would not be forthcoming and "recommended to the Board that his contract be cashed out as of May 31." At the following day's executive session of the Board, Hoffman stated "that he would like to have a pay out of his contract as of May 30." A motion to this effect was made by Bank Director Tope and was passed over Bank Director Korting's objection.17
   Also on May 26, the Bank issued a cashier's check for $61,796.48 to Hoffman, who immediately converted the check to cash. The Bank's general ledger shows this payment to have been a "prepaid expense" for the period from June 1 through December 1, and the record of this case contains no other probative evidence as to the check's purpose.18 After receiving the check, Hoffman continued to act as the Bank's President until he was forced out when the Bank was placed under conservatorship on July 7; there is no probative evidence that he was removed from office or that he voluntarily left the Bank's employ prior to that date.19
   Based on the foregoing facts, as well as upon those set out in the preceding section of this Discussion, I find that Hoffman would not have requested the prepayment of his salary but for his possession of confidential information that the Bank was going to be closed in the immediate future. I further find that Hoffman's request was made in anticipation of the Bank's closure. Finally, I find that the Chairman and members of the Board possessed confidential information concerning the Bank's imminent closure when they acted on Hoffman's request and that they approved his selfdealing in anticipation of the imminent closure of the Bank.

13 Commencement of such a review at that time was blocked by the Board's action on June 10.

14 The Bank's minutes for meetings on May 20, 25 and 26 so state.

15 The Bank's minutes so state.

16 I credit Brecht's testimony concerning the 1987 preparation of a stock prospectus which contained Hoffman's announcement that the latter intended to leave the Bank after December 1 of 1988. Given the disclosure requirements adhering to prospecti, I infer that Hoffman's 1987 announcement did not encompass the possibility of an earlier departure.

17 The Bank's minutes of the meetings of May 20, 25 and 26 so state.

18 The terms "cash out" and "pay out" were never defined by any of the individuals involved in the payment to Hoffman.

19 This finding is based on Respondents' proposed Finding of Fact 162; the reference in the minutes of the June 1 executive session of the Board to Hoffman's "full time responsibilities as President" and the shortage of his time in the future for other pursuits due to those responsibilities; and the fact that the testimony of Petitioner's witnesses, the minutes of the Bank's management committees and State Examiner Parkin's notes contain repeated references to Hoffman's continued performance of the duties of President after May 30. Since McQueary never replaced Hoffman, I find Respondents' proposed Finding of Fact 164 to be immaterial to the question of Hoffman's tenure.
{{4-1-90 p.A-1499}} C. Self-Insurance Fund
   The Bank carried directors' and officers' liability insurance ("D&O insurance") from its inception until approximately 1986, when the policy lapsed.20 At a Board meeting of March 15, Ms. Eliason, a Bank employee assigned to procure D&O insurance, reported that the Bank had been turned down for a second time by one company, that the Bank's insurance agents were getting information from a "couple" of newly discovered companies and that the Bank had recently sent letters of inquiry to 11 other insurers. She ended her report by stating that "she would continue to look for more reasonable markets."21 At an April 19 Board meeting, Eliason reported that her 11 inquiries had produced five replies, in response to which she had completed two applications.22
   At the May 17 Board meeting, Eliason reported that she was still getting responses but that they were "not very encouraging," that the quotations received in May were higher than those received the prior month, that she had contacted several new companies to no avail and that she would keep looking. Hoffman, who at this time possessed confidential information causing him to anticipate the Bank's imminent closure, suggested that a self-insurance fund might be established. The Bank's records contain no prior reference to such a fund. Later during the meeting, Hoffman reported on the Executive Committee's examination of an "emergency preparedness" plan which included "the establishment of a selfinsurance fund" and employee severance pay "should the Bank not make it."23
   At the executive session of the Board on May 20, Chairman "Hayes went on to the next item for discussion which was the setting aside of a legal fund to protect directors from possible suits that might occur should the Bank close and for funds to resist the conclusions of the audit." The Board thereafter voted to retain Bank Director Breeze's law firm, Boyko, Davis, Dennis, Baldwin & Breeze (Law Firm), to study the two questions. At a May 25 executive session of the Board, "Breeze said that at the request of the Board his firm had put together and defined the defensive strategy in handling the State Division of Banking and FDIC and had looked at what was necessary to set up a fund for legal defense for officers, employees and directors."24
   At a May 26 executive session, the Board returned to a tabled motion "to establish a self-insurance fund and to decide on the course of action against the State." While the Bank's future action against the State was the subject of a motion during this meeting, no definitive action was taken concerning the self-insurance fund until June 10. During the Board's executive session on that date, Tope's motion to transfer $100,000 for "legal fees/insurance" to the Bank's parent company was passed, and Hoffman indicated that "he would purchase a CD at another bank with the funds."25 The same day, the Bank made a $100,000 payment into the account of its parent, Alaska Continental Bancorp ("Bancorp"),26 and this money was ultimately used to buy a certificate of deposit at another institution.
   The record does not indicate that the Bank had fully explored the possibilities of obtaining D&O insurance prior to establishing a self-insurance fund, and there is no evidence that the Bank considered the establishment of such a fund until the Bank's President came into the possession of confidential information causing him to anticipate the Bank's imminent closure. The selfinsurance fund was first discussed by the Board on May 17 as an explicit part of a strategic response to the examination of the Bank. Finally, the Chairman of the Board on May 20 candidly described such a fund as one "to protect directors ... should the Bank close...." Accordingly, I find that the self-insurance fund was established in anticipation of the Bank's imminent closure

20 Brecht so testified.

21 The Bank's minutes so state. While Brecht and Hayes testified concerning the Bank's attempts to secure D&O insurance, their accounts were unfortunately devoid of temporal referents. There is, therefore, no reason to believe that their testimony referred to efforts other than those documented in the Bank's minutes.

22 The Bank's minutes so state.

23 The Bank's minutes so state.

24 The Bank's minutes for the meetings of May 20 and 25 so state.

25 The Bank's minutes so state.

26 The record does not establish whether this transfer was made pursuant to the plan "to save some assets" through the parent company, which was suggested by Hoffman on May 11.
{{4-1-90 p.A-1500}}in order to benefit the members of the Bank's Board of Directors.27
D. Attorney's Fees
   At a May 25 executive session of the Board, Hoffman made a motion to retain the Law Firm in connection with the examination. After amendment, the Board voted to retain the Law Firm to advise them as to the options available to challenge the examination "with the potential to at least buy a little more time."28 As discussed in the prior section, Breeze articulated the Law Firm's mandate on May 25 as encompassing both the establishment of a self-insurance fund and the development of a defensive strategy against the FDIC and the State.
   The Law Firm was hired pursuant to an oral agreement that it would bill for its services on an hourly basis against a retainer which would be paid in advance into the Law firm's trust account; any money remaining in the account after completion of the requested services was to be returned to the Bank.29
   On May 27, the Bank credited $30,000 to the Law Firm's account with the notation "billing to follow." On June 17, the Bank made a $35,000 credit, carrying the same notation, to the Law Firm's account. A final credit for $35,000 was made to the Law Firm's account on June 30. The Law firm submitted invoices dated May 24 showing charges of $17,880, June 28 showing new charges of $73,378 and July 8 showing new charges of $15,612.30
   Based on the foregoing facts and upon those appearing in sections A and C of this Discussion, I find that the Bank's Board of Directors retained the Law Firm for two purposes: (1) to delay closure of the Bank and (2) to facilitate the establishment of a self-insurance fund in anticipation of the Bank's imminent closure. I further find that the record does not permit a determination of the exact amount expended by the Bank to effectuate the latter purpose. Finally, I find that it was not demonstrated by substantial evidence that the Bank's management knew the Bank was insolvent when they made the payments for legal services.31 Accordingly, I conclude that the Bank's legal expenditures to oppose the FDIC were not demonstrated to be improper under any applicable legal standard.32 Indeed, the FDIC's own procedures clearly countenance opposition to its actions by the banks subject to its authority.
E. Lobbying Fee
   In early March, Hoffman hired three lobbyists to represent the Bank in connection with a bill in the state legislature which, if enacted, would "assist small banks" by allowing them to borrow capital; several comparably situated banks agreed to share the lobbyists' fees.33 Although there is no evidence of a written employment agreement or a written authorization to pay the lobbyists, the Bank's records reflect that it issued a March 7 check to each of them in the amount of $12,500, which represented half of each individual's fee, for "professional expense."34
   After a Loan Committee meeting on May 3, Hoffman asked Hayes to join the lobbying effort in Juneau in view of the latter's extensive legislative service, which included four years as Speaker of the Alaska House of Representatives. When Hayes expressed

27 Given the perceived probity of the documentary evidence set out above, together with the fact that Brecht attended the meetings of May 17, 20 and 25, I am forced to reject as incredible his testimony that no one mentioned a connection between the possibility of closure and the establishment of a self-insurance fund. For the same reason, I reject Hayes' affirmation that the fund was not created in anticipation of the closing of the Bank. In this context, I further reject as incredible Brecht's unsupported testimony that the fund was "something for the long term good health of the financial institution."

28 The Bank's minutes so state.

29 Hayes' testimony to this effect was not controverted, was the only direct evidence of the terms and conditions of the Law Firm's employment and was corroborated by the weight of the documentary evidence. Thus, the Law Firm's invoices refer to having "received funds into trust account" from the Bank, and the June 1 Board minutes refer to a billing "which had been applied against the advance." Petitioner argues that written fee agreements are both standard practice and an ethical consideration. Legal ethics are not an issue in this proceeding, and Hayes' credited testimony concerning his fee agreement with the Law Firm for representation in this case establishes that written agreements are not necessarily "standard practice."

30 The fact that the credits to the Law Firm's account took place in advance of the Bank's receipt of corresponding invoices and, in part, prior to the time the Law Firm performed the corresponding work is the expected consequence of the retainer agreement described in text and is without relevance to the issues before me.

31 See note 39, infra, and accompanying text.

32 Petitioner has cited no legal authority in support of its argument that a bank may not oppose the FDIC's actions, and the testimony on which Petitioner relies in support of the argument was stricken from the record. Accordingly, Petitioner's argument must be rejected.

33 The Bank's minutes of the March 15 reflect Hoffman's report to this effect.

34 Although described as "professional expense," these checks were charged to the Bank's "prepaid expense" account.
{{4-1-90 p.A-1501}}reticence, Hoffman offered to pay Hayes "the same amount as the other lobbyists." After talking with the other lobbyists on the telephone, Hayes accepted the offer.35 Although there is no evidence of a written employment agreement or a written authorization to pay Hayes, the Bank's records reflect that it issued a check to him in the amount of $25,000 for "professional services."36
   The single meaningful factor which distinguishes the payment to Hayes from the payments to the other lobbyists is one of timing; while the other lobbyists were paid in advance, the Bank did not issue a check to Hayes until a month after he completed his lobbying. Hayes testified that there was a discussion of the "payment of bills" at the executive session of the Board of Directors on June 10, and the minutes of that meeting reflect that the Board approved a $20,000 payment to Bank Director Brecht37 and the $100,000 funding of the self-insurance fund. It was in this context, Hayes further testified, that one of the directors asked Hoffman if Hayes had been paid for lobbying on behalf of the Bank; after a negative reply, "there was conversation to the effect" that Hayes should be paid. Based on the facts set forth in this and preceding sections of this Discussion, I find that the payment to Hayes was made in anticipation of the imminent closure of the Bank.
F. Analysis
   Petitioner contends that the payments made to Hoffman, Bancorp, the Law Firm and Hayes were unsafe or unsound banking practices. Respondents demur. All of these payments share certain characteristics. All took place after the Bank's management had come into the possession of reliable confidential information that the Bank was to be closed in the immediate future because the FDIC and the State had determined that it was insolvent. In fact, all of the payments were made in anticipation of the Bank's imminent closure. All of them constitute self-dealing in that each was made with the concurrence of one or more members of the Bank's management who personally benefited from the payment. In each instance, the degree of benefit either existed or was enhanced as a direct result of the fact that the Bank was about to close. Thus, Hoffman and Hayes benefited because the receipt of cash while the Bank was still open was of greater value to them than would have been a claim against a closed bank; the Bank's Board of Directors benefited by securing indemnification against future litigation which would not have been forthcoming after the Bank had closed.
   I am therefore compelled to find that the affected members of the Bank's Board of Directors acted on confidential information and in anticipation of the Bank's imminent closure to benefit themselves by removing assets from the Bank to the detriment of all who might have had a claim on those assets after the Bank closed. Since that group of claimants included, not only the Bank's creditors, but its depositors and shareholders, I further find that the payments in question were made in breach of the affected directors' fiduciary duty. For the foregoing reasons, I conclude that the payments to Hoffman, Bankcorp, the Law Firm (to the extent that these payments were for services related to the establishment of a self-insurance fund) and Hayes were unsafe and unsound banking practices, as alleged.38
   While technically moot, a brief reference to certain issues raised by the parties may be helpful. First, the record does not demonstrate whether the Bank was in fact insolvent. At the outset of the hearing, I ruled that this issue was beyond the proper scope of the proceeding; the probative value

35 Hayes' uncontroverted testimony to this effect is supported by Brecht's hearsay testimony and memorandum. Petitioner argues on reply brief that, because the only direct evidence concerning the terms of Hayes' employment came from his testimony, "there is no evidence that there was an agreement with the Bank to pay him the same amount as the other lobbyists." Petitioner cites no authority for this relatively unusual proposition, and I am aware of none. Petitioner also contends that Hayes' failure to timely register as a lobbyist, the high cost of his services and the reimbursement of his expenses prove that no agreement existed between him and the Bank. Even in the absence of Hayes' and Brecht's evidence, these facts fall short of substantial evidence.

36 Although described as being for "professional services," the check was charged to the Bank's "legal and professional fees" account.

37 Petitioner did not allege that this payment constituted an unsafe or unsound banking practice.

38 This conclusion is not inconsistent with the credited expert testimony of Kroeger, who condemned both the use of confidential information by "insiders" and the "diversion of funds" at a time when "closure was likely," and Densmore, who expressed concern that a payment to a director was a transfer of "monies out of the bank prior to its being closed."
{{4-1-90 p.A-1502}}of Petitioner's evidential proffers was therefore restricted, and the Respondents were prohibited from introducing any evidence concerning this issue. Accordingly, any attempt to again raise this issue after the conclusion of the hearing must be foreclosed by due process considerations. Second, Petitioner has not demonstrated by substantial evidence that the Respondents knew or should have known that the Bank was insolvent at the time the payments were made. Respondents contend that they believed that the Bank was solvent based in major part on a Price-Waterhouse audit, which had been updated to a time contemporaneous with that of the examination. Petitioner's procedural objections to the receipt of that audit in evidence leaves the record bare of any evidential basis for evaluating the reasonableness and propriety of the Board of Directors' purported reliance on the audit.39 Finally, I find the uncontested attempts of the Bank's management to halt or delay the impending termination of their stewardship over the institution's affairs to be in no way logically inconsistent with their demonstrated activities in anticipation of the closure of the Bank. Those activities, of course, included the self-dealing payments here at issue.
FINDINGS OF FACT40
   1. At all times pertinent to this proceeding and until August 3, the Bank was a corporation existing and doing business under the laws of Alaska and was an insured state nonmember bank.
   2. At all times pertinent to this proceeding, Hoffman was President of the Bank, a member of the Bank's Board of Directors and a participant in the conduct of the Bank's affairs.
   3. At all times pertinent to this proceeding, Hayes was Chairman of the Bank's Board of Directors and a participant in the conduct of the Bank's affairs.
   4. On April 18, the FDIC and the State commenced an examination of the Bank as of March 31.
   5. On or before May 6, Hoffman by virtue of his position came into the possession of confidential information that the FDIC and the State had found the Bank to be insolvent and that they intended to close the institution. At the time, Hoffman believed that the Bank would be closed in the immediate future.
   6. On May 11, Hoffman advised the Bank's Board of Directors that the preliminary results of the examination indicated that the Bank had a negative net worth of approximately $1,000,000, and he suggested that the Board make plans to "save some assets" if additional capital could not be secured for the Bank.
   7. On May 17, FDIC examiners met with Hoffman and provided him with a final list of adversely classified assets, which had been compiled during the examination.
   8. On or before May 18, the remaining members of the Bank's Board of Directors by virtue of their positions came into the possession of confidential information that the FDIC and the State had determined that the Bank was technically insolvent and that those agencies were engaged in a course of action which would culminate in the closing of the Bank in the immediate future.
   9. On May 20, Hoffman told the Bank's Board of Directors that he had informed the FDIC that the Bank's management was prepared to cooperate with a closure of the Bank on July 4.
   10. On May 26, the Bank's Board of Directors voted to pay the Bank's employees for all vacation pay accrued as of May 31.
   11. On June 1, Hoffman told the Bank's Board of Directors that the FDIC had asked the Board to pass a resolution allowing closure of the Bank.
   12. On or about June 1, the State transmitted a summary of its examiner's findings to the Bank.
   13. FDIC and State examiners monitored activities at the Bank from May 18 to August 3.
   14. On May 26, the Bank issued a cashier's check for $61,796.48 to Hoffman, who immediately converted the check to cash.
   15. The payment to Hoffman was made in connection with his employment contract, and the Bank's records describe the purpose of the check as a "prepaid expense" for the period from June 1 to December 1.

39 The evidential standard which Petitioner must meet in this proceeding is one of substantial evidence. See e.g., Sunshine State Bank v. FDIC, 783 F.2d 1580, 1584 (11th Cir. 1986).

40 Requested Findings of Fact and Conclusions of Law not appearing below have been modified or rejected in conformity with the foregoing Discussion or have been rejected as moot, redundant or irrelevant.
{{4-1-90 p.A-1503}}    16. After receiving the check, Hoffman continued to act as the Bank's President until the Bank was placed under conservatorship on July 7.
   17. Hoffman requested the prepayment of his salary while in possession of confidential information indicating the Bank's imminent closure, and his request was made in anticipation of that closure.
   18. The Bank's Board of Directors approved the payment to Hoffman while in possession of confidential information indicating the Bank's imminent closure, and their approval was given in anticipation of that closure.
   19. On or about June 10, the Bank at the direction of its Board of Directors issued a cashier's check for $100,000 to Bancorp.
   20. While the Bank's records described the purpose of that check as "prepaid insurance," the Bank did not have D&O insurance and the proceeds of the check were intended to constitute a self-insurance fund to cover any liability of the Bank's officers and directors resulting from potential lawsuits arising out of their activities at the Bank.
   21. The Bank's Board of Directors established this fund while in possession of confidential information indicating the Bank's imminent closure, and the fund was established in anticipation of that closure.
   22. The self-insurance fund potentially benefited every member of the Bank's Board of Directors.
   23. On May 27, the Bank credited $30,000 to the Law Firm's account pursuant to an oral agreement, which provided that the Law Firm would bill for services on an hourly basis against a retainer paid by the Bank into the Law Firm's trust account. On June 17 and again on June 30, the Bank credited $35,000 to the Law Firm's account pursuant to the oral agreement.
   24. The Law Firm submitted billings for costs and services of $17,880 on May 27, $73,378 on June 28 and $15,612 on July 8. An indeterminate portion of the services represented by these billing were directed to the Bank's establishment of a self-insurance fund.
   25. The Bank's Board of Directors approved the payment of attorneys' fees to facilitate the establishment of a self-insurance fund while in possession of confidential information indicating the Bank's imminent closure, and the payment of those fees was made in anticipation of that closure.
   26. On June 10, the Bank issued a cashier's check for $25,000 to Hayes.
   27. The Bank's records describe the purpose of that check as "professional services"; the term "professional" was generally used by the Bank to describe lobbying services.
   28. Prior to his association with the Bank, Hayes was an engineer, a real estate developer and a member and—for four years— Speaker of the lower house of Alaska's legislature; Hayes lobbied on the Bank's behalf in Juneau between May 4 and 9.
   29. The payment to Hayes was made when Hayes and the Bank's Board of Directors were in possession of information indicating the Bank's imminent closure, and the payment was made in anticipation of that closure.

CONCLUSIONS OF LAW

   1. At all times pertinent to this proceeding, the Bank was subject to the provisions of the Federal Deposit Insurance Act, 12 U.S.C. §§1811-1831d, the Rules and Regulations of the FDIC, 12 C.F.R. Ch. III, and the laws of Alaska.
   2. The FDIC has jurisdiction over the Respondents and over the subject matter of this proceeding.
   3. The evidential standard which the FDIC must meet in this proceeding is one of substantial evidence.
   4. The payment made to Hoffman described in Findings of Fact 13 through 17 constituted an unsafe or unsound banking practice within the meaning of 12 U.S.C. §1818(b).
   5. The establishment of the self-insurance fund described in Findings of Fact 18 through 21 constituted an unsafe or unsound banking practice within the meaning of 12 U.S.C. §1818(b).
   IT IS FURTHER ORDERED that:
   1. Should Respondents fail to reverse the foregoing transactions, (a) Hoffman shall reimburse the Bank to the extent that he personally benefited from any of the transactions identified in this Order and (b) Hayes shall reimburse the Bank to the ex-
{{4-1-90 p.A-1504}}tent that he personally benefited from any of the transactions identified in this Order.
   2. The effective date of this Order shall be thirty days after it is issued by the Federal Deposit Insurance Corporation.
   Done at Washington, D.C., this 19th day of May, 1989.
APPENDIX
TRANSCRIPT CORRECTIONS

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7 23 ceo CEO
10 9 8 B 8(b)
10 18 8 B 8(b)
11 8 8 A 8(a)
11 9 8 B 8(b)
11 11 order Order
11 12 8 B 8(b)
11 19 8 B 8(b)
11 19 order Order
12 2 8 B 8(b)
12 31 8 B 8(b)
12 18 findings Findings
12 18 fact Fact
12 18 conclusions Conclusions
12 20 of to
14 18 8 B 8(b)
15 16 plead pled
16 11 some civil
17 9 ; !:
22 3 on or— are
24 12 on are
24 13 five, five
25 24 amended Amended
31 6 cruxt crux
45 9 penalty penalties
48 5 lunch and luncheon
50 8 witnesses witness
83 25 owned other
84 1 owned other
115 20 and an
130 12 1988 1987
133 14 eic EIC
147 11 lost loss
188 23 —may in question, made him question
250 18 conclusiory conclusory
283 3 stated started
284 4 Jack Jeff
290 16 of and
299 12 the proceedings these proceedings
299 13 respondent. respondent,
299 14 they that
299 19 showing showing of
299 19 desire, desire
319 25 amorphis amorphous
328 13 Tote Tope
354 9 minute minutes
371 2 Mitchell's Mitchell as

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384 8 Parker Parkin
385 10 sot hat so that
398 10 jut just
405 20 left leapt
405 23 left leapt
444 16 A Q
459 16 ovation novation
459 20 ovation novation
465 24 , inadvertently inadvertently,
465 25 whether, whether
475 16 tot he to the
480 6 apologized apology
481 13 ovation novation
491 12 accepts acceptance
492 12 Tote Tope
499 6 it's that's
501 2 At issue Had issued
501 15 indication indicate
509 4 E and O D and O
550 12 he the
553 1 is was
560 15 petition her petitioner
561 18 The They
584 12 aggradation accreditation
652 2 you your
696 20 eith eight
743 17 of or
759 14 officer office
771 2 camel (ph) CAMEL
771 13 assay asset
796 24 managing management
882 6 The They
886 17 junction juncture
903 9 an one
920 12 Work Works
934 5 is it
934 8 CAEL CAMEL
938 9 my to
949 20 consider considered
979 25 amorphus amorphous
987 22 fete de complete fait accompli
1044 15 nodd you nod your
1082 22 sit set
1105 9 objection-able objectionable
1108 25 review interview
1163 14 evects events
1172 10 Relevant Relevance
1195 8 Ms. Mr.
1214 21 Sanyo Sano
1242 10 fire hire
1246 19 we I
1290 25 If—if If—in
1443 9 that say that
1500 13 invest investment
1560 22 President Speaker

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1565 2 the the meeting of
1565 7 the the meeting of
1614 25 Vehicle Traffic
1684 15 on
on a 1687 23 em them 1693
16 Waterhouse Waterhouse audit 1695 20
em them 1699 3 it
715 4 reco RICO

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