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   [5154A] In the Matter of Frank E. Jameson, Docket No. FDIC-89-83e(6-12-90).

   Officer and director removed from office and prohibited for three years from participation in affairs of Bank or any insured institution. (This decision was affirmed by the U.S. Court of Appeals for the Fifth Circuit, 931 F.2d 290.)

   [.1] Directors and Officers — Removal or Prohibition — Effect of Resignation
   FDIC has jurisdiction to issue Notice of Removal and Prohibition despite Respondent's resignation as director and officer.

   [.2] Participation in Conduct of Affairs — Independent Consultant — Factors Determining
   In determining whether an independent consultant was participating in the conduct of Bank's affairs, FDIC looks to nature of work performed, ability of individual to cause harm to institution, and relationship between institution and individual.

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   [.3] Directors and Officers — Duties and Responsibilities — Informing Fellow Directors
   When Bank's Board of Directors is required to approve a loan to respondent, who is a director and vice president of Bank, and Bank's president fails to inform Bank's Board of Directors, Respondent is obligated to raise the matter.

   [.4] Directors and Officers — Ratification of Prior Actions — Illegal Act
   Bank's Board of Directors has no authority to ratify an illegal act.

   [.5] Directors and Officers — Removal or Prohibition — Falsification of Records
   Falsification of Bank records is an unsafe or unsound practice and evidence of personal dishonesty, even where Bank suffered no loss and Respondent did not intend to profit by falsifications.

   [.6] Removal or Prohibition — Determination of Term
   FDIC may prohibit an individual from participation in affairs of any insured institution for a limited term to reflect the nature of the offense and mitigating circumstances.

In the Matter of
FRANK E. JAMESON, individually
and as vice president, a director, and a
person participating in the conduct of
the affairs of FIRST STATE BANK
LIBERTY, TEXAS
(Insured Nonmember State Bank)
DECISION AND ORDER

DECISION

I. PROCEDURAL BACKGROUND

   A Notice of Intention to Remove From Office and to Prohibit From Further Participation ("Notice") was served by the Federal Deposit Insurance Corporation ("FDIC") on Frank E. Jameson ("Respondent" or "Jameson") on April 27, 1989. Based on allegations that Respondent had engaged in unsafe or unsound banking practices, violations of law and regulation and/or breaches of fiduciary duty, the Notice sought Respondent's removal from banking pursuant to Section 8(e) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1818(e). Respondent's Answer denied the allegations of wrongdoing and asserted an affirmative defense based on jurisdiction.
   A hearing was held in Beaumont, Texas on October 24 and November 15, 1989, before Administrative Law Judge Steven M. Charno ("ALJ"). Both parties filed Proposed Findings of Fact, Conclusions of Law, Briefs, and Reply Briefs. The ALJ filed his Recommended Decision with the Office of the Executive Secretary on March 7, 1990, in which he fund that FDIC Enforcement Counsel "had failed to meet its burden of proof as to virtually every statutory factor which it was required to establish in order to prevail in an action to remove an individual from banking," Rec. Dec. at 11.1Enforcement Counsel for the FDIC filed Exceptions to the ALJ's Recommended Decision on March 27, 1990. This case is now before the Board of Directors of the FDIC ("Board") for final decision and order.

II. FACTUAL SUMMARY

   Following a five year stint with the Texas Department of Banking, as a Commissioned Bank Examiner and then as a supervisor, in May 1984, Respondent was hired by the First State Bank of Liberty, Texas, ("Bank") as an assistant vice president. His duties included, among other things, review of loan files to ascertain whether they contained appropriate documentation. From January 1, 1988, through March 31, 1989, respondent served the Bank in the capacities of vice president and advisory director. (Jnt. Stip. No. 4.)
   In late March 1988, Respondent met with the Bank's President, Benny Rusk, and requested a loan to pay some home repair


1 Citations in this Decision shall be as follows:
Recommended Decision — "Rec. Dec. at ____."
Transcript — "Tr. at ____."
Exhibits — "FDIC Ex. ____", or "Resp. Ex. ____."
Joint Stipulations — "Jnt. Stip. No. ____."
{{2-28-91 p.A-1542.1}}expenses.2The President responded by telling Respondent "it won't be necessary to borrow the money . . . the Bank will take care of it." (Tr. at 55.) When Respondent expressed concern as to how other employees would view such assistance, the President instructed Respondent to "handle the transaction" in the way Respondent "would feel most comfortable with the way [he] received the money." (Id.). Respondent submitted a "statement for issuance of [a] check" which indicated on its face that it was a "[b]ill in the amount of $3,100.00 for reimbursement of expenses and time in showing and maintaining other real estate properties after banking hours for the years of 1984 and 1985." The statement acknowledged that Respondent would be liable for income in the amount of $3,100 and bore the following signature line:

   "Sean's Construction Company
   By: /s/ Frank E. Jameson."

Contemporaneously with the submission of this statement, a check dated March 31, 1988, for $3,100 payable to Sean's Construction Company was prepared pursuant to Respondent's instructions. The check was signed by President Rusk, and Respondent endorsed it and converted the proceeds to his personal benefit.
   At the end of June 1988, Respondent again met with President Rusk and requested further financial assistance with some outstanding bills. Again, Rusk told Respondent "the Bank would be able to help [him]" and told him to handle it in the best manner to benefit [him]." (Tr. at 57-8). Respondent submitted a June 27, 1988, statement which directly paralleled the March 31 document. He explained to the Bank's cashier that, this time, $5,000 was to be paid by means of a check payable to Sean's Construction Company. After verifying the accuracy of Respondent's instructions with the Bank's President, the cashier issued and signed the requested check. Respondent deposited the check to his personal account.
   Sean's Construction Company is a fictitious entity named after Respondent's son. At Respondent's direction, both checks payable to Sean's Construction Company were reflected on the Bank's books and records as "repairs and maintenance" expenses, rather than as compensation to Respondent.
   Following the examination of the Bank in October 1988, Jerry Albright, another of the Bank's officers learned of the payments to Respondent, was "very disgruntled" that Respondent had received compensation which he had not received, complained to the FDIC about the "bonuses," and later submitted documentary proof of the transactions to the FDIC. (Tr. at 193.)
   In response to questions from bank regulators, Respondent set forth in a January 20, 1989, letter to the Texas Banking Commissioner his explanation of the transactions. Respondent asserted the following:

    I justified the funds as a reimbursement of expenses I had incurred over the years, in lieu of being issued as salary or bonus. A major factor in this decision was to keep `goodwill' among the other employees. In a bank such as ours, everyone knows each others' salaries, etc. No one else had received a sizeable bonus over the last few years, and I did not want any `hard feelings' among the staff. This has occurred in the past; it happens every time someone gets a larger raise than the next person. [FDIC Ex. 13.]
   Significantly, however, this letter does not mention the fictitious payee, the falsified bank records or the fact that Respondent had already received a $3,000 bonus for 1984 and an $11,500 bonus for 1985. (Resp. Ex. 6 and 7).
   On February 4, 1989, the board of directors of the Bank was for the first time made aware of the two transactions by means of the disclosures in Respondent's letter, and was told by President Rusk that the $8,100 was an "early bonus" which he "did not want the other employees to become aware of. . . ." (Tr. at 192-3.) The board thereafter unanimously resolved to ratify the payment of both bonuses.
   Respondent resigned his position with the Bank effective March 31, 1989, but was retained by the Bank commencing the next business day as "a temporary consultant" for the sum of $30.00 per hour, "to perform the duties of documentation of loan files and farm loan documentation." (Jnt. Stip.

2 President Rusk stipulated to his own removal from banking pursuant to section 8(e) of the Act. The facts surrounding that action are not part of the record herein.
{{2-28-91 p.A-1542.2}}No. 11.) The Bank was closed by the Texas Banking Commissioner on August 17, 1989. (Jnt. Stip. No. 3.)

III. DISCUSSION

   Central to the ALJ's recommendation is the credence given by the ALJ to the Respondent's explanation of his motivation and actions and the finding that his actions were sufficiently justified. As a result of his credibility determination, the ALJ goes to great lengths to strain the facts and his legal analysis of this case to reach his conclusion. The Board has very carefully reviewed the entire record of this case in light of the serious nature of the sanctions at issue. For the reasons set forth below, on the basis of its detailed study of this record, the Board rejects the ALJ's conclusions of law and findings of fact and orders the removal of Respondent.3

A. JURISDICTION

   The FDIC Notice alleges jurisdiction under section 8(e)(1) and section 8(e)(2) of the Act. These sections authorize the removal of a respondent who, in the case of section 8(e)(1), is a director or officer of an insured bank, or, under section 8(e)(2) is a "person participating in the conduct of the affairs" of an insured bank. The ALJ found that neither of these sections conferred jurisdiction over Respondent. As discussed below, the Board disagrees and finds that jurisdiction lies under either section.

Section 8(e)(1)

   [.1] The parties stipulated that the Notice was served on the Respondent after he had resigned as an officer and director. (Jnt. Stip. No. 12.) Notwithstanding this stipulation, FDIC enforcement counsel asserts that jurisdiction is appropriate under section 8(e)(1) by application of section 905(a) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub. L. No. 101-73, §905(a), 103 Stat. 183, 459 (codified at 12 U.S.C. §1818(i)(3)). That provision states that a party's resignation will not affect a regulatory agency's jurisdiction "to issue any notice and proceed under this section against any such party, if such notice is served before the end of the 6-year period beginning on the date such party ceased to be such a party with respect to such depository institution (whether such date occurs before, on, or after the date of enactment of the paragraph)." [Emphasis Added].
   The ALJ found that jurisdiction cannot be premised on section 8(e)(1) based upon a narrow reading of a sentence in the Conference Report discussing section 905(a). H.R. CONF. REP. NO. 222, 101st Cong., 1st Sess. 440 (1989). (Rec. Dec. at 7). Paragraph 4905 of the Conference Report provides, in pertinent part: "This section does not create a new offense; it is procedural in nature, and can therefore be applied retroactively to yet undiscovered misconduct and to currently pending supervisory matters that have been stayed awaiting congressional action."
   The ALJ read this sentence as creating a limitation on the applicability of section 905(a), finding that "the statute on its face permits retroactive application only where a proceeding had not been formally commenced by the filing of a notice prior to the enactment of FIRREA." The Board finds the ALJ's interpretation to be in error.
   The language of section 905(a) is clear, unambiguous and without limitation (other than the six year time frame). Therefore, reference to the Congressional Report is unnecessary. Even if reference to the Congressional Report were appropriate, the Board reads the language relied upon by the ALJ as merely illustrative of the type of situation in which the statute may be applied, rather than creating a limitation not found in the statute. The Board notes that other sections of FIRREA were specifically limited to prospective application.4Thus, Congress well knew how to create limitations on the applicability of certain sections of this legislation and cannot be deemed to have intended a limitation in section 905(a) which does not appear in it.5The point of the Conference Report is that section 905(a) is procedural in nature. Section 905 does not create a new offense, i.e., it does not make illegal those acts which previously


3 The Board's findings of fact and conclusions of law are set forth in this Decision.

4 Compare Section 905 with Section 903 of FIRREA which sets forth the grounds for removal and which specifically states that it is to be applied prospectively.

5 In fact, several recent decisions of the U.S. Courts of Appeal support the position that it was the intention of Congress in enacting FIRREA to grant the FDIC and other federal banking regulators broad powers to redress the massive problems facing the industry. See e.g., In re Resolution Trust Corporation, 888 F.2d 57 (8th Cir. 1989); Thurman v. FDIC, 889 F.2d 1441 (5th Cir. 1989).
{{2-28-91 p.A-1542.3}}had been lawful. Section 905 simply allows the FDIC to take enforcement action against a person who has committed the already wrongful conduct. Thus, section 905(a) operates to confer jurisdiction over the Respondent under section 8(e)(1) because Respondent was an officer and "advisory" director of the Bank at the time the events at issue took place and he was served with Notice by the FDIC within the applicable limitations period.

Section 8(e)(2)

   Subject matter jurisdiction under this section is dependent upon whether the Respondent was a "person participating in the conduct of the affairs of the Bank" at the time he was served with the Notice. It is uncontroverted that the term is not defined in the Act and has not been judicially interpreted in the context of section 8(e)(2). In reaching opposite conclusions regarding the meaning of the term, both FDIC enforcement counsel and the ALJ rely upon analysis of the term in an analogous statutory scheme contained in Fed. Sav. & Loan Ins. Corp. v. Hykel, 333 F. Supp. 1308, 1311 (E.D. Pa. 1971).
   The issue presented to the district court in Hykel was whether Hykel's activities in acting as a real estate agent on behalf of a savings association constituted "participation in the affairs of the institution." The court held that such activity did constitute participation in the affairs of the institution and that Hykel's removal was appropriate. In reaching this conclusion, the court looked to the legislative history and noted that the removal provisions were remedial in nature and designed to protect the institutions, the depositors, and the interest of the Government which underwrites the insuring agencies from the activities of those individuals in responsible positions which may tend to undermine public confidence. See FSLIC v. Hykel, supra, 333 F. Supp. at 1311.
   Mr. Hykel was a real estate agent described by the court as having "broad discretionary powers with respect to the sale or rental of property." The ALJ relied on the court's analysis of whether the agent's continued participation in the same affairs offered any opportunity for a recurrence of dishonest behavior. The ALJ distinguishes Hykel because he finds that Respondent's consultancy involved "virtually no operational discretion" and that the record "is devoid of evidence that his consultancy provided any other opportunity to engage in dishonest behavior." He thus concluded that Respondent was not a person participating in the affairs of the Bank and that the FDIC did not have personal jurisdiction over Respondent under section 8(e)(2). (Rec. Dec. at 8.) The Board reaches the opposite conclusion

   [.2] This Board has already stated that the status of a person as an independent contractor rather than an employee will not be determinative of whether such person is participating in the affairs of an institution. See FDIC-85-25e, 2P-H FDIC Enf. Dec. ¶5082 (February 3, 1987). Rather, the Board will look to the nature of the work performed, the ability of a respondent to cause harm to an institution, and the relationship between the role performed by respondent and the institution. Respondent's activities during his consultancy were an integral part of the Bank's loan process. His assessment of the adequacy of a loan file signaled its final approval for funding or the need for further documentation. Respondent admitted that this was the same work he performed as an assistant vice president of the Bank. (Tr. at 51–52). The fact that real estate agent Hykel had to get approval from his principal in order to close a deal did not keep the court from finding Hykel had "broad discretionary powers." Similarly, Respondent's discretion is not diminished by the fact that as a consultant he had to report to Bank employees for final action. In addition, on a daily basis Respondent had access to loan records and other records of the Bank. Although there is no evidence that Respondent ever again modified, falsified, or destroyed records, he had the opportunity to do so during his consultancy.
   The Board does not read Hykel as requiring a person to have unfettered discretion or to have actually subsequently injured the institution in order to be "participat[ing] in the affairs of an institution." In the instant case, Jameson had sufficient influence on the decision whether to fund loans and sufficient opportunity to harm the institution to pass the jurisdictional threshold.

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B. The Merits

   To justify removal of an officer or director under section 8(e)(1), the FDIC must prove by a preponderance of the evidence that: (1) the officer or director engaged in (a) a breach of fiduciary duty to the bank or (b) an unsafe or unsound banking practice; (2) the breach or practice caused (a) the bank to suffer substantial financial loss or other damage or (b) the officer or director to receive financial gain; and (3) the breach or practice was one (a) involving personal dishonesty or (b) demonstrating a willful or continuing disregard for the safety or soundness of the bank.
   Similarly, the removal pursuant to section 8(e)(2) of a person participating in the affairs of an insured bank requires the FDIC to prove: (1) the person's conduct or practice resulted in substantial financial loss or other damage to the bank; (2) the conduct or practice evidenced (a) personal dishonesty or (b) willful or continuing disregard for the safety or soundness of the bank; and (3) the conduct or practice evidenced the person's unfitness to participate in the conduct of the affairs of the bank.
   The pivotal finding made by the ALJ, and upon which his other findings are based, is that "the record evidence overwhelmingly establishes that the Bank's Board of Directors delegated its compensation-setting authority to the President and that he exercised that delegated authority to grant Respondent bonuses totalling $8,100." (Rec. Dec. at 9.) Thus, the ALJ finds that Respondent did not engage in the breach of fiduciary duty and unsafe or unsound banking practice of obtaining Bank funds without proper authorization. (Id.) Upon a thorough review of the record, the Board concludes that this finding and the ALJ's findings which flow from it, are erroneous.
   1. Authorization of the Payments to Respondent.
   The record is clear that at the time the Bank President indicated to Respondent that the Bank would "take care of" him, the President did not have the actual delegated authority to set or grant bonuses to officers. (Tr. at 174; Jnt. Stip. No. 5.) Although the record shows that Bank President Rusk had in the past given bonuses to officers, it also shows that these bonuses were announced by the President and then, relatively contemporaneously, ratified by the board of directors. (Tr. at 174, 183.) This was not the procedure followed with Respondent's "bonuses."6
   In initially seeking a loan, Respondent quite properly approached the Bank President. When President Rusk informed him that the Bank "would take care of him," the Board finds that it was understandable, given the nature of this Bank, for Jameson to expect Rusk to take responsibility for raising the matter with the board for approval or ratification.

   [.3] However, this does not eliminate Respondent's independent fiduciary responsibilities. With the passage of time and failure of Rusk to act, it became incumbent upon Jameson to raise the matter. As an officer and advisory director Respondent is deemed to have constructive, if not actual, knowledge of the requirements of the Bank's bylaws. At no time did Respondent raise the question of board approval with President Rusk, or with the board directly.
   One year later, after the regulatory authorities were informed about these transactions, the Bank's board of directors ratified the two bonuses totalling $8,100.00. Presumably, this is the delegation upon which the ALJ relies.7However, we find this delegation to be insufficient as a matter of law and thus, inoperable. The record establishes that, at the time of the vote to ratify the bonuses, the board members were not aware of all aspects of the transactions and the underlying material facts. Consequently, the ratification is not valid. Lang. v. Lee, 777 S.W. 2d 158 (Tex. Ct. App. 1989).
   The ALJ relies upon "the disclosures in Respondent's letter" to the Texas Banking Commissioner and the language of the Bank board's February 4, 1989, resolution ratifying the bonuses in finding full disclosure and thus a valid ratification. (Rec.


6 Obviously, the fact that the President and board of directors may have engaged in improper acts in the past is not a defense to the allegations of this case.

7 The record contains no evidence of any previous delegation. Mr. Delaney, a member of the board of directors, testified that it was understood that President Rusk did whatever he wanted regarding bonuses. (Tr. at 171.) In addition, the resolution of the board of directors contains the post-hoc, self serving statement that Rusk "had the express blanket authority from the board to remunerate Frank E. Jameson, or any other officer or employee for their services, without individual prior board approval or authority, and did so in this instance as a result of that longstanding custom and precedent." Ex. 4. Neither of these statements is the equivalent of an amendment of the bylaws.
{{2-28-91 p.A-1542.5}}Dec. at 6; Rec. Dec. at 6, fn. 18.) Further, the ALJ declines to give weight to the testimony of Bank Director Wiggins that he did not recall anyone at the ratification meeting commenting on the use of a fictitious payee. (Rec. Dec. at 6, fn. 18.) The ALJ makes no finding with respect to the board having knowledge of the false Bank records.
   The Board finds that the record establishes that the board did not have knowledge of the false bank records. First, Respondent's letter to the Banking Commissioner, his former employer and friend, is absolutely silent with respect to either the fact that Respondent authorized checks to be made payable to a fictitious payee, or that he directed inaccurate entries to be made in the Bank's records. On its face it is insufficient to support ratification of these transactions.
   Second, the sentence which the ALJ finds "establishes that the [b]oard knew Respondent's bonus checks had been drawn to a fictitious payee" states in pertinent part:
    WHEREAS, based on usual and customary banking practices in other small banks, payment to Frank E. Jameson in the manner in which it was done was for the sole purpose of avoiding in-house employee bickering and internal politics. . . [Rec. Dec. at 6, fn. 18; Ex. 4.]
   Under the circumstances of this case the Board finds this sentence to be too vague to evidence full, material disclosure. The operative phrase, "in the manner in which it was done", is subject to more than one interpretation. For example, it may refer to the failure to seek earlier ratification so that there would be no record of the bonus available to other officers. It is not specific enough to "establish" that the board knew about the fictitious payee. This is all the more true in light of Wiggins' testimony, no matter how little it is credited. In the absence of any testimony that full disclosure was made, it is entitled to some weight, and the Board has taken it into consideration.

   [.4] Even if the Board were to agree with the ALJ regarding the meaning of the above quoted sentence, it does not find any evidence that the Bank's board was aware at the time of the ratification that Respondent had directed false entries to be made in the Bank's records to further disguise these transactions. Because the Board finds that falsification of bank records is a serious breach of fiduciary duty and an unsafe or unsound banking practice, the failure to disclose this fact to the ratifying body is a material omission which defeats the ratification. Accordingly, the Board finds that Respondent obtained Bank funds without proper authorization and, therefore, engaged in a breach of fiduciary duty and an unsafe or unsound banking practice.
   Finally, while the Bank's board of directors could validly ratify the act of giving Respondent a bonus, ratification of the falsification of the Bank's records would only establish the board's complicity in the deception and would, in-and-of-itself, be a breach of fiduciary duty. Therefore, even assuming, arguendo, that the Bank's directors had been aware of the falsification of records, the Board holds that the Bank's board of directors is without authority to excuse such an illegal act.

   2. Falsification of Records.

   [.5] The ALJ found that "Respondent effectively admitted intentional falsification of the Bank's records, and the expert opinion of record is unanimous that such a falsification, regardless of motive, is both a breach of fiduciary duty and an unsafe or unsound banking practice." (Rec. Dec. at 10.) He further found "credible expert opinion supporting the argument that Respondent's falsifications damaged the integrity of the Bank's records." Id. The Board concurs and adopts these findings.8
   Notwithstanding these findings, however, because the ALJ also found that the payments to Respondent were authorized, he finds that the breaches occurred after authorized payments were made and thus, "the falsifications could not cause either a loss to the Bank or a gain to the Respondent." This conclusion requires a very strained interpretation of the facts of this case, with which the Board does not concur.
   In seeking to weave the facts of this case into a coherent tapestry, it is impossible to segregate the breach of fiduciary duty and unsafe and unsound practice related to the falsification of Bank records from the compensation received by Respondent, whether


8 The falsification of bank records is itself a violation of law. See, 18 U.S.C. §§1001, 1005. There are no degrees of falsification of bank records, regardless of the amount in question. It is a per se breach of fiduciary duty and an unsafe or unsound banking practice.
{{2-28-91 p.A-1542.6}}or not authorized. They are but segments of a whole transaction, each required to enable the Respondent to surreptitiously obtain the funds he requested (this, or course, credits Respondent's explanation of his motive). The falsification of Bank records is directly tied to the receipt of funds. Even if the funds had been authorized (and the Board holds to the contrary), and especially if Respondent's explanation is found to be credible, in order to conceal the transactions from his colleagues, Respondent still would have made the checks payable to a fictitious payee and falsified the records. To conclude that the gain to Respondent was independent of the falsification scheme smacks of legal sophistry.9
   Similarly, with respect to the issue of whether Respondent's conduct involved personal dishonesty or willful or continuing disregard for the safety and soundness of the Bank, the ALJ found that the "single proven breach or practice, that is, falsifications of the Bank's records, . . . occurred after any question of gain to Respondent had been settled." (Rec. Dec. at 10). He then concluded that "it cannot logically be argued that [Respondent] fraudulently or dishonestly intended to profit by the falsifications." (Id.)
   To the contrary, the Board finds that it cannot logically be argued that someone who admits to having falsified records has not acted dishonestly, regardless of motivation. Moreover, in light of the fact that Respondent repeated the scheme of fictitious payee/false recordation, the Board finds that Respondent's actions constituted a continuing disregard for the safety and soundness of the Bank.
   Accordingly, the Board finds that counsel for the FDIC has proven by the preponderance of the evidence each of the elements of an action under section 8(e)(1) of the Act. Therefore, the Board need not proceed to an analysis of whether removal would also lie under section 8(e)(2).

IV. REMEDY

   As noted previously, the Board has engaged in much deliberation on the issue of Respondent's removal from banking. The Board reiterates the serious nature of falsification of bank records, and notes that such a breach of fiduciary duty requires the Board to take severe action. Nonetheless, like the ALJ, upon a careful reading of the record, the Board is inclined to believe Respondent's explanation of his motive. While this cannot and does not excuse his conduct, it is a mitigating factor.

   [.6] Section 8(e)(5) of the Act provides that an "agency may issue such orders of suspension or removal from office, or prohibition from participation in the conduct of the affairs of the bank as it may deem appropriate." This language grants the Board authority to fashion a remedy that is appropriate considering all of the circumstances. The legislative history of section 8(e) indicates that Congress desired to provide regulatory agencies with the mechanism to eradicate insider abuse and to protect the banking industry. Section 8(e) became an additional remedy to the already existing sanction of insurance termination to provide bank regulatory agencies the flexibility to take effective action against individuals who jeopardized the integrity of a bank without imposing the more disruptive and uncertain sanction of insurance termination. The Board has concluded that imposition of a fixed term suspension or removal is consistent with the legislative history, language, and purpose of section 8(e), and with the Board's prior decisions. See, FDIC-87-61e; 87-62k, 2P-H FDIC Enf. Dec. ¶5113 (April 25, 1988). Imposition of a term removal allows the agency to deal with abuses while fashioning a sanction that it deems appropriate considering the circumstances of each case. The Board finds that, in this case, the removal of Respondent from banking for a period of three years reflects the serious nature of his breaches of fiduciary duty and unsafe and unsound banking practices, as well as the mitigating circumstances. While the Board appreciates the likely hardship this term removal will impose on Respondent, the integrity of the banking system requires the consistent imposition of sanctions. Accordingly, the Board will remove Respondent from banking for a period of three years.

ORDER OF REMOVAL AND OF
PROHIBITION
FROM FURTHER PARTICIPATION

   For the reasons set forth in the above Decision, and pursuant to section 8(e) of the Act, as amended by sections 903 and


9 Respondent stipulated to the gain and the Board adopts this as a finding. Jnt. Stip. No. 9. The ALJ's finding to the contrary is without any basis.
{{5-31-92 p.A-1542.7}}904 of FIRREA, Pub. L. No. 101-73, §§903 and 904, 103 Stat. 183, 453, 457 (1989) (codified at 12 U.S.C. §1818(e)), the Board of Directors of the Federal Deposit Insurance Corporation hereby ORDERS that:
   1. Frank E. Jameson is hereby removed as an officer and director of First State Bank, Liberty, Texas.
   2. Frank E. Jameson is hereby prohibited from serving or acting as an institution-affiliated party and/or from participating in any manner in the conduct of the affairs of any of the institutions or agencies listed herein, without the prior written consent of the FDIC and of the appropriate Federal financial institutions regulatory agency pursuant to the provisions of section 904(a) of FIRREA, Pub. L. No. 101-73, §804, 103 Stat. 183, 457 (1989) (codified at 12 U.S.C. §1818(e)(7)):
       (i) Any insured depository institution;
       (ii) Any institution treated as an insured bank under sections 8(b)(3)-(4) of the Act including: (1) any bank holding company, (2) any subsidiary of a bank holding company, (3) any foreign bank that maintains a branch or agency in a State, (4) any foreign bank or foreign company controlling a foreign bank that controls a commercial lending company organized under State law, and any company of which any foreign bank or company referred to in (3) or (4), above, is a subsidiary, or as a savings association under section 902(a) of FIRREA, including any savings and loan holding company, any subsidiary of a savings and loan holding company, any service corporation of a savings association, and any subsidiary of any service corporation of a savings association;
       (iii) Any insured credit union under the Federal Credit Union Act;
       (iv) Any institution chartered under the Farm Credit Act of 1971;
       (v) Any appropriate Federal depository institution regulatory agency;
       (vi) The Federal Housing Finance Board and any Federal home loan bank; and
       (vii) The Resolution Trust Corporation.
   3. Frank E. Jameson is hereby prohibited from soliciting, procuring, transferring, attempting to transfer, voting, or attempting to vote any proxy, consent, or authorization with respect to any voting rights in any institution described in paragraph 2 hereof during the term of his removal.
   4. Frank E. Jameson is hereby prohibited from voting for a director of any insured depository institution during the term of his removal.
   5. The provisions of paragraphs 1 through 4 of this Order shall be effective for a period of three years commencing thirty days from the date of this Order.
   The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provision of this ORDER shall have been modified, terminated, suspended, or set aside by the Board of Directors of the FDIC.
   By direction of the Board of Directors.
   Dated at Washington, D.C. this 12th of June, 1990.

___________________________________________
RECOMMENDED DECISION

In the Matter of
Frank E. Jameson, individually and
as vice president, a director, and a
person
participating in the conduct of the
affairs of
First State Bank
Liberty, Texas
(Insured Nonmember State Bank)

Steven M. Charno, Administrative Law Judge:

   A Notice of Intention to Remove From Office and to Prohibit From Further Participation ("Notice") was served by the Federal Deposit Insurance Corporation ("FDIC" or "Petitioner") on Frank E. Jameson ("Respondent") on April 27, 1989. Based on allegations that Respondent had engaged in unsafe or unsound banking practices, violations of law and regulation and/or breaches of fiduciary duty, the Notice sought his removal from office pursuant to Section 8(e) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1818(e). Respondent's Answer filed May 17, 1989 denied the allegations of wrongdoing and asserted an affirmative defense based on jurisdiction.
   A hearing was held before me in Beaumont, Texas on October 24 and November {{5-31-92 p.A-1542.8}}15, 1989.1Initial Briefs were filed by Petitioner and Respondent under due date of January 2, 1990, and reply briefs were filed by the parties under due date of January 17, 1990.2

DISCUSSION

A. Background

   Respondent was employed by the Texas Department of Banking from 1978 through May of 1984, serving as a Commissioned Bank Examiner for two years prior to being promoted to a managerial position. Immediately following his government service, Respondent was hired by the First State Bank ("Bank") of Liberty, Texas.3The beginning of that employment was delayed for an indeterminate period because certain officers of the Bank evinced jealous reactions over Respondent's proposed starting salary.4His duties for the first six months of his employment included the review of loan files to ascertain whether they contained appropriate documentation, but the record is silent as to his authority to attempt to correct any defects he discovered.
   The Bank's By-Laws vest authority in the Board of Directors to set the annual compensation of the Bank's officers. By virtue of a delegation of this authority, the Bank's President "had the express blanket authority from the Board to remunerate . . . any officer or employee . . . for their services, without individual prior Board approval or authority . . ."5The record is bare of direct evidence which might suggest that this delegation was other than wholly regular. While some bonuses given to officers by the President were later ratified by the Board, there is no evidence that all such bonuses were so approved.6
   It was the practice of the Bank to conceal an officer's bonus from other officers who were not similarly compensated in order to preserve "employee good will."7On at least one occasion, this practice resulted in paying a bonus by drawing a check to a payee other than the Bank officer who ultimately received the proceeds.8The Bank's use of such a subterfuge was brought to Respondent's attention in 1985.9


1 Petitioner's unopposed transcript corrections are hereby adopted. In addition, the word "not" is stricken from the sixth line of page 176 of the transcript of the October 24 hearing.

2 By motion filed January 29, 1990, Respondent sought leave to file his reply brief after the scheduled due date. In a response filed February 6, Petitioner opposed Respondent's request. Absent any demonstration of prejudice, I reaffirm my January 30 Order granting Respondent leave to file his reply brief on January 29.

3 Respondent was hired as an Assistant Vice President. The Bank's By-Laws do not indicate that a person holding this position is an officer of the Bank.

4 Respondent so testified without controversion.

5 This finding quotes and is partially based on the unrefuted, unanimous February 4, 1989 resolution of the Bank's Board of Directors. The accuracy of that business record is confirmed by the uncontroverted testimony of the Bank's Directors Delaney and Wiggins. The former credibly testified that he had served on the Board since the early 1980's and that, "as far as I can remember," the Bank's President had given bonuses to officers without prior approval by the Board and that the President had the consent of the Board to give bonuses "to whom and when he thought they merited it." The latter candidly testified that, as a new director, he had been told by older directors that the Bank's President had "the leeway to give bonuses to whomever be chose at his discretion." In this context, the fact that the minutes of the Board's meetings between 1984 and 1988 do not contain a written delegation of authority is without probative significance.

6 Petitioner's witness Schmalzer conceded the possibility that some of the bonuses paid to officers were not reflected in the minutes of the meetings of the Board of Directors. It is impossible to determine from the available evidence whether the Board was aware of or ever approved a $15,000 bonus which the Bank covertly paid to Executive Vice President Rankin in October of 1984; the record reveals only that the Board approved a 1984 bonus to Rankin in the amount of $25,000, and there is no way to determine whether the covert payment was part of or in addition to that amount.

7 Director Wiggins so testified without contradiction, while Director Delaney credibly affirmed that the Bank's policy was compensation received by their fellows.

8 In making this finding, I credit and rely upon (1) Director Delaney's uncontroverted testimony that he had "general knowledge" of several such instances during his tenure as a director, as well as specific knowledge of such a situation in 1984, (2) Director Wiggins' testimony that the 1984 situation was chronicled "as an afterthought" in a 1985 bank examination report, (3) a reference in the February 4, 1989 unanimous Board resolution to the use of subterfuge as a "usual and customary practice to prevent `in-house employee bickering'" and (4) Respondent's uncontradicted testimony that the 1984 situation involved a bonus paid to Executive Vice President Rankin by means of an October 26, 1984 cashier's check of $15,000 drawn by Huey Chaumont and ostensibly payable to Bobby W. Kind. I find that Director Delaney's inability to specifically recognizer that check was a lapse of memory rather than a Wiggins was available to Petitioner, and I refer from the fact that it was not offered in evidence that it did not contradict any related testimony favorable to Respondent.

9 Respondent so testified without refutation.
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B. Alleged Practices

   It was stipulated that Respondent served as a Vice president and Advisory Director of the Bank from January 1, 1988 through March 31, 1989. It was further stipulated that, on January 12, 1988, the Bank's Board of Directors set Respondent's compensation for 1988 at $3,333.33 per month.
   Several days before the end of March 1988, Respondent met with the Bank's President in the latter's office prior to the commencement of business and requested a loan to pay some home repair expenses. The President instead authorized the immediate payment to Respondent of a $3,100 "bonus prior to year end." When Respondent indicated that he was concerned as to how other employees would view such a bonus at a time when the Bank was "cutting back," the President instructed Respondent to "handle the transaction" in whatever manner the latter thought best. Respondent thereafter submitted a March 3110"state-


10 Although Respondent displayed some difficulty recalling when this statement was prepared, he credibly testified that he submitted it and a June 27 statement to the Bank within seven days of their respective dates.

(Next page is A-1542.9.)

{{2-28-91 p.A-1542.9}}ment for issuance of the check" which indicated on its face that is was a, "[b]ill in the amount of $3,100.00 for reimbursement of expenses and time in showing and maintaining other real estate properties after banking hours for the years of 1984 and 1985,"11which acknowledged that Respondent would be liable for income in the amount of $3,100 and which bore the following signature line:
   "Sean's Construction Company
   By: /s/ Frank E. Jameson."
Contemporaneously with the submission of this Statement, a March 31 check for $3,100 payable to Sean's Construction Company was prepared pursuant to Respondent's instructions. The check was signed by the Bank's President, and Respondent endorsed it and converted the proceeds to his personal benefit.12
   Approximately one week before the end of June in 1988, Respondent met with the Bank's President during the evening at the latter's home and requested further financial assistance with some outstanding bills. On the 26th or 27th of the month, the President authorized the payment of an additional $5,000 bonus to Respondent and told the latter to make such "entries as he felt . . . necessary." Respondent submitted a June 27, 1988 statement, which directly paralleled the March 31 document described above,13and explained to the Bank's Cashier that the $5,000 bonus was to be paid by means of a check payable to Sean's Construction. After verifying the accuracy of Respondent's instructions with the Bank's President, the Cashier issued and signed the requested check. Respondent thereafter deposited the check to his account.14

C. The Aftermath

   Sometime between an examination of the Bank in October of 198815and January of the following year, Jerry Albright, one of the Bank's officers, learned of Respondent's bonuses, was "very disgruntled" that Respondent had received something extra16and complained to Petitioner of the bonuses, later submitting documentary proof of the transactions to regulatory authorities.17
   In response to questions from bank regulators, Respondent wrote a January 20, 1989 letter setting forth the manner in which both bonuses had been paid. On February 4, the Board of Directors were made aware of the disclosures in Respondent's letter18and were told by the President that the $8,100 was an early bonus which he "did not want the other employees to become aware of . . .."19While the Board thereafter unanimously resolved to ratify the payment of both of Respondent's bonuses, they noted that their approval was


11 While Respondent had previously received bonuses relating to 1984 and 1985, there is no evidence that the Bank had previously compensated him for "showing and maintaining" its real estate after hours.

12 The above findings are based on (1) the President's uncontroverted written statement of January 20, 1989; (2) Director Wiggins' credited account of the President's February 4, 1989 statement to the Board that the transaction was "nothing more than a bonus I gave" Respondent; (3) Respondent's uncontroverted testimony and January 20, 1989 letter (which was placed in evidence for all purposes by Petitioner); and (4) the parties' stipulation that "Respondent obtained a bonus from the Bank in the amount of $3,100.00" on March 31, 1988.

13 While Petitioner's employees did not come upon either statement during an examination of the Bank in October of 1988, the Examiner-in-Charge conceded that both documents could have been in the Bank's files during that examination. Indeed, there is absolutely no evidence that either document was not in the Bank's files throughout the period from the date of submission to the time of the hearing.

14 The foregoing findings are based on the Cashier's uncontroverted written statement of January 20, 1989, as well as on the evidence set forth in note 12, supra.

15 Petitioner contends that an intention to fraudulently conceal the bonuses is demonstrated by Respondent's failure to volunteer particulars of the transactions during the 1988 bank examination. Respondent's rejoinder that he had no idea at that time that the transactions might be improper is not beyond belief given his awareness that a comparable transaction in 1984 had not aroused significant regulatory concern. In any event, proof of a failure to bring the matter to Petitioner's attention falls short of proving an attempt to fraudulently conceal the matter.

16 I credit Director Wiggins' uncontroverted testimony to this effect.

17 Examiner Schmalzer so testified. The Examiner's skepticism that one of the Bank's officers would go to the trouble of scrutinizing the Bank's records in order to find out whether another officer had received a bonus appears illfounded in view of Albright's uncontested scrutiny of the Bank's records concerning Respondent's bonuses.

18 The text of the February 4 unanimous resolution establishes that the Board knew that Respondent's bonus checks had been drawn to a fictitious payee. Petitioner's contention that the Board was not then aware of this fact ignores the resolution and apparently relies on Director Wiggins' testimony that he did not recall anyone at the February 4 meeting commenting on the use of a fictitious payee. Petitioner's contention is untenable.

19 I credit Wiggins' uncontroverted testimony to this effect.
{{2-28-91 p.A-1542.10}}not necessary in view of the President's delegation of authority "from the Board."20
   By means of a document purportedly dated and effective on March 31, 1989, Respondent resigned his positions with the Bank.21Beginning on April 3, the next business day following March 31, Respondent was retained by the Bank as "a temporary consultant for the sum of $30.00 per hour and performed the duties of documentation of files and farm loan documentation."22It is uncontested that his new duties and working environment23were radically different from those immediately prior to his resignation. While Respondent's review of loan files was similar to the duties he had performed during his first six months with the Bank, his authority and discretion as a consultant were strictly limited in that he was no longer permitted to deal directly with the Bank's customers but was required to submit any perceived documentary deficiencies to a Bank employee for further action.24Respondent remained in this consulting position until April 28, 1989.25
   Since May 1, 1989, Respondent has been employed as a commercial loan officer by a national bank in Texas. It is undisputed that Respondent has honestly performed the duties of his present position and has complied with all relevant regulatory requirements.26

D. Jurisdiction

   It was stipulated that the Notice which commenced this proceeding was served on Respondent on April 27, 1989. That Notice alleged that Petitioner had jurisdiction over Respondent as an officer and director of the Bank under Section 8(e)(1) of the Act, 12 U.S.C. §1818(e)(1), and as "a person participating in the affairs" of the Bank under Section 8(e)(2) of the Act, 12 U.S.C. §1818(e)(2).
   Because the Notice was served after Respondent had resigned as an officer and director, jurisdiction cannot be premised on Section 8(e)(1). Stoddard v. Fed. Reserve System, 868 F.2d 1308, 1310 (D.C. Cir. 1989). Petitioner maintains, however, that jurisdiction over Respondent as an officer and direction of the Bank can be effected by retroactively applying Section 905(a) of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), Pub. L. No. 101-73, §905(a), 103 Stat. 183, which was enacted on August 9, 1989. That provision states that a party's resignation will not affect a regulatory agency's jurisdiction "to issue any notice and proceed under this section against any such party . . . ." The remainder of the language in Section 905(a) provides no guidance as to whether the phrases "to issue any notice" and "proceed under this section" are intended to be read in the disjunctive, as appears to be Petitioner's contention, or in the conjunctive. Fortunately, the provision's statutory history provides the answer. The Conference Committee effectively mandated a conjunctive interpretation when it stated that the provision was intended to apply retroactively "to yet undiscovered misconduct and to currently pending supervisory matters that have been stayed awaiting congressional action."27H. R. Conf. Rep. No. 222, 101st Cong., 1st Sess. 440 (1989). I must therefore read the two phrases conjunctively and conclude that the statute on its face permits retroactive application only where a proceeding had not been formally commenced by the filing of a notice prior to the enactment of FIRREA.28Accordingly, I conclude that FIRREA was not intended by Congress to be, and cannot constitutionally be, retroactively applied under the facts of this case.29


20 The Board's resolution so states.

21 The parties so stipulated.

22 The parties so stipulated.

23 I credit Respondent's testimony that his consultancy required him to move from the Bank's executive offices to a storeroom.

24 I credit Respondent's uncontroverted testimony to this effect.

25 The parties so stipulated.

26 Respondent so testified without contradiction. On brief, Respondent argued that I should find his removal from banking to be an excessively harsh punishment. See Docket No. FDIC-86-56e. [1988] F.D.I.C. Enf. Dec. (P-H) ¶5110.1 find it unnecessary to address that argument in view of my rulings concerning jurisdiction and the merits.

27 On brief, Petitioner conceded that this case "is not based on newly discovered conduct and was not specifically `stayed' pending congressional action."

28 The impropriety of retroactively applying FIRREA also requires rejection of Petitioner's proposed conclusion of law dealing an "institution-affiliated party."

29 Respondent does not appear to raise and I shall not rule on the related question of whether Petitioner may proceed on a jurisdictional basis other than that set forth in the Notice without depriving Respondent of due process protections.
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   Petitioner's alternate assertion of jurisdiction is based on the contention that Respondent was a "person participating in the affairs" of the Bank at the time the Notice was served. While the quoted term is not defined in the Act and has not been judicially interpreted in the context of Section 8(e)(2), there is a persuasive analysis of its use in a highly comparable statutory scheme. In Fed. Sav. & Loan Ins. Corp. v. Hykel, 333 F. Supp. 1308, 1311 (E.D. Pa. 1971), a real estate agent with "broad discretionary powers" over the "affairs" of a financial institution was found to have "participated" in those affairs. In addition to relying on the scope of the agent's discretion, the trial court's analysis focused on whether the agent's continued participation in the same affairs offered any opportunity for a recurrence of dishonest behavior.30In the instant case, Respondent's consultancy involved virtually no operational discretion —all of his recommendations were tendered to Bank employees for any action they or their superiors might deem appropriate. In addition, he had no demonstrated authority to approve or make loans, and the record is devoid of evidence that his consultancy provided any other opportunity to engage in dishonest behavior.31For the foregoing reasons, I conclude that Respondent was not shown to be a "person participating in the affairs" of the Bank and that Petitioner does not have jurisdiction over him pursuant to Section 8(e)(2) of the Act.

E. The Merits32

   To justify the removal of an officer or director of an insured bank under Section 8(e)(1) of the Act, Petitioner must establish the following elements by a preponderance of the evidence:33(1) the officer or director engaged in (a) a breach of fiduciary duty to the bank or (b) an unsafe or unsound banking practice; (2) the breach or practice caused, as relevant, (a) the bank to suffer substantial financial loss or other damage or (b) the officer or director to receive financial gain; and (3) the breach or practice was one (a) involving personal dishonesty or (b) demonstrating a willful or continuing disregard for the safety or soundness of the bank. Similarly, removal pursuant to Section 8(e)(2) of a person participating in the affairs of an insured bank requires Petitioner to show the following facts by a preponderance of the evidence: (1) the person's conduct or practice resulted in substantial financial loss or other damage to the bank; (2) the conduct or practice evidenced (a) personal dishonesty or (b) a willful or continuing disregard for the safety or soundness of the bank; and (3) the conduct or practice evidenced the person's unfitness to participate in the conduct of the affairs of the bank.
   In order to satisfy these statutory requirements, Petitioner argues that Respondent obtained "Bank funds without proper authorization" and that doing so constituted a breach of fiduciary duty and an unsafe or unsound banking practice.34The record evidence overwhelmingly establishes that the Bank's Board of Directors delegated its compensation-setting authority to the President and that he exercised that delegated authority to grant Respondent bonuses totalling $8,100.35Accordingly, I find that Respondent did not obtain Bank funds without proper authorization and that he did not, therefore, engage in the alleged


30 Central to the analysis was the fact that the agent had behaved dishonestly in the very position from which the agency sought to remove him. That fact is not present in the instant case; there is no evidence that Respondent's behavior as a consultant was other than completely proper. Thus, Respondent's removal as a "person participating in the affairs" of the Bank could not be sustained even if Petitioner were shown to have jurisdiction over Respondent under Section 8(e)(2).

31 While Petitioner's expert witnesses were almost uniquely qualified to testify concerning the existence of any such possibility, neither addressed the subject.

32 While technically moot given my rulings on the jurisdictional issue, a statement of the reasons underlying all of my findings and conclusions is required by the Administrative Procedure Act, 5 U.S.C. §557(c).

33 Petitioner's burden of proof is established in Steadman v. SEC, 450 U.S. 91, 102 (1981).

34 Petitioner's proposed findings of fact 23 and 24.

35 While Petitioner's expert Schmalzer initially testified that the Board's written, limited delegation of authority to give bonuses might empower the President to do so, he later opined that it would be an unsafe or unsound banking practice for the Board to attempt such a delegation. Zamorski, Petitioner's other expert witness, conceded that the Board's authority to set compensation "can be delegated" to an executive officer. Zamorski had far more experience as a bank examiner and held a higher rank in Petitioner's hierarchy than did Schmalzer. Accordingly, I credit Zamorski over Schmalzer where, as here, their expert opinions appear to conflict. To the extent that expert testimony may be thought to be persuasive on the issue of the delegability of authority, I rely on Zamorski's opinion.
{{2-28-91 p.A-1542.12}}breach of fiduciary duty or unsafe or unsound banking practice.36
   In the alternative, Petitioner contends that Respondent's "intentional falsification of the Bank's records" constituted a breach of fiduciary duty and an unsafe or unsound banking practice37which (1) caused the Bank a substantial financial loss of $8,100,38(2) resulted in a financial gain to Respondent in the same amount 39and (3) caused the Bank "damage to the extent of the breach of integrity of its records and its credibility as an insured depository institution."40Respondent effectively admitted intentional falsification of the Bank's records, and the expert opinion of record is unanimous that such a falsification, regardless of motive, is both a breach of fiduciary duty and an unsafe or unsound banking practice. The record is clear, however, that this practice and breach occurred after the payments to Respondent had been authorized by the Bank's President. Thus, the falsifications could not cause either a loss to the Bank or a gain to Respondent. There is credible expert opinion supporting the argument that Respondent's falsifications damaged the integrity of the Bank's records,41but the record contains no probative evidence that the Bank's "credibility as an insured depository institution"42was destroyed. Petitioner has cited no authority for the proposition that damage to the integrity of a bank's records, unaccompanied by loss to the bank or gain to the perpetrator, constitutes either the type or degree of "other damage" sufficient to justify removal of the perpetrator.
   Finally, Petitioner argues that Respondent's "transactions" involve personal dishonesty on Respondent's part, as well as a willful or continuing disregard for the safety and soundness of the Bank.43Given the statutory requirements for removal, I assume that the term "transactions" is meant to refer to the single proven breach or practice, that is, falsifications of the Bank's records. Since that conduct occurred after any question of gain to Respondent had been settled, it cannot logically be argued that he fraudulently or dishonestly intended to profit by the falsifications.44With this motivation eliminated, the only remaining explanation for Respondent's conduct is the one supported by the preponderance of the evidence—he wished to prevent the ill-feeling which knowledge of his bonuses would engender among the Bank's officers and employees.45While that motivation cannot justify engaging in an unsafe or unsound banking practice, avoiding such ill-feeling is not an improper objective.46In summary, the record does not contain substantial evidence establishing that Respondent's falsifications resulted from either personal dishonesty or disregard for the Bank's welfare.
   For the foregoing reasons, I am compelled to conclude that Petitioner failed to meet its burden of proof as to virtually every statutory factor which it was required to establish in order to prevail in an action to remove an individual from banking.47The Notice in this proceeding should therefore be dismissed.48


36 This finding logically necessitates the rejection of Petitioner's proposed findings dealing with the alleged ramifications of such a practice or breach.

37 Petitioner's proposed findings of fact 26 and 27.

38 Petitioner's proposed finding of fact 29.

39 Petitioner's proposed finding of fact 31.

40 Petitioner's proposed finding of fact 30.

41 Zamorski so testified.

42 This term was not a subject of testimony by Petitioner's experts. On brief, Petitioner defined the phrase to mean that Respondent's alleged behavior could prevent the FDIC from having "confidence in the Bank's management to properly administer the Bank's affairs." Leaving aside the subjectivity of this definition and the fact that there is no evidence that the FDIC in fact lost confidence in the Bank's management, Petitioner's argument must be rejected because it is based on allegations of misconduct which were never proved.

43 Petitioner's proposed findings of fact 32 and 33.

44 Petitioner's oft-repeated contention that Respondent profited "through" or "as a result" of the falsifications is equally without a record support. Indeed, the contention is refuted by a preponderance of the credible evidence.

45 Petitioner apparently contends that the fact that six of the Bank's employees knew something about at least one of the bonus transactions proves that Respondent was not attempting to hide the bonuses from his fellow employees. Knowledge by the Bank's President and Cashier that Respondent was receiving a bonus could not be avoided since they signed the bonus checks. Albright learned of the bonuses in spite of Respondent's subterfuge, and there is no evidence that the remaining employees realized that either of the payments to Respondent was a bonus. Accordingly, Petitioner's contention must be rejected as a factually unsupported inference.

46 Schmalzer conceded that preventing other employees from learning of the bonus "could be a valid concern."


47 A bona fide belief by Petitioner's witnesses that Respondent stole $8,100 from the Bank is not a substitute for probative evidence of a theft.

48 Under 5 U.S.C. §505, as implemented by 12 C.F.R. §308.100 et seq., respondents in actions brought by the FDIC may, under certain circumstances, recover attorney fees and other expenses of the litigation.
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FINDINGS OF FACT49

   1. At all times relevant to this proceeding, the Bank was a banking corporation organized and existing under the laws of Texas, having its principal place of business in Liberty, Texas.
   2. At all times relevant to this proceeding, the Bank was insured by the FDIC and was not a member of the Federal Reserve System.
   3. From January 1, 1988 through March 31, 1989, Respondent served the Bank in the capacities of Vice President and Advisory Director.
   4. From April 3 through April 28, 1989, Respondent was a temporary consultant to the Bank.
   5. Respondent's consultancy was not shown to be a position in which he had any opportunity (a) to exercise authority or discretion or (b) to engage in dishonest behavior or in a willful or reckless disregard for the Bank's safety or soundness.
   6. Respondent was personally served with a copy of the Notice on April 27, 1989.
   7. Respondent was not shown to be an officer, director or person participating in the affairs of the Bank at the time he was served with the Notice.
   8. Pursuant to Section 16 of the By-Laws of the Bank, the Bank's Board of Directors was vested with authority to set the compensation to be received by the Bank's officers.
   9. The Bank's Board of Directors delegated authority to the Bank's President to set the compensation to be received by the Bank's officers.
   10. Although the Bank's Board of Directors on several occasions ratified bonuses previously authorized by the Bank's President, it was not shown to be their standard practice to do so.
   11. It was the Bank's policy and practice to conceal the giving and amount of an officer's bonus from other officers.
   12. In furtherance of this policy, the Bank in 1984 paid an officer's bonus by drawing a check to a payee other than the officer who received the proceeds.
   13. The Bank's Board of Directors on January 12, 1988 set the Respondent's monthly compensation for 1988 at $3,333.33.
   14. On or about March 31, 1988, the Bank's President authorized a $3,100 bonus for Respondent.
   15. After that bonus had been authorized, a Bank expense check for $3,100 payable to Sean's Construction Company was prepared at Respondent's request, was signed by the Bank's President and was endorsed in the name of the payee by Respondent.
   16. On or about June 27, 1988, the Bank's President authorized a $5,000 bonus for Respondent.
   17. After that bonus had been authorized, a Bank expense check for $5,000 payable to Sean's Construction was prepared at Respondent's request, was signed by the Bank's Cashier and was deposited to Respondent's account.
   18. Sean's Construction Company was a fictitious business entity utilized by Respondent to prevent other Bank employees from learning of his bonuses.
   19. Respondent was not shown to have obtained funds from the Bank without proper authorization.
   20. Respondent intentionally falsified the Bank's records.
   21. Intentional falsification of a bank's records by an officer or director is a breach of fiduciary duty and an unsafe or unsound banking practice.
   22. Respondent's conduct resulted in damage to the Bank to the extent of a breach in the integrity of its records.
   23. Respondent's conduct was not shown to have resulted in the destruction of the Bank's credibility as an insured depository institution.
   24. Respondent's breach of fiduciary duty and commission of an unsafe or unsound banking practice did not result in (a) a substantial financial loss to the Bank or (b) a financial gain to Respondent.
   25. Respondent's conduct was not shown to have involved personal dishonesty or to have demonstrated a willful or continuing disregard for the safety or soundness of the Bank.
   26. Respondent was not shown to be unfit to participate in the affairs of an insured depository institution.


49 Proposed findings of fact and conclusions of law not previously discussed and not hereinafter adopted are deemed redundant, irrelevant or immaterial to the issues properly before me.
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CONCLUSIONS OF LAW

   1. Petitioner did not have jurisdiction over Respondent under Section 8(e)(1) of the Act.
   2. Petitioner did not demonstrate that it had jurisdiction over Respondent under Section 8(e)(2) of the Act.
   3. Petitioner's burden of proof is one of a preponderance of the evidence.
   4. Respondent committed a breach of fiduciary duty and engaged in an unsafe or unsound banking practice by intentionally falsifying the Bank's records.
   5. Petitioner has failed to establish by a preponderance of the evidence those elements of Section 8(e) of the Act necessary to support issuance of the Order sought.
   6. The Notice should be dismissed.
   Upon the foregoing findings of fact and conclusions of law, and upon the entire record in this case, I hereby issue the following recommended:

ORDER

   The Notice of Intention to Remove from office and to Prohibit from Further Participation is dismissed.
   Done at Washington, this 5th day of March, 1990.

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