Federal Deposit
Insurance Corporation

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   [¶5171] In the Matter of Paul E. Oberstar, Boundary Waters State Bank, Ely, Minnesota, Docket No. FDIC-91-19e (11-26-91).

   FDIC orders Respondent prohibited from further participation upon finding the violation of a law, the possibility of prejudice to the interests of depositors, and willful disregard for the safety or soundness of the Bank. Respondent violated the Change in Bank Control Act by accepting proxies constituting 84.9 percent of the Bank's stock, after his notice of acquisition of control had been denied by the FDIC on the grounds of his lack of competence and integrity. [This order was reserved by the 8th Circuit Court of Appeals, 987 F.2d 494 (3-2-93).]

   [.1] Prohibition—Factors Determining Liability
   FDIC must establish three elements to justify an order of prohibition under Section 8(e) of the FDIC Act: misconduct, prejudice to the interests of depositors as a result of the misconduct, and willful disregard for the safety and soundness of the Bank.

   [.2] Change in Bank Control Act—Definition—"Control"
   Proxies to vote 84.9 percent of Bank's stock constitute "control" under CBCA's definition of "power, directly or indirectly, to direct the management or policies...or to vote 25 percentum or more of any class of voting securities" of Bank.

   [.3] Change in Bank Control Act—Proxy Exemption
   Regulation exempting "customary one-time proxy solicitation" from CBCA prior notice requirements does not apply to one-year unrestricted proxy.

   [.4] Change in Bank Control Act—Notice of Disapproval—Effect
   Respondent violated CBCA by acquiring control despite FDIC's notice of disapproval, even though the notice of disapproval was not a final order; statute prevents acquisition of control regardless of whether notice had become final.

   [.5] Change in Bank Control Act—Liability—Unsafe or Unsound Practice
   Acquisition of control despite FDIC's prior disapproval of such control for lack of competence and integrity is, by definition, an unsafe or unsound act.

   [.6] Prohibition—Liability—Prejudice to Depositors
   FDIC's previous determination of Respondent's unfitness to control Bank is sufficient to establish that his acquisition could prejudice depositors.

   [.7] Prohibition—Liability—Benefit to Violator of CBCA
   Control of Bank, regardless of what Respondent did after he acquired it, is in itself a benefit to Respondent.

   [.8] Prohibition—Liability—Willful Disregard
   Respondent whose acquisition of control of the Bank had previously been denied by FDIC acted with willful disregard for Bank's safety or soundness in acquiring control by proxy.
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In the Matter of
PAUL E. OBERSTAR,
individually and as an institution-
affiliated party of
BOUNDARY WATERS STATE BANK
ELY, MINNESOTA
(Insured State Nonmember Bank—in Receivership)
DECISION AND ORDER
FDIC-91-19e

   This proceeding arises out of a Notice of Intention to Prohibit from Further Participation ("Notice") in the affairs of any federally insured financial institution pursuant to 12 U.S.C. § 1818(e), issued on March 6, 1991, against Paul E. Oberstar ("Respondent"). The Notice alleges that Respondent violated the Change in Bank Control Act ("CBCA"), 12 U.S.C. § 1817(j), by accepting proxies constituting 84.9 percent of the stock of Boundary Waters State Bank, Ely, Minnesota ("Bank"), which he voted at the annual stockholders' meeting of the Bank of August 6, 1990, after his Notice of Acquisition of Control of the Bank ("Notice of Acquisition") had been denied by the Federal Deposit Insurance Corporation ("FDIC"). The Administrative Law Judge ("ALJ") issued his Recommended Decision ("R.D.") on August 2, 1991, that the FDIC's Notice be dismissed. Both the FDIC and the Respondent filed exceptions to the ALJ's Recommended Decision.
   After a review of the entire record of this proceeding, the Board of Directors ("Board") of the FDIC adopts the ALJ's Findings of Fact and concurs with the first through sixth conclusions of law, but rejects

{{1-31-92 p.A-1831}}the ALJ's seventh and eighth conclusions of law and the ALJ's proposed Order. Thus, the Board effectively grants the FDIC Enforcement Counsel's motion for summary disposition and finds a violation of law on uncontested facts.

A. Change in Bank Control Application

   The Bank had 65,000 shares of voting stock, of which 55,199 were owned jointly by Craig and Marcia Kronholm. R.D. at 16. On December 22, 1988, the Respondent and James H. Peterson entered into an agreement with the Kronholms to purchase their stock. Id. The Respondent submitted a Notice of Acquisition of Control of the Bank pursuant to section 1817(j)(1), on April 28, 1989. Id. On August 11, 1989, the FDIC issued a Notice of Disapproval of Acquisition of Control and Notice of Hearing ("Notice of Disapproval"), FDIC-89-161j, on grounds that Respondent lacked the requisite competence, experience, or integrity, Id. Respondent requested and received a hearing on the matter which was held December 18-21, 1989.
   After an administrative hearing, an Administrative Law Judge issued a recommended decision on April 20, 1990, that the FDIC Board deny the proposed acquisition because the Respondent lacked the competence and integrity and his acquisition of the Bank would not be in the interest of the depositors, or in the interest of the public. R.D. at 16. The Respondent did not file exceptions to the ALJ's Recommended Decision as he was entitled to do under the FDIC's Rules of Practice and Procedures at 12 C.F.R. § 308.41(a) (1990). In the Matter of Boundary Waters State Bank, Ely, Minnesota, 2 FDIC Enforcement Decisions and Orders (P-H), ¶ 5155, at A-1543. On August 28, 1990, the Board affirmed the ALJ's Recommended Decision and entered an order disapproving the proposed acquisition of the Bank by the Respondent and Peterson. R.D. at 17. On November 30, 1990, the Board entered an order terminating the Bank's deposit insurance, and on that day the Bank was closed by the Commissioner of Commerce for the State of Minnesota. Id.
   The Bank gave notice to its stockholders on July 6, 1990, that an annual meeting would be held on August 6, 1990. R.D. at 16. On July 26, 1990, following an administrative hearing, the ALJ issued a Decision recommending that the FDIC Board enter an order terminating the Bank's deposit insurance. Id. Despite the Notice of Disapproval, the Respondent obtained proxies to vote 55,199 shares of Bank stock on July 30 and August 1, 1990, from Craig and Marcia Kronholm.¹ R.D. at 17. The proxies were for a period of one year, were revocable, and place virtually no limit on the scope or purpose for which they could be used. See Proxies executed by Craig and Marcia Kronholm dated July 30 and August 1, 1990 (Attachments H and I to FDIC's Memorandum in Support of Motion for Recommended Decision ("FDIC's Memorandum") ("Proxies")). The Respondent accepted the proxies, and, on August 6, 1990, he nominated four incumbent members of the Bank's board of directors and voted the 55,199 shares for their re-election. R.D. at 17; Minutes of Annual Stockholders Meeting, Boundary Waters State Bank, Aug. 6, 1990 (Attachment J to FDIC's Memorandum) ("Minutes").

B. The ALJ's Recommended Decision

   After considering the testimony and documentary evidence presented by Enforcement Counsel and the Respondent, the ALJ made the following significant conclusions of law:
   1) The FDIC established a probable violation of 12 U.S.C. § 1817(j)(1);
   2) The FDIC did not establish by a preponderance of the credible evidence either the "effect" or "culpability" tiers of either 12 U.S.C. §§ 1818(e)(1)(B) or (C), respectively;
   3) The Notice should be dismissed in its entirety.
R.D. at 18.

C. FDIC's Exceptions

   The FDIC filed exceptions to the ALJ's findings and conclusions that:
   1. the FDIC failed to establish the element of "effect" under section 8(e)(1)(B) in that the FDIC failed to establish that the interests of the Bank's depositors could be

D. Respondent's Objections

   Respondent concurred with the result reached in the ALJ's recommended decision but filed exceptions to the ALJ's conclusions that:
   1. Respondent's acceptance of the Proxy was an acquisition of control of the Bank through a disposition of voting stock; and
   2. the FDIC established that Respondent violated "any law" within the meaning of 12 U.S.C. § 1818(e)(1)(A)(i)(I); and
   3. based on the record, the FDIC established a probable violation of 12 U.S.C. § 1817(j)(1).
Respondent's Exceptions to the Recommended Decision, FDIC-91-19e ("Respondent's Exceptions").

   Based upon a through review of the testimony, the documentary evidence, the briefs and arguments of the parties, the ALJ's Recommended Decision, and the Exceptions, the Board adopts the ALJ's findings of fact and adopts the first through sixth conclusions of law, but rejects the ALJ's seventh and eighth conclusions of law and therefore holds that the Notice of Intention to Prohibit the Respondent from Further Participation is reinstated and the Enforcement Counsel's request for summary judgment is granted.

   [.1] To justify an order of prohibition against the Respondent, the FDIC has the burden of establishing each of three elements under section 1818(e): 1) misconduct under section 1818(e)(1)(A); 2) by reason of such misconduct, an effect or potential effect under section 1818(e)(1)(B); and 3) that the misconduct involves culpability under section 1818(e)(1)(C). The FDIC's contention is that Respondent's acquisition of the proxy constitutes acquisition of control of the Bank under the CBCA without prior notice and after disapproval of application by the FDIC. Therefore, 1) the acquisition constitutes a violation of "any law" within the meaning of section 1818(e)(1)(A)(i), or alternatively was an "unsafe or unsound practice" as used in section 1818(e)(1)(A)(ii); 2) by reason of the acquisition, the interests of the Bank's depositors "have been or could be prejudiced" under section 1818(e)(1)(B)(ii), or alternatively, Respondent's control entailed "other benefit" within the meaning of section 1818(e)(1)(B)(ii); and 3) such acquisition demonstrated a "willful disregard" for the safety or soundness of the Bank. See FDIC's Motion for Recommended Decision, FDIC-91-19e.

A. Misconduct Under Section
1818(e)(1)(A)

1. Violation of "Any Law"
   The "misconduct" element of a removal and prohibition action is met if the FDIC establishes that Respondent directly or indirectly violated "any law or regulation." 12 U.S.C. § 1818(e)(1)(A)(i)(I). The Respondent violated section 7(j)(1) of the CBCA, 12 U.S.C. § 1817(j)(1), by acquiring control of the Bank after his Notice of Acquisition of Control was denied by the FDIC on August 11, 1989. The Change in Bank Control Act requires that:

(j)(1) No person, acting directly or indirectly or through or in concert with one or more other persons, shall acquire control of any insured depository institution through a purchase, assignment, transfer, pledge, or other disposition of voting stock of such insured depository institution unless the appropriate banking agency has been given sixty days' prior written notice of such proposed acquisition and within that time period the agency has not issued a notice disapproving the proposed acquisition. ...(Emphasis added).

WHEREAS, the FDIC has determined that the competence, experience or integrity of the Acquiring Persons and proposed management, and in particular Paul E. Oberstar ... is such that the proposed acquisition is not in the interest of the {{1-31-92 p.A-1833}}Bank's depositors or in the interest of the public to permit such persons to control the Bank.

   [.2] The CBCA defines "control" as "the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25 per centum or more of any class of voting securities of an insured depository institution." 12 U.S.C. § 1817(j)(8)(B). Therefore, when Respondent obtained proxies to vote 84.9 percent of the Bank's stock, he had "control" for purposes of the CBCA.
   However, Respondent maintains that to fall within the requirements of the CBCA, the control must have been acquired through a purchase, assignment, transfer, pledge or other disposition. See Citizens First Bank-corp, Inc. v. Harreld, 559 F. Supp. 867, 873 (W.D. Ky. 1982). Respondent interprets these words as indicating Congress' contemplation of a "long-term or permanent conveyance of all or virtually all of the rights of ownership of the voting stock." Respondent's Exceptions at 11. Respondent cites no authority for such an interpretation.
   The Board rejects the Respondent's reading of Congressional intent. Such a construction would be contrary to the purpose of the statute since it does not take long-term or permanent ownership of voting stock to pose a risk to the safety or soundness of an institution. By the very terms of the proxy, Respondent had virtually unlimited control of the Bank for one year. See Proxies. Congress intended that Respondent obtain regulatory approval prior to such control. See 12 U.S.C. § 1817(j)(1); Sletteland v. FDIC, 924 F.2d 350 (D.C. Cir. 1991) (acquisition of control was achieved through a voting trust of stock). Respondent's interpretation would permit circumvention of the CBCA since it would allow any person, even those who would otherwise be prevented from controlling an institution, to evade the statutory proscription and to control an institution indefinitely³ through proxy voting.
   Ownership is just one of several methods by which control can be acquired under the statute. As the ALJ noted, Congress speci-
² As the ALJ noted, Respondent has offered no explanation why Marcia Kronholm, the joint owner of the stock, could not have appeared at the annual stockholder's meeting to vote — or why Respondent had to accept the proxies when John Wavrin, the Bank's chairman, was also named in the proxies. R.D. at 6; see also Proxies.
³ Indefinite control potentially could be established through a series of one-year proxies.
{{1-31-92 p.A-1834}}fied several non-ownership transactions such as assignments, pledges, and the catchall term "other disposition." R.D. at 7. Therefore, the Board agrees with the ALJ in rejecting the Respondent's contention that the CBCA applies only to long-term transfers of stock ownership, as too restrictive, and therefore holds that Congress intended that Respondent obtain approval prior to his acquisition of control of the bank through the proxies. See Sletteland, 924 F.2d 350; R.D. at 7-8.

2. Applicability of the Exception Under 12
C.F.R. § 303.4(c)(6)

   [.3] The Respondent contends that these proxies constitute an exempt transaction under 12 C.F.R. § 303.4(c)(6), allegedly because they were obtained for the one time purpose of providing a quorum at the upcoming annual shareholders' meeting. Respondent's Memorandum in Opposition to the FDIC's Motion for Recommended Decision, FDIC-91-19e, at 18; Respondent's Exceptions at 2 and 7. Respondent further alleges that the proxies were made effective for one year because "no date had yet been scheduled for the annual shareholders' meeting," and "the bank contemplated calling only one shareholders' meeting with (sic) the next year." Respondent's Exceptions at 7.
   Section 303.4(c)(6) provides an exemption from the "prior notice requirements of the Change in Bank Control Act of 1978" for "[a] customary one-time proxy solicitation...." The ALJ found it unnecessary to address this issue due to his holding that the FDIC did not establish the second and third elements of section 1818(e). However, the ALJ suggested that this issue could not be decided as a matter of law due to Respondent's affidavit in which he testified that the proxies were "intended to be for the one-time purpose of producing a quorum at the Bank's annual stockholder's meeting." R.D. at 9. Therefore, the ALJ suggested a hearing on this issue if the Board found it necessary. Id.
   The Board finds that the proxy is too broad on its face to fit within the exemption and therefore, there is no question of fact requiring a hearing. An FDIC interpretive letter states:

We agree that [a customary one-time proxy solicitation] means "a solicitation of a revocable proxy for a specific shareholder's meeting and adjournments thereof." We also agree that a specific shareholders' meeting could be an annual meeting of shareholders or any special shareholders' meeting. Basically, the exemption does not encompass any attempt to create a proxy which would entail more than one meeting and its adjournments.

Acting Chairman Bonner⁴ also stated that the proxy which had been given had not been given for any one purpose and that Mr. Oberstar was free to vote the shares as he wished.

   [.4] Therefore, the Board concludes that the Respondent had control of the Bank within the meaning of the CBCA. The CBCA does not permit the acquisition of control of an institution, unless notice is given to the FDIC, and unless the FDIC has not issued a notice of disapproval. Thus, the Respondent's violation was in acquiring control of the Bank in spite of the FDIC's Notice of Disapproval. While the FDIC's Notice of Disapproval was not a final order, the statute prevents acquisition of control regardless of whether the Notice had become a final order.⁵

3. Unsafe or Unsound Practice

   [.5] The Board also finds that the first element of a removal and prohibition action under section 8(e) is satisfied by FDIC's showing that Respondent's acquisition of control of the Bank was an "unsafe or unsound practice." See 12 U.S.C. § 1818(e)(1)(A)(ii). An unsafe or unsound practice is generally understood to mean:

any action or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance funds.

B. Effect or Potential Effect Under 12
U.S.C. § 1818(e)(1)(B)

   The FDIC has demonstrated the second element of section 1818(e)(1)(B) in two ways: by showing that the interests of the insured depository institution's depositors could have been prejudiced within the meaning of section 1818(e)(1)(B)(ii); and that Re-
⁵ The ALJ reached the same conclusion but through different reasoning. The ALJ sought "to preclude the anomalous result that one could exercise control of a bank between the initial notice and final order of disapproval." R.D. at 9. The ALJ's reasoning is unnecessary since the statute mandates that no person may acquire control of an institution unless the statutory pre-requisites have been met. 12 U.S.C. § 1817(j).
⁶ This is not to say that his voting of the proxies could not be considered a separate act which could have constituted unsafe or unsound conduct. Although the Respondent and the ALJ focused much attention on negating the argument that voting the proxies did not actually have unsafe or unsound consequences, the Board finds it irrelevant to the FDIC's contention that the unsafe or unsound practice was the acquisition of control of the Bank.
{{1-31-92 p.A-1836}}spondent received a benefit by reason of his acquisition of control of the Bank.

1. Depositors Could Have Been
Prejudiced

   The purpose of the CBCA is to protect depositors and public by giving the FDIC an opportunity to approve those who seek to acquire control, based on a review of their competence, experience, honesty, and integrity. See 12 U.S.C. § 1817(j). If the FDIC denies an application based on lack of competence and integrity such that the proposed acquisition would not be in the best interest of the depositors, then the actual acquisition of control by that person, despite such denial, is potential prejudice to the depositors per se.
   The Board finds that the Respondent's conduct represented potential prejudice to depositors where he acquired control of the Bank in violation of the CBCA, and in spite of: 1) the denial of his Notice by the FDIC based on his lack of competence, experience, or integrity; and 2) the ALJ's determination, after a full administrative hearing, that "[Respondent's] record as a banker suggests that he lacks the competence and integrity to have a controlling voice in a troubled bank." Boundary Waters, at A-1557.

   [.6] Enforcement Counsel argued that offensive collateral estoppel could be used to prevent relitigation of the issue of whether the Respondent's control threatened the safety and soundness of the Bank, even though the final order of the FDIC had not yet been rendered in the FDIC's Notice of Disapproval of Respondent's Notice of Acquisition of Control. FDIC's Exceptions at 13. The Board finds that collateral estoppel is not necessary to decide this matter since the CBCA is violated even if one acquires control before a final order is issued, and the FDIC's Notice and the ALJ's decision are sufficient to prevent Respondent from acquiring control of the Bank and therefore to find that the Respondent's acquisition could prejudice the depositors at the time of the acquisition. To find otherwise would obviate the CBCA, the FDIC's Notice of Disapproval, and the ALJ's conclusions which were based on a full administrative hearing.
   The ALJ again focused on the fact that the Respondent's voting of the stock did not appear to have been capable of harming the bank since it was about to fail anyway. R.D. at 10. These considerations are irrelevant since the statute does not require that the FDIC wait until actual harm has occurred. In fact, section 8(e) was amended by deleting the requirement that the prejudice to depositors be "serious." Financial Institutions Reform Recovery and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183, 453 (1989). When Congress deleted the word "serious" it stated that:

Section 903 ... allows the regulatory agencies to proceed with a removal or prohibition action when ... the interests of the depositors have been prejudiced without requiring the agencies to quantify the ... prejudice.

2. Other Benefit

   Respondent maintains that the acceptance and voting of the proxies was gratuitous, solely to achieve a quorum at the stockholders' meeting, and that he received no compensation or any other benefit. See Respondent's Exceptions at 10. The ALJ concluded that the FDIC made no factual showing that the Respondent received "other benefit" from his violation of the CBCA. R.D. at 13. The FDIC contends that Respondent received "other benefit" from his violation of the CBCA in that he sought to acquire control of the Bank and obtained it. FDIC's Exceptions at 12. The FDIC has not argued that the Respondent received any financial gain. See R.D. at 13.

   [.7] Congress reduced the regulatory agencies' burden of establishing the element of "effect" in FIRREA by adding the language "other benefit" to section 8(e)(1)(B)(iii). This section now permits the FDIC to prove the {{5-31-92 p.A-1837}}element of effect by showing that "such party received financial gain or other benefit by reason of such misconduct." 12 U.S.C. § 1818(e)(1)(B)(iii). Personal control is an effect that came about by reason of Respondent's acquisition of the proxies in violation of the CBCA. It matters not what the Respondent did with his control of the institution. Therefore, the Board concludes that Respondent's control of the Bank is, in itself, "other benefit" within the meaning of section 8(e)(1)(B)(iii).

C. Willful Disregard Under Section
1818(e)(1)(C)

   The third element for establishing a removal and prohibition action is a showing that Respondent's misconduct "demonstrates willful or continuing disregard by [Respondent] for the safety or soundness of" the Bank. 12 U.S.C. § 1818(e)(1)(C)(ii). The ALJ found that "[t]o establish willful disregard, the FDIC must demonstrate that Respondent accepted and voted the proxies with at least constructive knowledge that by doing so the safety and soundness of the Bank would be adversely affected." R.D. at 15. The ALJ concluded that the FDIC did not establish that the Respondent's action constituted a willful disregard for the Bank's safety and soundness since the Respondent's voting for the four incumbent directors could not have harmed the Bank which was already unsound and on the verge of failure. R.D. at 15. The FDIC argues that it need only show that Respondent acquired control of the Bank with knowledge or constructive knowledge that such acquisition might present a risk to the safety or soundness of the Bank.
   The term "willful disregard," though not defined in the Federal Deposit Insurance Act, is "voluntary, purposeful, deliberate, and intentional" acts which constitute disregard for a bank's safety and soundness. In the Matter of * * *, Individually, and as president and a participant in the conduct of the affairs of * * * Bank, FDIC-86-56e, FDIC Enforcement Decisions and Orders (P-H), ¶ 5110, at A-1194-95 (citing United States v. Tucker, 686 F.2d 230, 232 (5th Cir.), cert. denied, 459 U.S. 1071 (1982) (finding willful disregard even though the Respondent believed he was acting in the best interest of the bank)). It is not necessary to show that Respondent intended to do harm to the Bank. Id. The term has been further defined as acting deliberately with full knowledge of the facts and risks, particularly engaging in "conduct [which] potentially exposed the bank to abnormal risk of loss or harm contrary to prudent banking practices." Van Dyke v. Board of Governors of Federal Reserve, 876 F.2d 1377 (8th Cir. 1989) (holding that a bank president's check-kiting activity showed willful disregard for a bank's safety and soundness, warranting removal from his position under section 1818(e)(1), even if the bank had not yet suffered actual harm). The term was also discussed as follows:

The willful or continuing disregard criteria were adopted with the idea that these two gauges of conduct would encompass those practices which though not fraudulent were deliberate and effectuated in the face of an inauspicious outcome or were knowingly repeated over a period of time and threatened the safety and soundness of the bank or savings and loan association. H.R. REP. NO. 1383, 95th Cong., 2d Sess. 18, reprinted in 1978 U.S. CODE CONG. and ADM. NEWS 9273, 9290. The disjunctive language of the willful or continuing standards defines the scope of section 8(e)(1); in the case of willful conduct, it is that conduct which is practiced deliberately in contemplation of the results....

   [.8] Respondent knew his acquisition of control of the Bank was denied by both the FDIC and the ALJ on grounds that he lacked the competence and integrity such that his acquisition would not be in the best interest of the bank or the depositors. Thus, Respondent acquired control in disregard of both the FDIC's and the ALJ's determination that he posed an abnormal risk of loss. Further, Respondent knew, or had constructive knowledge, that acquiring control of the Bank after the FDIC and an ALJ denied such control was contrary to prudent banking practices. See 12 U.S.C. § 1817(j). Therefore, the Board holds that Respondent acquired control of the Bank in willful disregard for its safety or soundness.

   The Board finds that by acquiring control of the Bank, Respondent violated the CBCA and engaged in an unsafe or unsound act which had a potentially prejudicial effect on the Bank and which benefitted the Respondent, and Respondent acquired such control in willful disregard to the safety and soundness of the Bank. Accordingly, the Board holds that the Respondent should be prohibited from participating in the conduct of the affairs of any insured depository institution.

   The Board of Directors of the Federal Deposit Insurance Corporation, having considered the entire record in this proceeding, hereby finds that, by acquiring control of the Bank, Respondent violated the CBCA and engaged in an unsafe or unsound act which had a potentially prejudicial effect on the Bank and which benefitted the Respondent, and Respondent acquired such control in willful disregard to the safety and soundness of the Bank.
   ACCORDINGLY, IT IS HEREBY ORDERED THAT, the Enforcement Counsel's Motion for Summary Disposition is granted; and
   IT IS FURTHER ORDERED, that the Respondent be, and hereby is, prohibited from participating in the conduct of the affairs of any insured depository institution.
   IT IS FURTHER ORDERED, that the Executive Secretary, or his designee, is instructed to execute and serve copies of the attached Decision and Order on counsel for all parties, on the Administrative Law Judge, and on the Commissioner of Commerce for the State of Minnesota.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 26th day of November, 1991.

In the Matter of
Paul E. Oberstar,
Individually and as an institution-
affiliated party of
Boundary Waters State Bank
Ely, Minnesota
(Insured State Nonmember Bank—In
Receivership)
James L. Rose, Administrative Law Judge:

   This matter is before me upon the FDIC's motion for a recommended decision upon its Notice of Intention to Prohibit the Respondent from Further Participation in the affairs of any federally insured financial institution pursuant to 12 U.S.C. § 1818(e)(1).
   In brief, the FDIC's Notice alleges that Paul E. Oberstar, in violation of the Change in Bank Control Act [12 U.S.C. § 1817(j)], accepted the proxies of Craig and Marcia Kronholm and voted them at the August 6, 1990, annual stockholders meeting of the Boundary Waters State Bank (herein the Bank). The Respondent admitted accepting and voting the proxies, but contends this was not a violation of 12 U.S.C. § 1817(j)(1) or otherwise an act which would justify prohibiting his further participation in the affairs of any federally insured financial institution.
   The FDIC's motion is essentially one for summary judgment. On brief Counsel argues that the three tiers which need to be established under Section 1818(e)(1) (misconduct, effect and culpability) are satisfied through offensive collateral estoppel, or as a matter of law.
{{1-31-92 p.A-1839}}
   Specifically, Counsel argues that accepting the proxies of 85 percent of the Bank's stock amounted to acquisition of control within the meaning of Section 1817(j) and was per se a violation of that statute; findings in a previous case were to the effect that acquisition of control of the Bank by the Respondent would potentially harm depositors; and, the fact that the Respondent accepted the proxies in light of the previous case denying his application for a change of control demonstrated a "willful disregard" for the Bank's safety and soundness.
   Counsel for the Respondent filed an opposition contending, inter alia, that there are factual disputes, specifically with regard to the nature of the proxies. Counsel argues that these proxies were given the Respondent only for the purpose of ensuring a quorum at the annual stockholders' meeting and therefore acceptance was an exempt transaction within the meaning of 12 C.F.R. § 303.4(c)(6). Further, the only exercise of the proxies was to vote for four incumbent directors. Counsel submitted affidavits as evidence of this contention.
   Counsel for the Respondent also filed a motion for summary disposition, arguing that the FDIC's case should be dismissed as a matter of law, essentially on grounds that acceptance of a proxy is not a "purchase, assignment, transfer, pledge, or other disposition of voting stock" within the meaning of 12 U.S.C. § 1817(j)(1).
   In addition to briefs and reply briefs, both counsel submitted supporting items of evidence — minutes of the August 6 meeting, the proxies, affidavits and so forth. Although testimony might reasonably be taken, from the arguments of Counsel, it appears that the FDIC intends to submit this case as a matter of law and would offer no additional evidence. In light of this, and since there is no dispute concerning the authenticity of the relevant documents offered by the FDIC, I conclude it is appropriate to enter a recommended decision of dismissal notwithstanding that the Respondent presented some factual issues which would be resolved following a hearing. Therefore, I conclude that the record is sufficiently complete to form the basis of a decision on the merits.
   Upon the record submitted by counsel, including their arguments and attached evidence which I take to be true for purposes of this decision, I hereby issue the following findings of fact, conclusions of law and recommended decision to dismiss the FDIC's Notice in its entirety.

   This is one of several matters before the FDIC involving the Bank, one of which also involved the Respondent when he and another individual sought to acquire control of the Bank. Following an administrative hearing, I concluded that the Respondent's proposed application for control was appropriately denied because, in brief, he lacked the requisite competence and integrity. My recommended decision was issued on April 20, 1990. It was affirmed by the FDIC Board on August 28, 1990 — after the events in issue here. Case FDIC 89-161j.
   The change of control was to be accomplished by the Respondent (and his partner) purchasing 55,190 shares of Bank stock from Craig and Marcia Kronholm who jointly owned 55,199 of the Bank's 65,000 shares. Thus, if approved, the Respondent and his partner would control approximately 85 percent of the Bank's stock.
   In addition to being its principal shareholder, Craig Kronholm was the Bank's president and chairman of the board of directors. However, on July 27, 1988, he consented to the issuance of an Order of Prohibition from Further Participation in Case FDIC-88-100e; and he is now serving a sentence in federal prison for bank fraud.
   The stock purchase agreement between the Kronholms and the Respondent and his partner was executed on December 22, 1988. By dates of July 27 and August 1, 1990, the Kronholms agreed that the Respondent could assign his interest in the agreement to whomever he believed could complete the purchase.
   Prior to initiation of the Change of Bank Control case, the FDIC filed an action to terminate the Bank's federal deposit insurance. Case FDIC 88-285a. That matter was heard by me on April 9, 10 and 11, 1990, and my decision recommending termination of insurance was issued on July 26, 1990. The FDIC Board affirmed and entered its order terminating insurance on November 30, 1990. On that day the State of Minnesota closed the Bank.

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B. CONTENTIONS OF THE PARTIES

   The FDIC alleges that the Respondent is an institution affiliated party and that he violated 12 U.S.C. § 1817(j) by acquiring the Kronholm proxy (Craig and Marcia each gave a proxy for the same shares which will together be referred to as "the proxy"). It is alleged that acquiring the proxy gave the Respondent control of 85 percent of the Bank's stock but his application for change in control of the Bank had been denied. Acquiring the proxy was therefore violative of the Change in Bank Control Act.
   The FDIC further contends that in the change of control case, a finding, conclusive here, had been made that control of the Bank by the Respondent would potentially harm depositors.
   Finally, accepting and voting the proxy demonstrated a willful disregard for the safety and soundness of the Bank. Hence, the three tiers of 12 U.S.C. § 1818(e)(1) have been satisfied and an order of prohibition should be entered.
   The Respondent's primary contention is that accepting and/or voting a proxy is not a transaction within the meaning of Seciton 1817(j)(1) which proscribes acquisition of control through "a purchase, assignment, transfer, pledge, or other disposition of voting stock...."
   In addition, the Respondent argues that he accepted and voted the proxy simply as a personal favor to the Bank's management; that he received no benefit from doing so; and he actually served the best interests of Bank and its depositors by his action, without which there would have been no quorum at the annual meeting.
   In brief, the Respondent asserts that the Bank was required by its bylaws as well as the FDIC to have annual stockholder meetings. The meeting for 1990 was scheduled for August 6 and notice was sent to the stockholders on July 6. Inasmuch as Craig Kronholm was under a Section 1818(e) removal order (and in fact was serving a prison term for bank fraud) he could not vote his stock. Thus in order to have a quorum, it was necessary that Kronholm give a proxy for his stock.
   Not explained by the Respondent is why Marcia Kronholm, the joint owner, could not have appeared at the stockholders' meeting and voted the stock. Also not explained is why the Respondent had to accept the proxy when John Wavrin, the Bank's chairman of the board of directors, was also named: "hereby appoint either John Wavrin or Paul E. Oberstar as my proxy."
   According to the affidavits of Wavrin and Oberstar, Oberstar was present at the meeting simply as a favor to Wavrin, since he had a vacation cabin nearby and had intended to be in the area at the time of the meeting.
   The Respondent voted the stock for the four incumbent directors offered by management. The only other significant item of business concerned discussion of the change in control and the Bank's need for a capital infusion of about $1.1 million. It was noted that following an administrative hearing, an administrative law judge had recommended that the FDIC Board terminate the Bank's deposit insurance. The Respondent told the stockholders that he planned to withdraw his application for change of control and assign his interest to his partner so that the acquisition could go foward, the capital infusion be made and the Bank saved. (FDIC Ex. J, Minutes of the August 6, 1990, stockholders meeting.)
   In addition, the Respondent contends that this proxy was not a transaction under the Change of Bank Control Act inasmuch as 12 C.F.R. § 303.4(c)(6) exempts "A customary one-time proxy solicitation and receipt of pro-rata stock dividends."

1. Institution-Affiliated Party

   The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 broadened the scope of 12 U.S.C. § 1818(e)(1) to include "any institution-affiliated party", which is defined in 12 U.S.C. § 1813(u)(2) to include "any person who has filed or is required to file a change-in-control notice with the appropriate Federal banking agency under section 1818(j) of this title." Since the Respondent had filed an application for change in control of the Bank, he clearly comes within the definition of an "insitution-affiliated" party and an action under Section 1818(e)(1) can be brought against him.

2. Prohibition Under Section 1818(e)(1)

   Though somewhat different in format, Section 1818(e)(1) is in substance the same under FIRREA as it was previously. To support an order of prohibition against an insti- {{1-31-92 p.A-1841}}tution-affiliated party, the FDIC must establish each of three tiers: a) misconduct which has a particular b) effect and which demonstrates the individual's c) culpability. The FDIC has the burden to prove each element by a preponderance of the credible evidence. Steadman v. SEC, 450 U.S. 91 (1981).

a. Misconduct

   i. Violation of Law
   The misconduct alleged here is the Respondent's acceptance of the Kronholm proxy, the fact of which is not contested. This gave the Respondent the power to vote about 85 percent of the Bank's stock. Such clearly was acquisition of control of the Bank through "disposition of voting stock" within the meaning of Section 1817(j), and therefore required notice to the FDIC. I reject the Respondent's argument that acceptance of a proxy for a 85 percent of a bank's voting stock is not acquisition of control. Under the statute, ownership is just one of several methods by which control can be acquired. Congress also specified such nonownership transactions as assignments and pledges, and then included the catchall of "other disposition." The language of Section 1817(j)(1) is inclusive, suggesting that Congress intended the broadest possible coverage. The Respondent's contention that the Change of Bank Control Act applies only to transfers of stock ownership is too narrow and is rejected. See, e.g., Sletteland v. FDIC, 924 F.2d 350 (D.C. Cir. 1991) where aquisition of control was to be achieved through a voting trust of stock.
   By Section 1817(j)(1), one may acquire control of a bank only if 60 days prior notice is given the appropriate Federal banking agency and within that time (or extensions) the agency has not issued a notice of disapproval. Thus acquisition of control without giving the required notice, or within the disapproval period (unless notice is given by the agency that it will not disapprove) is violative of the statute.
   Here, however, the Respondent had already given notice of his intent to acquire control of the Bank by purchasing this very stock. The Respondent's proposed acquisition had been denied administratively by the FDIC, a decision with which I concurred following an administrative hearing. At the time of the events here the FDIC Board had not yet ruled, though the Respondent had chosen not to take exceptions to my decision.
   In any event, at the time the Respondent acquired the proxy he had pending an application for change of control involving this stock and had filed the required notice with the FDIC. And at that time the appropriate Federal banking agency had not yet entered a final order approving or disapproving the proposed acquisition on the basis of the administrative record as required by 12 U.S.C. § 1817(j)(4). By its terms, the Notice of Disapproval of Acquisition of Control and Notice of Hearing did not become effective as a Final Order since a request for hearing was timely filed. (FDIC Ex. D.)
   Therefore, at the time the Respondent accepted and voted the proxy, he had pending an application for change of control of the Bank, the denial of which had not yet become a Final Order of the FDIC. No doubt acquiring control where the agency has entered a final order of disapproval is a violation of Section 1817(j); however, such did not occur here. Thus the question is whether the initial determination of an agency operates to bar acquisition of control pending final agency action following an administrative hearing.
   I conclude it does, in order to preclude the anomalous result that one could exercise control of a bank between the initial notice and final order of disapproval. Thus I conclude that the FDIC established that the Respondent violated "any law" within the meaning of Section 1818(e)(1)(A)(i)(I).
   The Respondent's contention that this proxy is exempt pursuant to 12 C.F.R. § 303.4(c)(6) cannot be decided as a matter of law, given his affidavit that he in fact solicited the proxy for the one-time purpose of producing a quorum at the Bank's annual stockholder's meeting. Though on its face the proxy appears to be too broad to fit within Section 303.4(c)(6), the facts surrounding it, including the Respondent's testimony, might show it to be an exempt transaction. However, in view of my findings, infra, that the FDIC failed to sustain its burden of proof, this issue need not be addressed; but if the the FDIC Board concludes that the second and third tiers of Section 1818(e)(1) have been established, then I recommend the case be remanded for hearing on the issue of whether the proxy was an exempt transaction under 12 C.F.R. § 303.4(c)(6).
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   ii. Unsafe or Unsound Banking Practice
   In its Notice, the FDIC alternatively alleged that by accepting and voting the proxy the Respondent engaged in an unsafe or unsound banking practice. FDIC Counsel argues that I had made a finding in the change of control case, subsequently affirmed by the Board, to the effect that if the Respondent obtained control of the Bank, such could potentially harm depositors. Exercising control by voting the proxy was an act which could harm depositors and was therefore an unsafe or unsound banking practice.
   Although the phrase unsafe or unsound banking practice covers a lot of territory, it does not include everything which might conceivably be a detriment to depositors. Indeed, for a onetime event to be found an unsafe or unsound practice, there must be some showing that harm could reasonably result from that act. Here the act for which the Respondent is charged was voting for four incumbent members of the Bank's board of directors at a time when it was virtually certain the Bank's insurance would be terminated and it would be closed. Other stockholders likewise voted for them. There is no suggestion by the FDIC that any of these board members had, or might, harm the Bank or its depositors. Thus it is difficult to understand how the Respondent's vote met the standard definition of an unsafe or unsound practice.
   While the term "unsafe or unsound practice" is not defined in Section 1818, it is universally accepted that Congress meant to adopt the view of then Federal Home Loan Bank Board Chairman John Horne, who stated in testimony before Congress:

Generally speaking, an "unsafe or unsound practice" embraces any action or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance funds.

Unsafe and unsound banking practices... encompass what may be generally viewed as conduct deemed contrary to accepted standards of banking operation which might result in abnormal risk or loss to a banking institution or shareholder.

b. Effect

   Though I conclude that the record offered {{1-31-92 p.A-1843}}by the FDIC does suggest a finding of misconduct under Section 1818, I further conclude that this record does not establish the effect or culpability tiers.
   To establish effect under Section 1818(e) (1)(B) the FDIC must prove:

   (i) such insured depository institution or business institution has suffered or will probably suffer financial loss or other damage;
(ii) the interests of the insured depository institution's depositors have been or could be prejudiced; or
(iii) such party has received financial gain or other benefit by reason of such violation, practice, or breach;

c. Culpability.

   In order to establish the third tier the FDIC must prove by a preponderance of the credible evidence that the Respondent's action:

   (i) involves personal dishonesty on the part of such party; or (ii) demonstrates willful or continuing disregard by such party for the safety or soundness of such insured depository institution or business institution....

Your committee has provided statutory language which will give the regulatory agencies a less burdensome test under which they may institute removal proceedings. The provisions would authorize removal when an individual has evidenced per-
{{1-31-92 p.A-1844}}sonal dishonesty (current standard) or has demonstrated willful or continuing disregard for the safety and soundness of the financial institution.
This new standard will allow the agencies the opportunity to move against individuals who may not be acting in a fraudulent manner but who are nonetheless acting in a manner which threatens the soundness of their institution. Legis. His. P.L. 95-630 p. 18, reprinted in 1978 U.S. CODE CONG. and ADM. NEWS 9290.

We also agree with the agency's contention that although "continuing disregard" may require some showing of knowledge of wrongdoing, it does not require proof of the same degree of intent as "willful disregard." 757 F.2d at 1203.

   1. At all material times the Bank was a corporation existing and doing business under the laws of the State of Minnesota, with its principal place of business at Ely, Minnesota.
   2. At all material times, the Bank had 65,000 shares of voting stock, of which 55,199 were owned jointly by Craig and Marcia Kronholm.
   3. On December 22, 1988, the Respondent and James H. Peterson entered into an agreement with the Kronholms to purchase their stock.
   4. On April 28, 1989, the Respondent and Peterson submitted a notice of acquisition of control of the Bank pursuant to 12 U.S.C. § 1817(j)(1).
   5. The FDIC administratively denied the proposed acquisition by notice of August 11, 1989.
   6. On April 20, 1990, following an administrative hearing, the undersigned administrative law judge issued a Decision recommending that the FDIC Board deny the proposed acquisition.
   7. A finding necessary to this decision was that the Respondent's competence and integrity indicated it would not be in the interest of the depositors of the Bank, or in the interest of the public, to allow him to acquire control of the Bank.
   8. On July 6, 1990, the Bank give notice to its stockholders of an annual meeting to be held on August 6, 1990.
   9. On July 26, 1990, following an administrative hearing, the undersigned administrative law judge issued a Decision recommending that the FDIC Board enter an order terminating the Bank's deposit insurance.
   10. On July 30 and August 1, 1990, respectively, Craig and Marcia Kronholm gave their proxy to vote 55,199 shares of Bank stock to either John Wavrin or the Respondent. The proxies were for a period of one year but were revokable at will.
   11. On August 6, 1990, the Respondent accepted the proxies, appeared at the stockholders meeting, participated and voted the 55,199 shares for the reelection of four in- {{4-30-92 p.A-1845}}cumbent members of the Bank's board of directors.
   12. On August 28, 1990, the FDIC Board entered an order disapproving the proposed acquisition of the Bank by the Respondent and Peterson.
   13. On November 30, 1990, the FDIC Board entered an order terminating the Bank's deposit insurance, and on that day the Bank was closed by the State of Minnesota.

   1. At all material times, the Bank was a state nonmember bank within the meaning of 12 U.S.C. § 1813(e)(2) and was a depository institution within the meaning of 12 U.S.C. § 1813(c)(2).
   2. The FDIC is the appropriate Federal banking agency to bring this action within the meaning of 12 U.S.C. § 1813(q)(3).
   3. The Respondent filed a change-in-control notice with the FDIC under 12 U.S.C. § 1817(j)(1) with regard to this Bank and therefore is an institution-affiliated party within the meaning of 12 U.S.C. § 1813(u)(2).
   4. The FDIC has jurisdiction over the Bank, the Respondent and the subject matter of this action.
   5. The FDIC moved for a recommended decision in its favor on the pleadings, attached uncontested exhibits and the decisions in cases FDIC 89-161j and FDIC 88-285a.
   6. On this record, the FDIC did establish a probable violation of 12 U.S.C. § 1817(j) (1).
   7. On this record, the FDIC did not establish by a preponderance of the credible evidence either the effect or culpability tiers of 12 U.S.C. § 1818(e)(1).
   8. The Notice of Intention to Prohibit from Further Participation should be dismissed in its entirety.
   Upon the foregoing findings of fact, conclusions of law and the entire record in this matter, I recommend the FDIC Board issue the following:

   The FDIC's Motion for Recommended Decision is denied and the Notice of Intention to Prohibit From Further Participation in Case No. FDIC-91-19e is dismissed in its entirety.
   Dated: August 2, 1991