FDIC: 1992 - Docket No. FDIC-90-115e


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[¶5184] In the Matter of Robert S. Stoller, Coolidge Corner Co-operative Bank, Brookline, Massachusetts, Docket No. FDIC-90-115e (9-22-92).

Reconsidering an earlier order of prohibition [see ¶5174] against a bank official who is an attorney, the FDIC board clarifies the order. It concludes that the order's industry-wide prohibition precludes respondent from acting as either a bank official or a lawyer for a financial institution in the absence of a special exception pursuant to Section 8(e) of the FDI Act.

[.1] Practice and Procedure—Reconsideration—Standard for Granting
The Board has inherent authority to grant reconsideration; it does so if it finds an issue of first impression which requires clarification.

[.2] Prohibition—FDI Act Section 8(e)—Retroactive Application
Prohibition on acting as an institution-affiliated party [Section 8(e)(6)] is not applicable to conduct occurring prior to the enactment of FIRREA, but FIRREA permits retroactive application of the prohibition on participation in the conduct of the affairs of financial institutions [Section 8(e)(6)].

[.3] Participant in Conduct of Affairs—Legal Counsel
The scope of the Section 8(e) prohibition on participation in the conduct of affairs includes service as legal counsel to financial institutions. An attorney representing a financial institution is "participating in the conduct of the affairs" of the bank and, like officers and directors, occupies a position of trust and has important fiduciary obligations to the institution.

[.4] Prohibition—FDI Act Section 8(e)—Scope of Prohibition
Although the order prohibits respondent from representing financial institutions, he is free to represent individuals in transactions involving institutions; and if he wants to represent institutions he may submit application to the FDIC pursuant to Section 8(e)(7) for authorization to do so.

In the Matter of
ROBERT S. STOLLER, individually
and as president, director,
and/or a person participating
in the conduct of the affairs of
COOLIDGE CORNER CO-OPERATIVE BANK
BROOKLINE, MASSACHUSETTS
(In Receivership)
DECISION AND ORDER
ON MOTION FOR
RECONSIDERATION
AND CLARIFICATION
FDIC-90-115e

BACKGROUND

   The Federal Deposit Insurance Corporation ("FDIC") initiated this prohibition proceeding against Robert S. Stoller ("Respondent") on July 17, 1990, pursuant to section 8(e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(e) (1988 & Supp. II 1990). The Notice of Intention to Prohibit From Further Participation ("Notice") alleged that Respondent had engaged in unsafe or unsound banking practices, violations of law and regulation, and/or breaches of fiduciary duty. The Notice sought to prohibit Respondent from further participation in the conduct of the affairs of Coolidge Corner Co-operative Bank, Brook-
{{11-30-92 p.A-2083}} line, Massachusetts ("Bank") and any other insured depository institution.
   On June 3 through 5, 1991, a hearing was held in Boston, Massachusetts, before an Administrative Law Judge ("ALJ"), who issued a Recommended Decision and Order that Respondent be prohibited from participating in the conduct of the affairs of the Bank or any other federally insured financial institution.
   [.1] On February 18, 1992, the Board of Directors ("Board") issued a Decision and Order to Prohibit From Further Participation ("Decision and Order") adopting the ALJ's Recommended Decision and Order (these documents being hereinafter collectively referred to as the "Board's Decision"). The Board's Decision describes evidence of Respondent's legal violations, unsafe or unsound practices and breaches of fiduciary duty resulting in substantial financial losses to the Bank and ultimately contributing to its closure. The Decision also discusses evidence that Respondent had received financial gain or other tangible economic benefit by reason of his violations, practices, and/or breaches of fiduciary duty, and concludes that his conduct demonstrated personal dishonesty and both willful and continuing disregard for the safety and soundness of the Bank. The Board's Prohibition Order barred Respondent, pursuant to 12 U.S.C. § 1818 (e)(7)(1989), inter alia from "participating in any manner in the conduct of the affairs" of insured institutions without obtaining the approval of the FDIC and the appropriate regulatory agency. On March 3, 1992, Respondent filed a Motion for Reconsideration and Clarification pursuant to 12 C.F.R. § 308.44(b)(1991).¹ The Motion seeks to "clarify" the Order of Prohibition by adding the statement "[n]otwithstanding the above [prohibitions], this Order does not prohibit Respondent from providing legal representation and legal advice to any federally insured financial institution."²
   For the reasons set forth below, the Board concludes that it must clarify its original Decision and Order regarding the scope of section 8(e)(7). Contrary to the position urged by Respondent, however, the Board is persuaded on reconsideration of the Decision and Order that it incorrectly suggested that Respondent could continue to represent financial institutions as a lawyer without following the procedures set forth in 12 U.S.C. § 1818(e)(7)(B) (1988 & Supp. II 1990) for obtaining an exception to the Order. Accordingly, the Decision and Order will be reaffirmed to the extent that it upholds the retroactive application of 12 U.S.C. § 1818(e) (7) (1988 & Supp. II 1990), but will be modified to clarify that Respondent may not engage in legal representation of any institution listed therein without the prior written approvals required by statute.

DISCUSSION

This case raises an issue of first impression before the Board: what is the effect of a prohibition on a Respondent who is both a bank official and an independent contractor but subject to a prohibition arising out of his actions as a bank official. To what extent may he still represent financial institutions as an independent contractor? Due to the importance of the issue raised by this case, the Board has carefully reconsidered its earlier Decision and Order.

[.2] The original Order prohibited Respondent from either "service or acting as an institution-affiliated party, as that term is defined in...12 U.S.C. § 1813(u) (1989), and/or from participating in any manner in the conduct of the affairs of any [financial institution]." Decision and Order at page 24. In its Decision (pages 19–20 and n. 20), in addressing Respondent's argument that the prohibition violated the ex post facto of the Constitution clause by depriving him of his right to earn a livelihood, the Board stated that he could continue to represent financial institutions so long as he did not violate the terms of the Order, that is, participate in any manner in the conduct of the affairs of the institution or become an institution-affili-

¹ The Rules of Practice and Procedure codified at 12 C.F.R. Part 308 have not included a provision permitting or governing motions for reconsideration since mid-1991. The Rules were amended at 56 Fed. Reg. 37975 (Aug. 9, 1991), and section 308.44 was deleted at that time. The Board, however, has inherent power to reconsider any order it issues.

² Respondent also filed a Supplemental Motion for Reconsideration and Clarification dated April 21, 1992. This pleasing would have been untimely under 12 C.F.R. § 308.44(b)(1991) (15-day limit for motions for reconsideration) and failed to explain, as required by the regulation, why the argument it raised — that section 8(e)(7) should not be applied retroactively—could not have been made earlier. Nonetheless, the Board has considered this argument and rejects it, adhering to the discussion in its original Decision and Order on this issue.
{{11-30-92 p.A-2084}}ated party. This conclusion was based on the language of the Order, which, in turn, tracked the language of 12 U.S.C. § 1818(e)(6) (1988 & Supp. II 1990). However, the prohibition on acting or serving as an institutionaffiliated party in 12 U.S.C. § 1818(e)(6) is explicitly inapplicable to activity, as here, occurring prior to the enactment of FIRREA. FIRREA § 903(g), 103 Stat. 457, 12 U.S.C. § 1786 note. Accordingly, those portions of the Decision and Order prohibiting Respondent from becoming an "institutionaffiliated party" must be stricken.
   In addition to barring Respondent from becoming an "institution-affiliated party," however, the Order imposed, and the Board hereby reaffirms, retroactive application of an industry-wide prohibition on Respondent pursuant to 12 U.S.C. § 1818(e)(7) (1988 & Supp. II 1990). Section 1818(e)(7) specifically authorizes a prohibition against "participating in any manner in the conduct of the affairs" of a financial institution.
   Thus, the question before the Board becomes the reach of the prohibition on "participating in any manner in the conduct of the affairs" of a financial institution contained in 12 U.S.C. § 1818(e)(7). The Board concludes that the industry-wide prohibition precludes Respondent from acting, inter alia, as either a bank official or a lawyer for a financial institution in the absence of a special exception granted pursuant to 12 U.S.C. § 1818(e)(7)(B). In reaching this conclusion, the Board has given due consideration to prior court and Board decisions affording the language at issue and similar language a liberal interpretation.
   The starting point for the Board's analysis is the language of the statute. E.g., CPSC v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980). The phrase "participating in any manner in the conduct of the affairs" of a financial institution appears to the Board to sweep very broadly, encompassing without question the work of a lawyer or other independent contractor in a position of trust advising or representing the institution in matters relating to lending or other sensitive areas. The meaning of this and similar phrases has been previously addressed in slightly different contexts by this Board was well as one court. FSLIC v. Hykel, 333 F. Supp. 1308, 1310-12 (E.D.Pa. 1971), vacated as moot 468 F.2d 1386 (3d Cir. 1972); In the Matter of Frank Jameson, FDIC-89-83e, 2 P-H FDIC Enf. Dec. & Ord. ¶5154A at A-1542.3 (June 12, 1990) (relying on Hykel), aff'd on other grounds, 931 F.2d 290 (5th Cir. 1991); FDIC-85-25e, -85-112k, -85-113k, 1 P-H FDIC Enf. Dec. & Ord. ¶5082 at A-999-1002 (Feb. 3, 1987) (interpreting the phrase "participating in the conduct of the affairs" of a bank). In each case the language at issue has been given a broad reading.³
   In Hykel, the court construed the exact terms at issue herein in the context of the authority of the Federal Savings and Loan Insurance Corporation, under former 12 U.S.C. § 1730(h) (1966), to prohibit bank officials who are indicted for criminal activity from "further participation in any manner in the conduct of the affairs" of the institution with which they were affiliated. The court concluded that this language precluded Hykel, president and a director of a savings and loan at the time of his indictment, from serving as a real estate agent for the savings and loan.
   In reaching this result, the court canvassed the legislative history of the provision, finding that Congress was particularly concerned to strengthen the powers of federal agencies to protect financial institutions, their depositors, and the deposit insurance funds "from the activities of those in fiduciary positions which may tend to undermine public confidence in the integrity of these institutions." 333 F. Supp. at 1311 (citation omitted). Because the sale of real estate constituted an "affair" of the association, and Hykel's activities as a real estate agent provided an opportunity for dishonest behavior, the court concluded that the statutory language reached those activities.
   In the Jameson case, the Board relied on Hykel in determining whether an independent consultant providing loan documentation services was a "person participating in the conduct of the affairs of the bank" who would be subject to a prohibition order under the former 12 U.S.C. § 1818(e)(2) (1982). The Board observed that it had pre-

³ The legislative history of section 1818(e)(7) does not directly address the reach of the phrase at issue in this case. However, Congress enacted both the original section 8(e)(1) under which this action was brought and the new section 8(e)(7) applied to Respondent in an attempt to strengthen the banking agencies' enforcement authority. See FIRREA §§ 101(9), (10), 103 Stat. 187, 12 U.S.C. § 1811 note; 1978 U.S. Code Cong. & Ad. News 9273, 9279-81, 9290-91. Accordingly, the Board's broad reading of the statutory language at issue is fully consistent with the legislative history underlying that language.
{{11-30-92 p.A-2085}}viously recognized (in FDIC-85-25e, supra) that an individual need not be a bank employee to be subject to a prohibition under section 1818(e)(2). In interpreting the phrase, the Board looked to three factors: "the nature of the work performed, the ability of the respondent to cause harm to an institution, and the relationship between the role performed by respondent and the institution." ¶5154A at A-1542.3. The Board concluded that Jameson's activities were covered by the phrase at issue because he had the opportunity to harm the institution in the course of his consultancy, even though he had to report to bank employees who had the final say. Ibid.
In sum, the Board has liberally construed similar language in previous cases to reach individuals without a title or explicit authority in the financial institution so long as they had an opportunity to harm the institution. These previous cases control the disposition of this case and, as discussed below, require that the language of section 8(e)(7) be construed as covering those who act as attorneys for financial institutions. At the same time, however, this result makes sense as a matter of statutory construction. If the concept of participation does not sweep broadly, it is difficult to define it is a manner which gives affected individuals any real notice of the extent of the prohibition.
In applying the test enunciated in the Board's prior decisions the Board notes that the language given a broad interpretation in Jameson and FDIC-85-25e is narrower than that at issue in this case because it covers only "participation in the conduct of the affairs" as opposed to "participation in any manner in the conduct of the affairs" of a financial institution. However, the Board need not decide in this case whether the additional underscored words in 12 U.S.C. § 1818(e)(7) require a different analysis from Jameson. Even under the arguably more stringent Jameson test, the prohibition against participation contained in section 1818(e)(7) plainly covers the activities of an attorney representing a financial institution.

   [.3] As the Board has made clear in another context, an attorney representing a financial institution, like the institution's directors and officers, occupies a position of trust and has important fiduciary obligations to the financial institution. See In the Matter of Patrick G. Huycke, Bank of Southern Oregon, Medford, Oregon, FDIC-91-086jj, 2 P-H FDIC Enf. Dec. & Ord. ¶5168A at A-1808 (Aug. 26, 1991). Because of this position, attorneys have a significant opportunity to harm the institution if they are so inclined. Even an attorney representing the institution in real estate conveyancing transactions, as Stoller seeks to do, is in a position to cause significant harm. Making these loans is a fundamental part of a bank' business, and there are numerous ways for an attorney whose primary loyalties lie elsewhere to undermine the lender. For example, an attorney drafting loan documents can slant the provisions in favor of either the borrower or the lender, if he sees fit. A bank officer, however, depends upon his attorney to exercise the utmost loyalty and fidelity to the bank's interests. He does not have the expertise to police the attorney's conduct and should be able to assume that the attorney is zealously representing the bank's interests.
   In this case, for example, the record shows that Stoller could not be trusted to put the bank's interests before his own even when he was employed by the bank. Thus, there is reason to question even more his ability to fulfill his duties properly while representing a bank.
   In sum, it is clear to the Board that an attorney has "sufficient influence" on a bank's decisions and "sufficient opportunity to harm the institution," Jameson, ¶5154A at A-1542.3, to come within the prohibition contained in 12 U.S.C. § 1818(e) (7) on "participating in any manner in the conduct of the affairs" of a financial institution. An individual against whom the Board has issued a prohibition order has invariably engaged in serious misconduct. Given this prerequisite for issuance of a prohibition order, it is the Board's view that Congress enacted the industry-wide prohibition to ensure that an individual subject to such an order would be kept as far as possible from any position of trust in the banking industry, particularly positions connected with the fundamental business of the industry — making loans.
   Thus, on reconsideration, the Board concludes that its February 18, 1992, Decision and order must be modified, but not in the manner suggested by Respondent. The Order itself must be amended to eliminate the prohibition on serving or acting as an insti-
{{11-30-92 p.A-2086}}tution-affiliated party. Pages 19 and 20 must also be modified to make clear that Respondent may not represent financial institutions as an attorney without obtaining an exception to the prohibition pursuant to 12 U.S.C. § 1818(e)(7).

[.4] Two final observations are in order. First, Respondent retains his license to practice law. He may even represent parties involved in transactions with financial institutions so long as he does not represent the institutions themselves.
Second, if he wishes to represent financial institutions, he has the right to submit an application pursuant to 12 U.S.C. § 1818(e) (7)(B) for authorization to do so. See In the Matter of Marvin Clark, Sr., Farmers and Merchants Bank, Dublin, Georgia, FDIC-89-199e, 2 P-H FDIC Enf. Dec. & Ord. ¶5162 at A-1618 (Jan. 29, 1991) (discussing section 1818(e)(7) exceptions). This process was clearly designed by Congress to afford the agencies involved the opportunity to determine whether a Respondent who has engaged in serious misconduct could perform work on behalf of an institution supervised by those agencies without undue risk to those institutions and to impose "terms [on performance of the work] that will protect the employer, the banking industry and the insurance fund." Ibid. Thus, the availability of exceptions pursuant to section 8(e)(7)(B) provides Respondent with the opportunity to demonstrate that the legal work he proposes to perform is consistent with the best interests of financial institutions, while recognizing the interest of the financial regulatory agencies in reviewing the specifics of the proposed representation.

ORDER

   For the foregoing reasons, it is hereby ORDERED that the Board does reconsider and clarify its original Decision and Order dated February 18, 1992 in this matter.
   It is further ORDERED that the Decision and Order of February 18, 1992 is modified as follows:
   1. Footnote 20 on page 20 is deleted.
   2. The last two sentences of the paragraph beginning on page 19 and ending on page 20 are deleted and the following sentences are substituted: "Here, there is no limitation on Respondent's license to practice law, only limitation on the clients he may represent. Without obtaining authorization pursuant to 12 U.S.C. § 1818(e)(7), he may still represent parties dealing with financial institutions so long as he does not represent the institutions themselves. In addition, Respondent is, of course, prohibited, inter alia from being an officer, director, or employee or otherwise engaging in the business activities of a federally insured financial institution."
   3. In paragraph 1 of the Order of Prohibition from Further Participation, the following words are deleted after the word "Robert S. Stoller is hereby prohibited" "from serving or acting as an institution affiliated party, as that term is defined in section 3(u) of the FDI Act, 12 U.S.C. § 1813(u)(1989), and/or."
   4. Paragraphs 2 and 3 of the Order of Prohibition from Further Participation are hereby deleted because they are derived from a statutory provision not applicable in this case, 12 U.S.C. § 1818(e)(6) (1988 & Supp. II 1990). However, Respondent is admonished that all of the conduct proscribed by those paragraphs constitutes activity prohibited by the language in paragraph 1 of the Order.
   In all other respects the Decision and Order of February 18, 1992 remains in full force and effect.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 22nd day of September, 1992.
   /s/ Robert E. Feldman
   Deputy Executive Secretary

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